This Article begins by describing the market for investment in commercial litigationA Litigation-investment transactions share features of existing economic relationships, such as commercial lending, liability insurance, contingent fee-financed representation, and venture capital, but none of these existing practices furnishes a suitable analogy for regulating litigation investment. Like third-party insurance, litigation investment is a way to manage the risk associated with litigation while bringing to bear the particular subject matter expertise of a risk-neutral institutional actor. Insurance companies and litigation investors may be systematically in a better position to reduce the risk of litigation, either through risk pooling or information-cost advantages. Like insurance and contingent fee financing, litigation investment involves the provision of funds for legal representation by someone other than the litigant, whose interests are contractually aligned with the litigant's interests. Most lawyers who handle cases on a contingent fee basis, however, are limited in the size and complexity of cases they can self-fund, due to opportunity costs and the lack of sufficient capital to absorb a substantial loss. Litigation investment therefore provides some of the risk-transferring benefit of contingent fee representation while taking advantage of the potential of diversifying among a large pool of lawsuits. Unlike most types of insurance sold in the United States, but like contingent fee representation, the litigation-funding relationship arises only after a dispute has ripened into an actual or contemplated lawsuit. Litigation investment, like both liability insurance and contingent fee financing, also has the potential to complicate the traditional conception of legal representation as a two- party, attorney-client relationship and to increase the agency costs inherent in any principal-agent relationship.
Anthony J. Sebok and W. Bradley Wendel,
Duty in the Litigation-Investment Agreement: The Choice Between Tort and Contract Norms when the Deal Breaks Down,
66 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol66/iss6/6