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63 DePaul L. Rev. 195 (2013-2014)
Litigation Finance and the Problem of Frivolous Litigation

handle is hein.journals/deplr63 and id is 209 raw text is: LITIGATION FINANCE AND THE PROBLEM OF FRIVOLOUS LITIGATION Michael Abramowicz* Litigation finance companies have some incentives to screen plaintiffs applying for financing based on the strength of their claims, but a company may still have incentives to provide financing when the probability that a plaintiff would prevail at litigation is low. The re- sult is that litigation finance may facilitate both meritorious and non- meritorious claims. This Article argues that fee limitation rules for litigation finance companies can improve their incentives to select only relatively high probability cases, thus enhancing the normative case for states to enact legal reforms allowing litigation finance. A simple version of the rule, which will work if a case is sure to go to trial, allows a successful plaintiff to return no more than the amount borrowed and then the same amount again, plus ordinary interest. This rule will encourage finance companies to lend only where a plaintiffs probability of winning is expected to be greater than 50%, although the rule can be altered to target lower probability thresholds. The Article also describes alterations to the rule to accommodate the possibility of settlement, cases in which damages are disputed, where injunctive relief is at issue, where financing is provided in install- ments, and where only a portion of the plaintiffs expenses are paid by litigation finance companies. Should fee limitation rules become established in the fee limitation context, they also might be extended as a vehicle of tort reform. A requirement that plaintiffs and defend- ants fund some portion of their litigation costs through litigation fi- nance can reduce frivolous suits and frivolous defenses of meritorious suits and may have advantages over other mechanisms, such as fee-shifting rules. INTRODUCTION Recently, litigation finance companies and arrangements have be- come more commonplace in both the United States and abroad.1 Typ- * Professor of Law, George Washington University. I am grateful to the Searle Center on Law, Regulation, and Economic Growth for funding this research, and to participants in a Searle Center Roundtable for helpful comments. 1. See, e.g., David S. Abrams & Daniel L. Chen, A Market for Justice: A First Empirical Look at Third Party Litigation Funding, 15 U. PA. J. Bus. L. 1075 (2013) (documenting the recent increase in litigation finance in Australia); Susan Lorde Martin, Litigation Financing: Another Subprime Industry that Has a Place in the United States Market, 53 VILL. L. REV. 83 (2008) (discussing litigation finance in the United States); Andrew Hill, Money for Smart Suits, FIN.

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