Scales of Justice, by Rory Kearney

That’s exactly what happened when S&T Oil Equipment & Machinery dealt with Juridica Investments Limited, a litigation financing company.  Though the relationship started out amicably – S&T contracted JIL to fund a case that S&T had filed against the Government of Romania – things got ugly when the litigation strategy changed, and S&T and JIL are now in opponents in their own suit in the Southern District of Texas.  The irony of course is that S&T has ended up having to finance a lawsuit on its own against its litigation financier.

The concept behind litigation financing is fairly simple:  when potential plaintiffs are deterred from litigating by administrative costs, they can turn to litigation financiers who front money in exchange for a percentage of the plaintiff’s award.

But in practice, litigation financing can be very unattractive.  What happens when the interests of the financier diverge with the interests of the plaintiff?  What happens to the autonomy of plaintiff’s counsel?  As noted in a paper by John Beisner, Jessica Miller, and Gary Rubin of Skadden, Arps, Slate, Meagher & Flom LLP, “Third-party litigation funding increases a plaintiff’s access to the courts, not to justice.”

Litigation financiers at times burn the individual customer – as in the S&T case – but their charring mark is almost always left on society.   Litigation financing can inflate the already overloaded dockets of judges and pile on added legal cost burdens to targeted U.S. companies.

Defenders of litigation financing might claim that financiers have no interest in funding meritless cases.  But this untrue.  The math behind the financier’s decision making can be seen as:

  • Known cost of financing the case = (C)
  • Expected monetary benefit for financier if case is won = (B)
  • Probability of winning or settling = (P)

The financier will support the case when (C) is less than (B) multiplied by (P).  (C) < (B)(P)

The problem is that (C) is very small and (B) is very big.  Accordingly, the right side of the equation can be the large side even when the probability of winning is very low (a frivolous case).  It would be a bit like saying you could pay $1 to play in a $10,000 lottery that you have a 5% chance of winning.  Of course you would take this deal.  And so do the litigation financiers.

What then is to be done to remedy the situation?  In the paper referenced above, Beisner, Miller, and Rubin recommend that litigation financing be legislatively proscribed.  In this Washington Legal Foundation paper, Damon R. Leichty of Barnes & Thornburgh shows that litigation financing can be narrowed by the courts, as in Abu-Ghazaleh v. Chaul.  Still others claim that if the (B) factor were limited, the litigation financing would naturally eclipse.

The solution remains to be determined, but it’s certain that litigation financing poses a problem.