Litigation Trolls

Abstract

Third-party financing of litigation has been described with a variety of unflattering metaphors. Litigation financers have been likened to gamblers in the courtroom casino, loan sharks, vultures, Wild West outlaws, and busybodies mucking about in the private affairs of others. Now Judge Richard Posner has referred to third-party financers as litigation trolls, an undeniably unflattering comparison to patent trolls. But what it is, if anything, that makes third-party financers “trolls”? Legal claims are, for the most part, freely assignable, the proceeds of claims are assignable, and various strangers to the underlying lawsuit, including liability insurers and plaintiffs’ contingency-fee counsel, are permitted to have an economic interest in the outcome of the litigation. On one view, therefore, third-party litigation investment is just another innovative financial product that enables risk to be carved up and allocated more efficiently. Life insurance, attorney contingent fees, and derivative contracts on exchange-traded commodities were all formerly regarded with extreme suspicion, but are now widely accepted. But people still hate patent trolls. So whether litigation funding is some kind of conceptual anomaly is an important question because, as it happens, Posner’s dictum coincides with a public-relations campaign by the U.S. Chamber of Commerce to stigmatize third-party litigation financing and saddle the industry with new and burdensome regulations. This short paper evaluates the conceptual critique of litigation financing by comparison with two other areas in which it is claimed that some form of financing “just doesn’t sit right” in light of the nature and function of the legal system – patent trolling and contributions to judicial election campaigns.

Keywords: litigation funding, litigation financing, third-party litigation financing, alternative litigation financing, ALF