Sebok Defends Third-Party Litigation Finance

Tony Sebok has posted to SSRN Some Realism About Litigation Finance. The abstract provides:

Third-Party Litigation Finance (TPLF) has attracted a large amount of scrutiny and criticism in recent years, ranging from targeted legislation proposed in various state legislatures and the U.S. Senate, to numerous law review articles grimly warning of its dangers to the civil justice system.

This Article takes up one specific strand of criticism – that TPLF, if allowed by the courts, will drive third parties to take control over the lawsuits they fund, with disastrous consequences for the funded parties, the defendants they sue, and society in general. The Article challenges every step of the criticism. First, the Article demonstrates that the examples of the seizure of control offered by the critics were not the product of third parties taking control “away” from counterparties. Second, the Article argues that, in the context of commercial TPLF, the U.C.C. already builds into its default rules the power, for the benefit of funders, to take “commercially reasonable” steps to protect their security interest, including taking steps to cause the counterparty to conduct their litigation consistent with the representations that accompanied the funding contract. Third, the Article argues that modern contract theory offers strong normative grounds for parties giving partial control to the funder to protect itself – something quite similar to what is already in the U.C.C. Fourth, the Article argues that, given that positive law and normative contract theory sup-port commercial TPLF contracts conveying to funders the power to limit counterparties to agreed-upon commercially reasonable conduct, the common law precedents to which the critics refer have been misread. The Article argues that, contrary to what the critics claim, the common law does not prohibit parties from drafting TPLF contract terms that give funders the power to limit counterparties to agreed-upon commercially reasonable conduct – especially in commercial TPLF.