Law professor's website scrutinizes litigation funding
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University of Iowa law professor Maya Steinitz has launched a new website that takes on controversial issues raised by allowing people to invest in lawsuits in which they otherwise have no involvement.
Specifically the site offers model litigation funding contract terms, and invites the public to debate them.
“Litigation finance contracts are treated as trade secrets, and yet their terms impact key issues in our legal system,” says Steinitz, an associate professor at the UI College of Law and supporter of litigation funding. “Unless these contract terms are exposed to serious debate, litigation funding may impact our justice system in profound and suboptimal ways.”
Litigation funding is an investment by a third-party financier who pays for the plaintiff’s legal expenses in a lawsuit in exchange for a share of a damages award. The investment is a great deal riskier than most, however, because the financier will receive nothing if the defendant wins. The concept has caught the attention of hedge funds and other savvy investors in recent years looking for a high risk, high reward speculative product.
It has also caught the attention of the United States Chamber of Commerce, which wants the practice regulated.
Steinitz says third party litigation finance has been relatively transparent in other countries, such as Australia, but in the United States the industry has operated very quietly, even secretively, outside the narrow context of small-dollar loans to personal injury plaintiffs. She says this kind of contract secrecy means plaintiffs can be exploited relatively easily. Plaintiffs currently have no way of ascertaining what “typical” terms might be, she says, and cannot effectively screen funders. Nor will this situation change, Steinitz says, because without transparency, accurate reputation markets cannot emerge.
Plaintiffs aren’t the only ones who face contracting challenges, either, Steinitz points out. The contract protects investors, as well, who might lose money if, for instance, plaintiffs misrepresent key facts in their case.
“One of the goals of the model contract is to improve funders’ ability to handle information risks,” she says.
Steinitz hopes the website will make litigation funding more transparent and foster debate about funding contracts’ terms. Experts from a broad spectrum of backgrounds have already agreed to comment on various terms, and the public is invited to join in. Through this discussion Steinitz will air the key issues raised by lawsuit funding and finalize model language that is commercially reasonable, solidly legal, and in the public interest.
“Ultimately the model could serve as an easily-accessible starting place for the tailored negotiations each deal requires,” she says.
Steinitz’s model contract is based on venture capital contracts, reflecting the many similarities of the investments and the investors who participate in them. To keep the debate focused, the model contract’s terms will be rolled out gradually.
The website is located at www.litigationfinancecontract.com.