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Should the law preserve party control? Litigation investment, insurance law, and double standards.


Litigation investment, sometimes known as litigation finance, is increasingly accepted around the world. Once prohibited as champerty, litigation investment is now embraced in England, Canada, and Australia, as well as in many civil law nations. In the United States, the development of a robust market for investment in litigation has been met by various objections. One objection is that litigation investment interferes with the autonomy of lawyers. A second objection is that it promotes frivolous litigation.

This Article takes up a popular argument against litigation investment: the legal system should not encourage parties to sell their control over litigation that would vindicate their rights. This criticism is based on an unspoken assumption that private law theory requires party control to stay with the original rightholder and contracts that allow the sale of party control to a stranger should be struck down, either for being contrary to public policy or for some other legal basis.

Although I briefly consider justifications rooted in moral philosophy, which support the view that party control should not be sold, I focus mostly on arguments based on the common law. I propose that arguments against the sale of party control based on the structure or nature of the common law are anachronistic. As society evolved, courts and legal commentators abandoned such arguments, which once constrained the sale of party control before the middle of the nineteenth century. Liberal attitudes about the sale of party control were first seen in the gradual elimination of rules limiting the assignment of choses in action. Liberalization was next seen in insurance. I will demonstrate that as the role of insurance in society grew, courts reinterpreted common law practices to permit the alienation of control of litigation for profit in various contexts, including subrogation and liability insurance.

This Article concludes that by looking at the evolution of insurance law, we can learn how rigid attitudes about the relationship between victims and wrongdoers can be bent to fit social needs. The Article takes note of the growing consensus in the United States, as well as in other common law nations, regarding the social benefits of litigation investment. Finally, 1 argue that given the appetite for litigation investment among the public, courts and policymakers should be skeptical of arguments that use party control as a justification to block this new form of financing for lawsuits.

     A. Historical Rejection of Litigation Investment
     B. The Three Modern Critiques
        1. The Consequentialist Critique
        2. The Perfectionist Critique
        3. The Rule-of-Law Critique
 II. The Rule-of-Law Critique of Litigation Investment
     A. Interference with the Lawyer-Client Relationship
     B. Interference with the Plaintiff-Defendant Relationship
     C. Interference with the Party-Court Relationship
III. Loss of Party Control in Tort and Insurance Law
     A. Introduction: How to Lose Control
     B. Assignment
        1. The History of Limitations on the Assignment of
           Choses of Action
        2. Modern Permissiveness in the Law of Assignment
     C. Subrogation
     D. Full Coverage Cases in Liability Insurance


Along with other common law nations, the United States is experiencing a dramatic increase in litigation investment. (1) Litigation investment is a contract between strangers whereby one takes an interest in the future recovery of the other's lawsuit in exchange for something of value. (2) As litigation investment has become more common, drawing the attention of sophisticated financial institutions, it has also garnered some critical attention as well. (3) Among the many arguments against litigation investment is that it impermissibly interferes with the control of litigation by the parties to the dispute. (4) This Article responds to the "control argument" by making two points: first, that the common law permits parties to alienate their control over litigation by contract in numerous contexts; and second, that the fact that the common law has enforced contracts permitting the alienation of control over litigation in contexts other than litigation investment (specifically the insurance context) should make us skeptical of the argument that litigation investment represents a new threat to civil litigation as it is practiced in the United States today. (5)

Litigation investment, as the next Part explains in greater detail, occurs when nonlawyers invest for profit in litigation in which they otherwise have no interest. (6) "[L]itigation is the expenditure of money by a party to enforce (or defend) an existing or anticipated legal claim, when the money is used either to purchase the services of an attorney in anticipation of an appearance before, or submission of materials to, an adjudicative body." (7) At the end of the twentieth century, some critics argued that the American litigation system needed reform because plaintiffs' attorneys thought of litigation as an investment, which increased the amount of socially unproductive and frivolous claims. (8) "Litigation investment is now the object of a similar sort of critique based on the fear that litigation will be subject to a new round of commercialization." (9)

The plan of this Article is as follows: In Part I, I will explain what litigation investment is and its current status in American law. I also will review the three major arguments against litigation investment, which I call the "consequentialist," "perfectionist," and "rule-of-law" critiques. In Part II, I will further examine the rule-of-law critique. Although rooted in the tort reform movement of the 1980s and 1990s, (10) which was concerned primarily with plaintiffs' lawyers' abuse of the civil justice system, the rule-of-law critique of litigation investment is concerned with protecting the civil justice system from outside forces such as investment firms. If the law discourages (or prohibits) parties from giving away control over the litigation to strangers who have a financial stake in the outcome, the proper functioning of the courts--including the professional independence of plaintiffs' lawyers--will be compromised. Part III takes up the question of whether party control over litigation was ever central to the proper functioning of the civil justice system, as the critics seem to assume. In this Part, I will demonstrate that courts have permitted parties to give up control over their claims in litigation and have not blocked the party's choice because it violated a formal legal value intrinsic to the law known as party control. In fact, in the context of insurance law, courts have permitted strangers to take total control over a party's litigation. (11) My point is that we should be skeptical of arguments against litigation investment that are based on principles rejected in other areas of tort and insurance law, although the problem of reconciling such a contradiction should not be minimized. (12) My larger goal is to shift the debate about litigation investment away from the alleged risk it poses to party control toward the question of how to regulate investment in litigation so that it (1) provides increased access to the courts while (2) protecting both parties to the litigation investment contract from opportunistic behavior by the other. (13)


Litigation can be financed with funds from various sources. (14) In common law systems, the most likely source of funds is the litigant herself. On both the plaintiff and defendant side, parties can spend their own money to pay attorneys, purchase litigation support services, and cover litigation-related expenses. Under the "English Rule," the prevailing party can recover these costs from the losing party; although it must be noted that recovery of legal expenses is not guaranteed when cases settle because these may be themselves the subject of adjustment. (15) In the United States, where each side bears its own costs absent certain contractual or statutory cost-shifting provisions, litigation costs mean that as a technical matter self-funded prevailing parties are not made whole. Defendants and plaintiffs pay a surcharge even when they are legally in the right because of the existence of good-faith resistance from their opponent.

Some forms of third-party litigation funding in the United States are pervasive features of contemporary life. Most familiar is the plaintiff's attorney who offers to represent a party in litigation on a contingent fee basis. Even though at one time this practice was strictly prohibited in the United States, contingency fees have become a mainstay of American legal culture and, even when criticized, are recognized as the chief means by which lower- and middle-class persons can secure plaintiff-side representation. (16) Even corporations use contingent fee agreements and are doing so with increasing frequency. (17) A second group of third-party litigation funders are insurance companies. Liability insurance, as will be explained in Part III.D, is really two kinds of insurance sold together: "litigation" insurance, which offers to pay for the cost of the insured's litigation under certain circumstances, and "judgment" insurance, which offers to pay for the cost of the insured's legal liabilities under certain circumstances. The two are not unrelated, which is why they are sold together, although in theory they could be broken apart. Someone confident that she will never legally wrong another party might want insurance to cover only the costs of proving that she is not liable. Another person, confident that if he legally wrongs another it will be in circumstances so clear that there would be no point contesting the judgment, might want insurance to cover only his liability. One could even imagine insurance for persons or corporations who expect to be plaintiffs but want to hedge the cost of legal representation; this need could be met with an insurance product that covers only plaintiff-side litigation costs. (18) Legal aid is a third type of third-party litigation funding. (19) Even though legal aid comprises an important source of civil litigation funds for liability claims in Europe, in the United States legal aid is not a significant source of funds for legal claims outside of housing and civil rights. (20) Legal aid probably occupies a larger role in America in the public's imagination than in the reality of the legal system. (21)

This Article will focus on a fourth kind of third-party funder of litigation: private-sector firms that invest in litigation for profit. (22) Although investment in litigation is not a new phenomenon, recently investment litigation has developed into an industry with a significant presence and a discrete identity. The emergence of litigation investment firms in the United States parallels the rise of similar firms around the world, in both common law and civilian systems. (23) This Article will refer to this last kind of third-party funding as "litigation investment." (24)

Although a complete review of the legal and economic landscape of the litigation investment industry is not possible in this Article, the structure of the industry can be laid out in a few broad strokes. (25) First, the industry has two quite different branches. (26) One branch consists of firms that invest in relatively low-dollar-value personal injury claims. (27) This part of the industry is known as "consumer" litigation investment. (28) Consumer litigation investment consists of firms purchasing a partial interest in the proceeds of litigation. (29) The purchase is not of a portion of the legal claim that might produce the proceeds. Instead, the purchase is of the proceeds that will come into existence if the legal claim--and a number of other contingencies--are satisfactorily resolved. (30) Consumer litigation investment is not allowed in all jurisdictions in the United States. There is some controversy over whether, even when consumer litigation investment is legally permissible, it nonetheless falls within the statutory definition of consumer credit, and therefore should be limited by the jurisdiction's relevant usury laws. (31) Further, some might quibble with the use of the term "invest" in connection with consumer litigation investment because the funds paid to purchase litigation proceeds are almost never used for litigation expenses, such as the lawyer's time or the costs associated with investigating and trying a claim. (32) This is a consequence of the fact that almost all personal injury suits are handled through contingent fee arrangements, which means that the cases in which consumer litigation investment occurs are already funded by another third party, the plaintiffs attorney. (33) So why do parties sell litigation proceeds to consumer litigation investment firms? According to the consumer litigation investment firms, consumers use the money to pay for living expenses. (34) Because the bargaining strategy for settlement often produces delay until the so-called "eve of trial," plaintiffs are in a better position to maximize settlement value if they are not forced to settle early due to a need for money. (35)

The other branch consists of firms that invest in high-dollar commercial claims, typically involving millions of dollars, and sometimes more. This part of the industry is known as "commercial" litigation investment. (36) Like in consumer litigation investment, commercial litigation investment consists of firms purchasing litigation proceeds. Unlike consumer litigation investment, the funds paid to purchase litigation proceeds are typically used for litigation expenses. (37) Even though commercial litigation investment can involve virtually any sort of claim, it often involves commercial contract and tort disputes, as well as intellectual property and qui tarn claims. (38) For a few reasons, the legal status of commercial litigation investment is not identical to that of consumer litigation investment. Although the doctrines of champerty generally do not distinguish between the consumer and commercial purposes of legal investment and, therefore, treat all such contracts as legal or illegal depending on their structure, consumer credit laws (as their name implies) do not typically apply to commercial litigation investment. (39)

A. Historical Rejection of Litigation Investment

For centuries, litigation investment was prohibited in the common law. (40) Originally, the prohibition was seen as a companion to the larger and more sweeping prohibition of the assignment of choses of action. This doctrine, although analytically separate, was supported by the larger, general anxiety over the "commercialization" of litigation in premodern and modern societies. (41) Today, the few limitations on assignment are an anachronistic remnant of this earlier period and only rarely emerge to interfere with or block the fluid transfer of claims in complex commercial markets. (42) The larger anxiety over the commercialization of litigation persists in American society, however, and has its fullest expression along the fault line of champerty law: state law permitting partial ownership of proceeds--and under what circumstances--reveals how freely investment in litigation can occur in that jurisdiction. (43)

Resistance to litigation investment has been broad and varied over the centuries, starting with the Romans. (44) Blackstone strongly opposed any form of litigation investment. He objected that such investors were simply "officious intermeddlers" who would disturb the "repose" of defendants, and he repeated the concern shared by many in the English bar, that wealthy and titled elites would encourage their tenants and retainers to sue their rivals by supporting the costs of the suits--and maybe even rewarding the tenant or retainer with a side payment. (45) Radin hypothesized that some of the resistance was rooted even more deeply than that and reflected Christianity's vestigial hostility to litigation and secular courts. (46) As these arguments fell aside, they were replaced by arguments that reflected the concerns of the newly emerging market economy. (47) The arguments Radin encountered in 1936 have been supplanted by a new generation that are different--on the surface at least--from the old arguments. (48) The modern arguments can be grouped into three categories: (1) consequentialist, (2) perfectionist, or (3) rule of law (or jurisprudential).

B. The Three Modern Critiques

1. The Consequentialist Critique

The consequentialist argument typically focuses on the putative, perverse incentives created by the introduction of self-interested third parties in litigation, who are not themselves lawyers. The fear is that by allowing self-interested nonlawyers to support litigation, the quality of litigation will decline, thus producing an increase in the amount of litigation that is fraudulent, frivolous, or specious. (49)

Needless to say, many questionable assumptions are built into the consequentialist argument. Because this Article is not the appropriate place to engage them, it may be more efficient to simply note that most, if not all, of the assumptions that are behind the consequentialist argument parallel the assumptions behind the arguments made by critics of the entrepreneurial plaintiffs bar. (50) The critics of American civil litigation argue that the contingent fee produces lawyer-driven litigation that is more likely to be fraudulent, frivolous, or specious compared to a system in which lawyers do not directly share in the recoveries of their clients. (51) The key assumption shared by the consequentialist argument against litigation investment and the consequentialist argument against the contingent fee is that persons who seek to maximize their return on investment in litigation will not select claims based on their merit--or social value--but on their expected return as an investment. Further, some persons who seek to maximize their return on investment in litigation will either unconsciously or deliberately make legal claims that are invalid. (52) It does not matter at this point in the argument why it is rational for investors in claims to put forward invalid claims; it may be that that the legal system is incapable of identifying invalid claims, or that even if the legal system is capable of identifying them in theory, in practice it will not because the relevant "transaction costs" are so high that it is cheaper for defendants to settle (that is, to pay a portion) of a zero-value claim than to defeat a zero-value claim on the merits. (53)

A variant of the consequentialist argument is that self-interested third parties will exploit vulnerable claimholders, taking from them a huge portion of their expected recovery in their litigation in exchange for a paltry amount. (54) This version of the consequentialist argument is made almost exclusively against consumer litigation investment, and is really a form of paternalism. This argument is the same one that has been made to support state-imposed limitations on various self-regarding actions in the marketplace, such as minimum wage and maximum hour legislation, or limitations on subprime mortgages and payday lending. (55) Jeremy Bentham was one of the first to observe the family resemblance between the paternalistic laws prohibiting usury and champerty. (56) In the case of litigation investment, the paternalistic argument is worth considering only if unrestricted sale of litigation proceeds by competent and fully informed adults leads, as an empirical matter, to the destitution of the seller. Even then, as John Stuart Mill would point out, it is not clear why--unless the burden of the consequent destitution impacts the seller's family or society--the state should step in to interfere with the seller's freedom to make financially unsound deals. (57) Given that even the first stage of the paternalistic argument has not been established--other than by anecdote--it is like the first consequentialist argument, more often settled by appeals to other factors, such as those I will discuss below.

2. The Perfectionist Critique

The perfectionist argument endeavors to avoid making predictions about the economic effects of litigation investment. Instead, the argument takes the position that litigation investment must be prohibited because it is inconsistent with certain deontological principles, and that (to take but one variation of this argument) litigants should be prevented from debasing themselves by selling their proceeds, or (to take another variation) society should not be allowed to develop the view that legal rights are just another commodity that can be bought and sold. (58) As W. Bradley Wendel has noted, the most promising line of argument that does not rely on reference to the internal norms of law itself--which I will discuss below under the rubric of the rule-of-law argument--depends on the sort of anti-commodification arguments made by neo-Aristotelians like Elizabeth Anderson and Michael Sandel. (59)

Perfectionism can take different forms. "Human nature" perfectionism takes the development of human nature in its objective form to be a moral requirement. (60) It follows from this position that it is both right and good for the state to prevent individuals from acting in ways that are broadly speaking, irrational or, more narrowly, contradict their ideal rational selves. A problem with human nature perfectionism is that without a robust theory of human reason, it seems not only somewhat arbitrary (why should human nature matter so much?) but also question-begging (how can we distinguish right reason from mere appetite?). (61)

In the alternative, perfectionism can focus on a specified list of objective goods with the perfection of human nature being instrumental to their achievement. (62) "Objective goods" perfectionism finds widespread support when there is near universal consensus on the attractiveness of certain goods, such as art or health, and the patent irrationality of other goods, such as self-debasement or pain. (63) Outside a small set of clear cases, objective goods perfectionism trades a bit on a form of consequentialism. If people seem to prefer their own pleasure over items that others deem objectively good, why should the state prefer the latter over the former? Critics of perfectionism suspect that subjective tastes, which are just expressions of revulsion or disgust, do the work of sorting out which objective goods have priority over others. (64) The objective goods perfectionist response is that it is a category error to think that there is a simple priority or "master value" under which all human goods fall, and that Bentham was wrong to claim that pushpin is as valuable as poetry. (65)

Michael Walzer developed and supported his theory of "complex equality" on the various "blocked exchanges" he observed around him. (66) For example, he noted that almost all modern societies either prevented or would not honor contracts to purchase public office, public honors, children, et cetera. (67) Walzer makes a strong case that as a formal matter, there are incommensurable goods, and that for this reason, the state is justified in preventing people from using money to distribute those goods. (68) He does not provide much of a test for determining which goods, as he puts it, are the ones that "money can buy"; he relies to a certain degree on moral anthropology. (69)

Michael Sandel, who builds on Walzer's argument, embraces the moral anthropology implicit in his version of perfectionism. (70) He, too, makes his argument by pointing out the many instances when society feels uncomfortable allowing the market to govern the distribution of goods. (71) His general point, while the same as Walzer's main point, is built less by irrefutable example and more by accretion. Whereas Walzer held up certain goods that clearly should stay outside the market, Sandel's goods are designed to induce some ambivalence. For example, is it really self-evident that people should not be allowed to purchase short-cuts through immigration and customs lines in the airport or better access to health care through "concierge doctors"? (72) Sandel's argument is not that any one of these market incursions into a previously nonmarket sphere of activity is wrong in itself, but rather that the accumulation of market incursions can destroy the vocabulary of nonmonetary value theory, which perfectionism both identifies and endorses. (73) Sandel argues that "markets change the character of the goods and social practices they govern." (74) Sandel's "crowding-out" argument provides an answer to the Millian who sees no basis in the "Harm Principle" for preventing activities which are apparently wholly self-regarding. Sandel argues that wholly self-regarding acts do not exist because our shared noneconomic value system is a public good, which if available to be enjoyed by one, is by necessity enjoyed by all, and vice-versa: its rejection even by a few of us limits its availability to everyone else. (75) Of course, it is incumbent on the advocate of perfectionism at the social level, like Sandel, to explain why certain private acts may be prevented in the name of the preservation of shared social attitudes, but others are not.

The perfectionist critique of litigation investment must be based on the claim that litigation is a sphere of activity in which commodification is especially dangerous. It would resemble in form, therefore, the claim that a market in judicial outcomes is wrong. (76) But the reason we intuitively understand the commodification of judging to be a synonym for "corruption" is not only because money is exchanged in its doing--that is too simplistic a test--but because in addition to money changing hands, we see that there is something amiss with a judge making a decision for a citizen that paid the most money. In other words, it is more like Walzer's argument about separate spheres with their own metrics of value than Sandel's argument that allowing markets in this one area might be the straw that breaks the camel's back. Legal judgment is about the meaning of law and the weight of the facts. The amount of money offered by a party to the legal dispute is simply irrelevant to the question the judge is supposed to answer. Stated that way, the answer as to why an auction of judicial authority is unacceptable is relatively easy to state: a judicial judgment is supposed to be based on legal reasons and nothing else. To add a new reason--especially a supervening reason--based on financial self-interest, friendship, or loyalty to family is to make a mistake about the kind of reasons that should count in civil litigation. (77)

3. The Rule-of-Law Critique

By analogizing the perfectionist critique of litigation investment to the argument against selling judicial authority, we can see that a promising avenue of argument is that litigation investment introduces the wrong sort of reasons into the legal system. As a result, the parties' outcomes diverge from what the law should ideally produce. This is different from the perfectionist arguments put forward by Sandel and Walzer. It is an argument that law is a special kind of reasoning which litigation investment will disrupt. This Article calls this the "rule-of-law" argument against litigation investment. The idea that legal reasoning is different in kind from other forms of reasoning is not in itself radical. (78) The rule-of-law critique takes a further step to say that participants in litigation must be shielded from nonlawyer influence when there is litigation investment. According to the rule-of-law critique, clients must be shielded from nonlawyer influence in the formation of legal advice even if they want it and, by extension, the court must be protected from the effects that flow from the nonlawyer's influence on the client.

The rule-of-law critique is different from any of the perfectionist arguments because although it is normative, it does not have to be rooted in the controversial metaethical naturalism that perfectionism (arguably) must assume. (79) One can make an argument about what "our" legal system requires and remain neutral not only on the question of what is good for all people, but even on the question of whether legality must be the same for all people. Rule-of-law arguments can be based on the kind of familiar scholarship produced by Blackstone and Holmes when they wrote about the common law--they claimed to be doing nothing more than describing the essential features of our legal system, conceding, at least implicitly, that at the most fundamental level these features were ultimately contingent. (80)

The basic structure of the rule-of-law argument is this: (1) the common law is characterized by features a, b, c, d ... z; (2) litigation investment tends to weaken one of those features (for example, b); (3) if a litigation investment transaction would weaken b, public policy requires that courts refuse to recognize the transaction. Barring that, legislatures should prohibit litigation investment transactions that would result in the loss of b, either through voluntary agreement or by operation of law. This Article suggests that for critics of litigation investment, transfer of control is like example b--an essential feature of litigation whose loss would change the very character of the practice. (81) As we will see, there are subsidiary rule-of-law arguments against litigation investment, such as the need for transparency before the court, or the rule of standing that requires the real party in interest to be before the court. These will be dealt with as elaborations on the original argument--that party control is an essential feature of the rule of law in common law adjudication.


If taken at face value, the rule-of-law critique is a claim about the essential elements of common law adjudication. (82) According to those who embrace it, litigation investment "threatens to compromise the integrity of the U.S. judicial system." (83) How exactly does litigation investment undermine the integrity of the judicial system? There are three subsidiary arguments that compose the party control argument. These are: (1) interference with the lawyer-client relationship; (2) interference with the plaintiff-defendant relationship; and (3) interference with the party-court relationship. Critics of litigation investment have claimed that the control granted to third parties in litigation investment either destroys or impermissibly complicates these relations, and that the cumulative effect of the episodes of interference that occur as a result distorts the legal system to the point where it no longer serves its fundamental rule-of-law function. (84) The purpose of this Part is to demonstrate that in each of these relations the common law has already permitted parties to alienate their control by contract. This Part will briefly explain why uncovering this contradiction matters. It matters because each of the following subsidiary rule-of-law arguments assumes that party control is necessary for the success of some aspect of tort or insurance law. This set of assumptions is false.

A. Interference with the Lawyer-Client Relationship

The chief concern by those who raise rule-of-law objections to litigation investment is that it will interfere with the relationship between the party who has the claim and her lawyer. The Institute for Legal Reform has argued that litigation investment "undercuts plaintiff and lawyer control over litigation because the [litigation investment] company, as an investor in the plaintiff's lawsuit, presumably will seek to protect its investment, and can therefore be expected to try to exert control over the plaintiff's and counsel's strategic decisions." (80) This concern is echoed by those who worry about whether an attorney can fulfill her ethical obligations in a case in which her client has signed a litigation investment contract. (86)

There are two very different arguments being made here. The first is that litigation investment contracts may require lawyers to violate ethical obligations to their clients. The second is that even if a lawyer can ethically represent a client who has contractual obligations to a litigation investor, the relationship between the lawyer and the client will be affected in a way that somehow interferes with the operation of the common law. (87) The first argument has been discussed most recently in a report published by the American Bar Association Commission on Ethics 20/20 and an opinion of the New York City Bar Association. (88) Both report that an attorney is not necessarily prohibited by the rules of professional responsibility from representing a client who wishes to make a contract with a litigation investment firm. (89) The second argument has received less attention.

As will be demonstrated in Part III of this Article, the common law permits parties to alienate control over litigation of their claims to third parties in numerous contexts: assignment, subrogation, and third-party liability contract. In the case of assignment, discussed in Part III.B, the original claimholder and her attorney (if there had been one) are fully substituted by another party with new representation; even if it is the same lawyer, the retainer is between the new party and the lawyer. So the common law's embrace of assignment (which, while not complete, is quite advanced) says nothing pro or con about the argument made against litigation investment with regard to its interference with the lawyer-client relationship. In subrogation and liability insurance, however, the relationship between the party and her lawyer is identical to that of the claimholder and her lawyer in the litigation investment contract. (90) Yet courts have upheld contracts in cases of subrogation and liability insurance, and rejected arguments that they are unenforceable because the insurer's control supplants the insured's power over her own case.

The concern that critics express about the relationship between the claimholder and her attorney in litigation investment reflects a similar confusion that insurance law scholars identified among those who once argued against allowing lawyers to represent insurers as well as insureds in the third-party liability insurance context. (91) The fear was that if a lawyer was permitted to jointly represent both the insurer and the insured in litigation and the insurer has the right to control under the insurance contract, the lawyer cannot in advance obtain adequate consent from the insured to prevent a conflict of interest if the insured and insurer come to disagree on the conduct of the insured's defense. (92) The reason this is not a real dilemma is twofold.

First, the insured can order the lawyer, as her agent, to accept instructions from other persons, including the insurer, and in fact, the insured may be obliged under the insurance contract to issue such instructions. (93) Second, if the insurer and the insured disagree with each other about the best way to litigate the claim and whether the insured's instructions to the lawyer to obey the insurer are still in force, the lawyer's obligation is clear: the lawyer must either obtain a conflict waiver from both parties, or if that is impossible, withdraw from representation of one or both parties. (94) If the insured comes to regret her promise to the insurer, her remedy is in contract. She can always breach the contract and defend at her own expense using any attorney she chooses. (95) The insurer cannot use the insurance contract to order the lawyer to be disloyal to the insured. What the insurer can do (and this is perhaps what really upsets the critics of dual representation) is make it very expensive for the insured to regain the freedom to tell her attorney to do things to which the insurer is opposed. (96) The same is true in litigation investment: the same duty of loyalty that exists between the insured and her attorney exists between the claimholder and her attorney. If the claimholder breaks with the investor for any reason, her remedy is governed under the litigation investment contract. Her relationship with her attorney cannot be "interfered with" by the investor, even though the cost of regaining the freedom to tell one's attorney to do things to which the investor is opposed may be very high. (97) But that is an artifact of the terms of the contract between the client and the investor--and the ability of the investor to enforce the contract. It does not flow from the idea that party control is an essential feature of the common law.

B. Interference with the Plaintiff-Defendant Relationship

Some critics have argued that litigation investment interferes with the relationship between the claimholder and the party she is suing. The Institute for Legal Reform has argued that
   [t]he pernicious effect on defendants is clear: because [litigation
   investment] agreements are typically made under a "veil of
   secrecy," a defendant facing a claim funded by [litigation
   investment] may not even realize who is guiding litigation strategy
   and decisions on the other side, making it unfairly difficult to
   mount an adequate defense. (98)

In Weaver, Bennett & Bland v. Speedy Bucks, Inc., a plaintiffs lawyer alleged that an investor, Speedy Bucks, intentionally induced the lawyer's client to refuse a reasonable settlement offer, against her attorney's advice, and worse, did so in secret because the lawyer did not know that the client had taken money from the investor. (99)

As we will see in the discussion of the law of subrogation in Part III.C, courts have enforced contracts that transfer party control in litigation to insurers and have concluded that the question of who is in control of the litigation may remain hidden from the factfinder and the court, unless some independent wrong is alleged, such as the promotion of perjury, the concealment of assets, or some form of tortious interference. I will argue that the same rule-of-law concerns are at stake in the transfer of party control in subrogation and litigation investment, and the rule in the former should be the rule in the latter.

In liability insurance, one of the risks that arises from transferring control is not, as is alleged in the case of litigation investment, that settlement will not happen, but that settlement will happen too easily and against the strong objections of the insured. The story of how courts dealt with this risk by imposing the duty to settle on insurers and expanding the duty to defend is one of remarkable responsiveness on the part of the law to the needs of society, but it is important to remember that courts did not eliminate all the risks faced by an insurance consumer who transfers party control in exchange for coverage. (100) This is the point of the discussion of the so-called "full coverage" cases in Part III.D. The fact that in third-party insurance the party who cedes control may have more faith in her defense than her insurer has, and that in litigation investment the party who cedes control may have more faith in her claim than her investor has, is a distinction without a difference from a rule-of-law point of view. In both cases, control over such things as whether to go to trial is being sold for a price to a stranger, albeit for different reasons. (101) The underlying rationale for adopting a liberal attitude in both cases--that the common law should allow such transactions barring strong countervailing public policy reasons--is the same.

C. Interference with the Party-Court Relationship

Some critics have focused on the rule-of-law concern that litigation investment interferes with the relationship between the claimholder and the court. For example, in American Optical Co. v. Curtiss, a party who, for its own reasons, did not want to enforce a patent was approached by another party who wished to deprive the patent infringer of its market, and who offered to take an assignment of the patent and bring an infringement suit, which that party would fund and control. (102) The court held that the contract violated New York's public policy because it was a "contrivance" designed to allow a stranger to profit by pretending to the court that it was the real party in interest. (103) Stephen Presser has argued that from the earliest years, the "Blackstonian hostility to third parties becoming involved in lawsuits," had to do with the sense that "the third-party funder is anonymous ... [using] secret influence" that "amounts to 'fraudulent interference.'" (104)

The argument that the rule of law is violated because litigation investment allows third parties to conceal their "real" interest from the court warrants two different answers. First, as the discussion of subrogation in Part III.C demonstrates, the common law has enforced contracts that are explicitly designed to conceal the true identity of the party in interest from the jury (although probably not the judge). Second, to the extent that this is a genuine concern, it is not obvious that litigation investment requires opacity at all. Unlike subrogation, in which the concealment of the identity of the benefitted party is a major benefit--if not the central goal--of the insurer, it is not clear that litigation investment funders need to keep their involvement secret from adverse parties, the courts, or even juries. (105)
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Title Annotation:Abstract through II. The Rule-of-Law Critique of Litigation Investment, p. 833-859
Author:Sebok, Anthony J.
Publication:William and Mary Law Review
Date:Feb 1, 2015
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