Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 10. Damages
institutions may be risk averse because of government regulation of financial
institutions or may find it costly to estimate the likelihood that the claim can be
established in court. These factors may make the interest rate prohibitively high.
And many legal claims (notably most tort claims) are by law not assignable—in
order, it is said, to prevent the fomenting of litigation—and so are worthless as
collateral.
RICHARD POSNER, ECONOMIC ANALYSIS OF LAW 782-84 (2011). The contingency fee contract is a
solution to the problem of otherwise unmarketable claims. The contingent fee allows lawyers
effectively to lend legal services in return for a stake in the otherwise unmarketable claim. By
pooling many claims, the lawyer is able to achieve a diversification of her investment that no one
plaintiff is able to achieve. Moreover, the plaintiffs’ lawyer is a specialist, which gives her the
capacity to make better judgments about the value of particular claims than a traditional lender
would be able to make.
Posner observes that contingent fees of a third or more of the claim often seem exorbitant.
Sometimes they are. But Posner observes that “the contingent fee compensates the lawyers not
only for the legal services he renders but for the loan of those services.” The risk of losing the
case and the long time delays between the labor performed in the pretrial phase of a case and the
ultimate payment of damages, if any, create what are essentially high implicit interest rates on the
loans that plaintiffs’ lawyers are effectively extending their clients. See id. at 283.
If the problem is unmarketable claims, and if plaintiffs’ lawyers are superior bearers of the
risks in question, why not go further? Indeed, the contingent fee introduces a problem of its own,
which is that as joint owners the lawyer and the plaintiff each lack the incentives to act that
exclusive ownership would produce. Why, then, not allow plaintiffs or prospective plaintiffs
simply to sell all or nearly all of their unmatured claims to third parties such as lawyers? The
booming litigation finance industry is experimenting with precisely this. A number of states have
loosened their regulations on the sale of litigation claims to allow litigation finance, and a new
class of hedge funds have leapt into the breach, often led by joint teams of investment experts and
former lawyers with expertise in litigation. See Jonathan T. Molot, Litigation Finance: A Market
Solution to a Procedural Problem, 99 GEO. L.J. 65 (2010). Critics object that such finance
arrangements might produce too much litigation. Posner is not certain:
It might seem that the contingent fee contract and even more clearly outright sale
must result in more litigation. Not necessarily, even though they certainly make it
easier for an illiquid or risk-averse person to bring a suit. The likelier a suit is to be
brought if there is a violation of law that causes injury, the greater the deterrent
effect of whatever legal principle the suit would enforce, and hence the less likely
are potential defendants to engage in the forbidden conduct. What is more, a
contingent-fee contract gives the lawyer a greater incentive to decline a weak case
than if he is paid on an hourly basis, because the cost of losing is shifted from the
client to the lawyer. It is a filtering device.
POSNER, ECONOMIC ANALYSIS, supra, at 284; see also Michael Abramowicz, Litigation Finance and the
Problem of Frivolous Litigation, 63 DEPAUL L. REV. 195 (2014).
Critics of the contingent fee see the matter very differently. Many object to the use of litigation
finance strategies. But many still object even to the investments that the contingency fee allows the
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