Agency Costs in Third-Party Litigation Finance Reconsidered

Abstract

A common criticism of third-party litigation finance is that it can increase agency costs for litigants. One reason critics give for this is their belief that financiers will do something they are prohibited from doing: meddle in the litigants-lawyer relationship. But we think this gets things backwards. Because financiers cannot meddle in the litigation, they try instead to align their interests with the lawyers and the litigants. As we show here, although financiers do this imperfectly, the happy side effect of their efforts is very often to better align the litigants with their own lawyers. They do this by introducing hybrid fee arrangements that prior scholarship has shown to be superior to the contingency or hourly fees that litigants would have otherwise paid their lawyers. For these reasons, we believe much of the concern in the third-party litigation finance literature over exacerbated agency costs and who controls the litigation has been mistaken.

Keywords: third party litigation financing, agency costs, law and economics, contingency fees