Here’s history in the making.

At one time, before many of us were born, plaintiffs had to bankroll their own lawsuits. There, they would pay the attorney for his time and counsel. The plaintiff bore the entire risk for the outcome. But, if he won, he kept the entire pile of money, minus his expenses paid to the attorney.

The next – and dominant – paradigm: contingency fees. There, the risk is transferred to the attorney. In exchange for accepting that risk, the attorney keeps a healthy portion of any settlement / judgment after expenses. That amount is generally 33 to 40%. Naturally, the plaintiff’s attorney must diligently assess the risk / benefit for each opportunity. If the attorney loses, the plaintiff does not go bankrupt.

Enter the modern age.

Third party financing of lawsuits, as reported in the NY Times on November 15th:

Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings…

Ardec Funding, a New York lender backed by a hedge fund, lent $45,000 in June to a Manhattan lawyer hired by the parents of a baby brain-damaged at birth. The lawyer hired two doctors, a physical therapist and an economist to testify at a July trial. The jury ordered the delivering doctor and hospital to pay the baby $510,000. Ardec is collecting interest at an annual rate of 24 percent, or $900 a month, until the award is paid.

For decades, state laws prevented people from “betting” on other person’s lawsuits (scrabble word: “champerty”). The rationale: such interventions would stir up vexatious litigation. Recent changes in some state laws are propping open the floodgates.

The article continues:

[T]he work sits somewhere between banking and gambling. Lenders employ experienced lawyers to judge the strength of cases. They consult databases showing the results of similar lawsuits, just as appraisers value homes based on recent sales. A corporate defendant may have a history of battling personal injury claims; or juries in a specific county may have a history of siding with local employers. Then they place their bets. Counsel will invest up to $10 million in a law firm.

Risk is not entirely transferred, though.

Law firms are generally obligated to repay loans even if they lose. Firms that make less than expected often struggle to make the required payments, and a number of firms that borrowed from one lender have filed for bankruptcy protection.

Whether the firms make money or not on their “investments”, one thing is certain. By infusing capital into funding lawsuits, there will be more lawsuits.