The New York Times recently published an article on institutional investors increasingly investing in private litigation. This development, understandably, is “send[ing] shivers down the spines of general counsels all across the globe,” but even this increase in financing options leaves many parties on the defense side with an inherent advantage. Traditionally, the law of champerty and maintenance has, with few exceptions, prohibited the outright selling of claims to third parties. Thus, private litigation on the plaintiff-side has traditionally been financed through debt instruments like loans. Even the hedge funds and the private equity firms discussed in the article are mainly serving as lenders, not equity holders. By contrast, litigation on the defense side is financed by whatever financial options are available to the defendant, and thus can take advantage of capital markets not available to plaintiffs.
I am highlighting the article not to wade into the debate on whether this increased investment activity is a good thing, but to discuss the law of procedural due process. In my previous posts (here, here, here, and here) I have argued that the problem of mass torts is best understood as a property problem. Specifically, individual ownership of each claim by the plaintiffs leads to suboptimal results for everyone. In fact, it leads to self-defeating behavior, because individual ownership leads to less than optimal deterrence and, as a result, more mass torts. So one way to avoid the problems posed by individual ownership is to collectivize ownership of the claims through a class action. So what do I mean by that, and how does this relate to the law of procedural due process?
The Due Process Clauses found in the Fifth and Fourteenth Amendments prohibit federal and state governments from “depriv[ing] any person of life, liberty, or property, without due process of law.” In civil litigation, the Supreme Court has recognized the claim, sometimes referred to as a “chose in action,” as a protected “property” interest for purposes of the Due Process Clause. Setting aside the issue of state action, the idea is that a plaintiff’s “chose in action” cannot be “deprive[d]” without “due process.”
A “chose in action,” like any property interest, can be understood as a “bundle” of a number of entitlements. Litigation financing implicates two such entitlements. One obvious one is the right to alienate, or sell, the property, which Roman civil law referred to as the “abusus.” The law of champtery and maintenance severely restricts this entitlement, which some have criticized. Another entitlement is the compensation that each claim could provide, at least contingently. This was referred to as the “fructus” under Roman law but can also be understood as the “beneficial interest” of the “chose in action.” Understandably, it is the “fructus” that is motivating recent investment in litigation. Apart from these two entitlements, a third entitlement is the right to dispose of the “chose in action,” understood under Roman law as the “usus” but analogous to the “legal interest” or the “legal title” in the chose in action.
These various entitlements may sound somewhat ornate and arbitrary, but they actually have some significance, even in recent Supreme Court cases. For example,