The Whac-A-Mole Game: An Empirical Analysis of the Regulation of Litigant Third-Party Financing

Publication Date

7-26-2024

Journal

Theoretical Inquiries in Law

Abstract

Using a unique private dataset from one of the largest consumer litigation financing firms in the U.S., we are the first to explore the impact of states’ regulatory activity (statutory or judicial) on funders’ behavior and consumers’ welfare. Our comprehensive dataset includes data on over 105,000 third-party funding agreements from 2000 throughout 2020 and data we compiled ourselves from court decisions, state legislation, and regulatory actions.

Our analysis shows that laws or court decisions that loosen restrictions on LTPF are generally associated with greater funding activity, while restrictions on the interest rate that funders can charge are generally associated with less funding activity. However, in the cases that are funded, the funder tries to circumvent restrictions on the funding agreement by altering other terms. For example, when legislation prohibits compounding or limits how long funders can charge interest, the funder responds by increasing the posted monthly interest rate. Although these interest rate increases are not enough to completely offset the impact of the other restrictions on the funder’s returns, the funder nevertheless has higher returns than it would have without the attempted circumvention.

More generally, our analysis reveals that restrictive court rulings and regulations generally induce funders to either leave the jurisdiction or to adjust other terms in the funding agreement in an effort to maintain their returns. As in the classic Whac-A-Mole game, funders try to maintain their pre-regulation per-funding-return no matter how states’ regulatory activity tries to get rid of it. Although the funder is not always successful in circumventing regulation, policymakers must be aware of funders’ responses to restrictive regulation to ensure that policies are achieving their desired result.

Volume

25

Issue

2

First Page

117

Last Page

140

Publisher

Tel Aviv University

DOI

https://doi.org/10.1515/til-2024-0017

Disciplines

Law | Litigation

Link to Full Text

Share

COinS