March 31, 2015

Why Lawsuit Lending Left Unchecked Is a Threat to Free Enterprise

As an affiliate of the U.S. Chamber of Commerce, the U.S. Chamber Institute for Legal Reform (ILR) knows a thing or two about free enterprise.

It is this very commitment to the free enterprise system that led the U.S. Chamber to create ILR: Free markets and economic freedom are based upon the rule of law.

It was free market economist Freidrich Hayek who argued in his seminal book, Road to Serfdom, that the very foundation of a free society is one that is based upon rule of law, rather than “a country under arbitrary government.” Hayek argued that such rule of law “means that government in all its actions is bound by rules fixed and announced beforehand.”

At the time of the American founding, this idea was articulated clearest by John Adams. The United States was to be “a government of laws, and not of men.”

In other words — a legal system based on certainty, rather than arbitrary rules and the whims of the powerful.

Such is the reason that ILR is fighting against the excesses of the burgeoning lawsuit lending industry.

Lawsuit lending is a process whereby a plaintiff receives “up front” cash from a third-party lender to cover immediate living or medical expenses for the duration of his or her lawsuit. The plaintiff then repays the loan plus interest to the lender out of any settlement or judgment award resulting from the case.

Aside from prolonging litigation and artificially inflating settlement values, how can this single industry be a threat to the rule of law and, thus, the free enterprise system?

The American civil justice system has traditionally been based on two distinct parties: the plaintiff and the defendant. The lawsuit lending industry, however, inserts itself as an entirely new party to the process — with a purely financial interest in the outcome.

Really, lawsuit lending is a scheme that benefits only the lenders; it redistributes wealth from the consumer-plaintiff, to the lender.

When a lawsuit with merit is decided or settled, the defendant compensates the plaintiff to make him or her whole, to make up for the loss or the harm that the plaintiff has experienced. But lawsuit lending reorients the whole process away from making people whole to enriching the lending company.

It also distorts the legal system by perverting the economic incentives of a plaintiff. In other words, a plaintiff will be forced to hold out for a larger settlement, based not on the merits of the case, but because he or she needs more money to cover the amount of the lawsuit loan.

The rule of law in this country is predicated on having a basic level of certainty and predictability. The same rules apply to all people no matter who they are, where they are from, and what is their lot in life. Justice is blind, and everyone is equal before the law.

But that’s not what we have when third parties like predatory lawsuit lenders are injecting themselves into our legal justice system.

A free enterprise system based upon the certainty of rule of law protects businesses and consumers alike. One based on arbitrary rules is unpredictable, uncertain, and doesn’t serve anyone well.

Further, there’s really nothing “free market” about extortive and predatory practices. For example, most lawsuit lenders charge an interest rate of 60 percent to 150 percent of the loan amount, and there are many examples of interest rates reaching as high as 250 percent. And the lenders are pushing legislation in some states to codify such exorbitant rates into law, while existing laws on the books limit the rates other lenders can charge. Free market principles would never validate practices like this.

The last thing we want is our legal system to be run like a casino when the United States is already the most litigious country in the world.

If the problem of lawsuit lending isn’t addressed now, we’re likely to see this industry continue to grow. Imagine companies in every state — with lobbyists in every state capitol — that depend on expanded liability standards and rampant litigation in order for them to prosper. Does that promote the rule of law? Or does it promote the rule of a select group of lawsuit lenders?

The overreach of the lawsuit lending industry is a direct threat to our free enterprise system. By creating a separate set of arbitrary laws exclusively for this industry, policymakers are distorting the legal system, creating uncertainty, and breaking down the rule of law necessary for the free market to flourish.

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