The Duty to Cooperate

Posted on by | No Comments | View Comments

Litigation funders, like venture capitalists, are confronted with an agency problem referred to in the VC literature as the problem of effort provision: the value of their investment hinges on the efforts of others. While venture capitalists have only entrepreneurs to deal with in this regard, litigation funders must rely on the efforts of both the plaintiff and the plaintiff’s litigation counsel. Venture capitalists mitigate this agency risk by bargaining for seats on the board of directors and other control rights. As discussed earlier, litigation funders face champerty challenges if they obtain control of the litigation. For these reasons, litigation funders structurally face more acute agency problems, at least theoretically. However, whether litigation funders actually face an acute agency problem depends on the claim, the claimant and the financing structure.

The effort-provision VC agency problem is driven by the fact that the investors’ money goes to the entrepreneurs directly. With money in their pockets, the entrepreneurs could be less “hungry”, less motivated to succeed overall. The litigation funder’s money goes to the lawyer, not the plaintiff, and to the extent that getting paid weakens the attorney’s motivation to win, that’s countered by the lawyer’s ethical duties to her client. In addition, funders and plaintiffs structure deals to ensure the attorney has “skin in the game”, that is, some of the attorney’s compensation is contingent on winning.

The effort provision problem also exists in an area other than VC that is also a common analogy for litigation funding, namely insurance. However, unlike the insured, the claimant in a typical litigation finance case is a plaintiff not a defendant and stands to lose, significantly, by not exerting effort.

As a result, in the kind of fact pattern and financing structure the model contemplates, there is little effort-provision agency risk. Nonetheless, it is possible to imagine financing scenarios where the risk is real, such as when there are multiple, jointly funded plaintiffs (e.g. a mass tort) or when control of the claim has been purchased by the funder, perhaps by paying an up front “control premium” to the plaintiff. In both situations the claimant’s individual drive to cooperate is significantly lessened.

Regardless of how severe the effort provision agency risk under the model contract and its fact pattern is in practice, we believe it is prudent to adopt the insurance industry solution, namely, a contractual duty to cooperate in the prosecution of the claim. Here is the language we propose:

3.1.2 Duty to Cooperate: Plaintiff covenants to cooperate in the prosecution of the Claim. Specifically, Plaintiff [will/will cause its officers, executives and employees to] promptly and fully assist  Litigation Counsel as reasonably necessary to conduct and conclude the Claim. For the avoidance of doubt, such assistance includes all actions any plaintiff may reasonably expect undertaking, such as submitting to examination;  verifying statements under oath; and appearing at any proceedings. The examples in the preceding sentence are illustrative and do not limit plaintiff’s duty to cooperate in any way.

Leave a Reply

Your email address will not be published. Required fields are marked *


7 × eight =

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

  • © 2018 Maya Steinitz All Rights Reserved
  • Designed By: MWD Affordable Web Designs