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Friday, November 19, 2010

"Choses in Action" and the "Life, Liberty, or Property" Interest

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, in Sprint Comm'ns v. APCC Servs., the Court had to consider whether an "aggregator," that is, a third party hired to bring claims on behalf of pay numerous phone operators, had standing to sue for statutory damages owed by long distance providers like Sprint.  Providers like Sprint owed the amounts because they allowed individuals to avoid paying the pay phone operators by calling numbers like 1-800-COLLECT.   By contract, the aggregators could bring the claim but had to remit all proceeds back to the long distance providers.  So does an aggregator under this arrangement have standing?  The Supremes held yes, drawing on a history of cases where an individual with "legal title" to a claim was permitted to sue even though the entire "beneficial interest" remitted to another party.  Of course, as Justice Roberts pointed out, if you have nothing, you have nothing to lose, so it is unclear how the aggregators could thus establish an "injury-in-fact" for purposes of Article III standing.  Nevertheless, the larger point is that the various sticks in the bundle that is the "chose in action" can be, and have been, sliced and diced.

Why does this matter for due process?  Well, one way to understand any potential "depriv[ation]" caused by the class action is to see it as, in essence, a taking of legal title.  It takes away the right of each plaintiff to use his or her "chose in action" as he or she sees fit, which is often described as "litigant autonomy."  In fact, the class action deprives the legal title of the claims and assigns it to a third party, class counsel.  But, as I argue in my draft, this judicial assignment (or something functionally similar) is necessary to avoid the strategic behavior caused by individual ownership of legal title.

I want to conclude by discussing one interest that cannot be adequately captured by the traditional "bundle of sticks" that define the "chose in action."  A "chose in action," like any intangible property interest, involves a number of entitlements, but the chose in action itself implies a further entitlement.  As most famously shown by Calabresi and Melamed, a "chose in action" is really a secondary entitlement that is meant to protect another, primary entitlement.  And the primary entitlement in mass torts is safety.  The "chose in action" is meant to deter parties from committing mass torts in the first place.  Now, the Supremes have been all over the map as to whether an entitlement to "deterrence" can be understood as "property" interest in and of itself, but it certainly is an interest that is wrapped up in the "chose in action."  As I argue in my draft, an entitlement to "deterrence," while perhaps itself not subject to independent protection (although others have argued for it as a matter of structural due process), should be included in the due process analysis as a private interest.  I will have more to say about this in subsequent posts.

Posted by Sergio Campos on November 19, 2010 at 05:45 PM | Permalink

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