ASSIGNABILITY OF CAUSES OF ACTION

This section deals with legal causes of action as a species of intangible property. Preliminarily, we should note some general facts about the body of American law that governs the assignability of a cause of action by a plaintiff to a third party.m _{Although courts were originally hostile to assignment of virtually} all causes of actions, many types of claims are now transferable. Claims arising out of contract are, in general, fully assignable and are, indeed, actively exchanged in commerce. Many tort claims, e.g., those for damage to property, nuisance, etc., are also generally assignable. We focus here, however, on personal injury claims, one type of cause of action that is normally not assignable. Although personal injury claims are not directly transferable, they may be de facto transferable, at least in part, through certain assign-

m _{See generally, Weinberg, “Tort Claims as Intangible Property: An Exploration from an Assignee’s} Perspective,” 64 Ky.L.J. 49 (1975); Lylle, Personal Injuries: Creditors v. Victim, Claim and Award,” 81 Dick.L.Rev. 82, 93-101(1976); 6 Am.Jur.2d Assignments Secs. 34-45 (1963); Annot., 76 A.L.R.2d 1286(1961).

ments of interests, perhaps most notably through subrogation by an insured to the insurance carrier.n Strangely, some jurisdictions have permitted assignment of the proceeds of personal injury claims although the assignment of the claim itself is barred.o

THE CASE OF NIKE v. LOBEL

Victoria Nike is a graduate student in aerospace engineering and, until a fateful day last Fall, an avid competitive runner for her local track club. On the day in question, Victoria was running on one of the streets adjacent to her university’s campus. Suddenly her dreams of a medal-winning performance in the annual Lynchboro 10-Miler were rudely shattered by an “encounter of the worst kind” with an automobile driven by a local businessman, George Lobel. Lobel was cited by the investigating police officer for driving under the influence of alcohol. However, it has subsequently become apparent that, if Nike sues, Lobel’s attorney will vigorously raise a defense of contributory negligence. Nike was, he will contend, running on a heavily traveled street at dusk and failed to wear a reflective vest or any highly visible kind of clothing. Also, the damage calculations are likely to be the subject of fierce dispute since the extent and permanence of Nike’s injuries are not perfectly clear. Specifically, Nike’s ability to pursue her athletic career in the future is highly debatable.

Nike’s roommate, Carla Konomos, is a first-year student in the economics Ph.D. program. Konomos has a low tolerance for Nike’s frequent wailing about the painful uncertainties of her legal position. Indeed, Konomos has recently been heard to mutter under her breath: “Idiot! Why doesn’t she just peddle her claim for a little upfront money?! Just sell out and avoid all the months and months of grief over this.”

QUESTIONS

1. Suppose that Nike did want to sell her claim in exchange for some advance compensation. finder pre- sent law in the U.S., important restrictions exist as to her ability to transfer rights to a cause of action in exchange for financial or other consideration. Whom do you understand to be the intended beneficiary of these restrictions on transfer? Are there any general public policy purposes that the re- strictions are designed to serve?

2. Absent any legal restraints, why might Nike want to sell her claim rather than litigate it herself? Enumerate as many conceptually distinguishable reasons as possible.

3. Suppose that Nike had a disability policy under which her insurance carrier will pay her immediately for various bodily injuries under a fixed-payment schedule. To what extent is it possible for an insurance company to recover from Lobel under Nike’s personal injury claim?

4. What problems, if any, do you see with legal restrictions against free assignment of tort claims to third parties? Are there any areas in which you would be prepared to expand on the present degree of assignability?

5. Does membership in the Bar constitute a good reason why a potential claim purchaser might not be permitted to engage in such transactions?p

n _{Kimball and Davis, “The Extension of Insurance Subrogation, 60 Mich. L.Rev. 841, 858, 867-68} (1962); Reed, “Insurance Subrogation in Personal Injury Actions: The Silent Explosion,” 12 Am.Bus.L.J. 111 (1974).

o

Although New York Statutory and common law both appeared to bar assignment of personal injury claims, in Richard v. National Transportation Co., 158 Misc. 324, 285 N.Y.S. 870 (1936) an injured party’s assignment to a hospital of the proceeds from such a claim was held valid. But see Southern Farm Bureau Casualty Insurance Co. v. Wright Oil Co., 248 Ark. 803, 454 S.W.2d 69 (1970) where the distinction between the cause of action and a contingent claim on proceeds is rejected.

p _{For instance, New York law bars an attorney from acquiring an interest in any suit where the primary,} and not merely incidental, purpose of the assignment is to bring a suit. See N.Y. Judiciary Law Sec. 488 (McKinney 1968).

6. Now assume the same basic facts as in the Nike situation described above, except that all legal restrictions on the assignability of legal claims have been abolished. After careful consideration of her situation, Nike feels, that compared to litigating the claim herself, it would be preferable to sell the claim if she can get any price over $7200. Six lawyers have approached Nike and expressed an interest in buying her claim. Although Nike of course has no way of knowing it, the maximum bids that the lawyers are willing to pay are $6800, $7300, $7550, $7650, $7900, and $8200, respectively. 7. What would explain why the various parties place different values on Nike’s claim?

8. What prediction would you make about the price that Nike is likely to receive?

9. Suppose that only lawyers #2 and #5 above exist. They realize that, by concerted action, they probably could get Nike to sell for $7201. What is the concerted action? Use a Prisoner’s Dilemma analysis to assess the prospect of their being able to collude effectively against Nike. How would the presence of additional lawyers affect matters?

10. Back to all six lawyers again. In addition, assume that, by remarkable coincidence, there are four other cases exactly like Nike’s. Each lawyer is only capable of handling at most one case. How would the existence of the four other cases affect the price that Nike could expect?

11. “Laymen tend to have a fundamental misconception about the behavior of markets. They believe that buyers compete against sellers and sellers against buyers. Actually, it is the buyers who are their own worst opponents, and likewise for the sellers.” Comment on this statement.

SOME COMMENTS ON THE “ANSWERS”

WARNING: If you read this section without having first tried to work out for yourself the answers to the questions above, the author cannot take responsibility for resultant defects in your learning!

Here are a few thoughts on what you might have gotten out of the preceding questions. Not all of the items are dealt with, and you should work out the details of some of these general answers, if you have not already done so.

Most people initially feel that an underlying aim of the restrictions on transferability is protection of the unsophisticated victim from exploitation. One important lesson of the Nike hypothetical is the troubling implication that the restrictions on assignability tend actually to disadvantage plaintiffs. The favored parties appear to be (a) defendants, who effectively buy the cause of action in what we call “settlement;” and (b) lawyers and insurance companies to whom a modified interest in the cause of action can be given through contingency fees and subrogation, respectively. These parties are not obliged to compete against possibly higher bids for claims that might otherwise be forthcoming from persons to whom full or partial assignment is legally impermissible.

The gain to defendants is perfectly clear. However, it might be objected that, if the number of lawyers or insurance companies is large, then competition will tend to eliminate any net gains to the lawyers and insurance companies: the consideration given for the contingency fee or subrogation will tend to equal the value of the interest surrendered by the victim. For instance, market pressure will force the price of insur- ance policies to be lowered by the prospective value of the insurance company’s potential recovery under the subrogation privilege. Similarly, lawyers will have to give “value received” in services for the contin- gency fees they get. Thus, these “favored” parties would not really gain at the expense of the Nikes of the world. Is this argument correct? There is a subtle aspect to the answer that requires analytical results treated in Chapter II. By way of preview, the answer is: Yes and no; market pressure does guarantee some return to assignments of interests through the “back door” means of contingency fees and subrogations, but the value received in this way is likely to be less than it would be if the claims were capable of out- right sale. Can you guess why at this point?

The small-scale competition among several would-be purchasers is designed to show something of the process whereby freer transferability might ensure the victim of receiving a fair value for the claim. Allowing a competitive market generates information about the claim’s value. Unlike the two-person

Chicken game analyzed above, bluffing and misinformation is not likely to work when the number of parties increases; one’s bluff is likely to be in effect “called” by a competitor. Thus, Nike does not have to be a sophisticated evaluator of her own claim, so long as the potential purchasers are themselves sophisti- cated and are compelled to compete against one another.

The answer to the part of the problem dealing with price prediction is that the potential purchaser who places the highest value on the claim will get the claim. This bidder must at least outbid the second-high- est valuation. Where between that minimum outbid and the maximum valuation will the actual payment made to Nike fall? That ultimate result is somewhat indeterminate, a product of the bargaining process between Nike and the high-value lawyer.

The key to the remainder of the question is this: if four claims are now to be (bought) sold instead of one, the price must be low enough to induce the fourth most reluctant buyer to buy and, at the same time, high enough to induce the fourth most reluctant seller to sell. What range of prices meets these criteria? The price predictions just suggested involved an area of indeterminacy, a bargaining range.

What do you think happens to the range of indeterminacy as the number of buyers and sellers increases? If you can work out the answers to these questions, you are well on your way to understanding the process of price formation in a competitive market.

An objection frequently raised against transferability is that it will result in cases being litigated that otherwise would have been settled. Now, it is not so clear that this would be such a bad thing even if true. Bias against plaintiffs may now cause cases not to be litigated that should be litigated. More surprisingly, it is not even so clear that the incidence of settlement would not be increased rather than decreased. Cases tend to be settled when the opposing parties have similar estimates of the expected value of the recovery. For instance, suppose that plaintiff and defendant have identical estimates of the outcome of a case if it is litigated to final judgment: they both estimate that the prospect of judgment to the plaintiff is worth about $55,000. [In the next chapter, we will get a little bit more sophisticated about how prospects are evaluated v hen they are to any extent uncertain.] Suppose further that litigation costs are $4000 for plaintiff and $3000 for defendant. In total, the parties can save $7000 in costs by not going to trial. Hence, they will both be better off at any settlement figure between $51,000 and $58,000.

The above example can be generalized. Estimates of the outcome need not be identical in order for mutual gains from settlement to exist; the divergence in views must merely be less than the cost to both parties of proceeding to final judgment. Do you see why this is true?

Now for the relevance of assignability to all of this. A plausible argument might be that assignability would produce a more objective valuation of claims by people who are specialists in such evaluations. After all, if the present holder of a claim placed an unduly low value on it, there would be money to be made from detecting this fact and purchasing the claim for a figure closer to its real value. Indeed, a mar- ket-like valuation of one’s claim might induce a downward revaluation by one who overvalues his cause of action. After all, if I see that nobody else values my asset as highly as I do, it may produce some reas- sessment in my mind as to the accuracy of my original subjective valuation. In sum, transferability might well produce more uniformity in the valuation of claims. If so, an increase rather than a decrease in pre- trial settlement is a defensible prediction. Do you find this a persuasive argument? Why?