Litigation Archives – Southern California Law Review

Litigation Finance in the Market Square

October 2025October 2025Suneal Bedi* & William C. Marra†

Litigation finance is the subject of a contentious scholarly and policy debate. Litigation funders provide capital to litigants or law firms in exchange for a share of case proceeds. The current debate centers on how litigation finance impacts the civil justice system. Proponents of funding argue it helps litigants get their day in court, while opponents argue funders pervert the judicial process. Policymakers are torn between these two competing viewpoints, without a clear path forward.

This Article reframes the debate about litigation finance. Scholars and policymakers have focused too narrowly on the “litigation” part of litigation finance, that is, on how funding impacts the legal system. We shift the focus to the “finance” implications of litigation finance. We explore for the first time how litigation finance affects competition not only in the courtroom but also in the marketplace—how companies use funding to access not just the courts but also the capital markets. To do this, we offer a novel interdisciplinary approach drawing on the classic business concept of “nonmarket strategies.” This scholarship, which has been all but ignored by legal scholars, studies how companies leverage “nonmarket” institutions like courts to increase their competitive advantage in the market. While we introduce this scholarship with reference to litigation finance, it holds promise to reframe the debate around legal issues far beyond the realm of litigation funding.

Our central claim is that any regulation of litigation finance is a regulation not only of the courts but also of the capital markets, with significant but unexplored implications for contemporary debates about funding. We show that the regulation of funding affects competition in the marketplace and is especially likely to harm small and medium-sized enterprises, which are more likely to rely upon litigation funding to pursue nonmarket strategies. Our approach also offers new insights into the ongoing debate about funding’s impact on the civil justice system. We conclude by inviting scholars and policymakers to further study these new questions about litigation finance’s impact outside the courthouse gates and in the market square.

Introduction

This Article reframes the contentious scholarly and policy debate about litigation finance. Third-party litigation funders provide capital to litigants or law firms in exchange for an interest in the potential recovery from a legal claim.¹ The standard approach to litigation funding focuses exclusively on how litigation finance affects litigation: that is, how it impacts the civil justice system and access to the courts.² Scholars have explored whether funding improves or impairs the legal system, benefits or harms litigants, prolongs or expedites cases, impairs or supports the attorney-client relationship, and so on.³ In the political arena, a fight over how funding should be regulated pits those who argue funding levels the litigation playing field against those who contend it spurs frivolous suits and encourages speculation on lawsuits.⁴

These are important themes but not the full story. Litigation finance is not just “likely the most important development in civil justice of our time,”⁵ it is also a highly important development for the capital markets and business arena. To fully appreciate the welfare effects of third-party funding, scholars and policymakers must study not only how litigation finance impacts litigation but also how it impacts finance; how it affects not only access to the courts but also access to the capital markets. This Article starts that process.

This Article is the first to shift the debate about litigation finance to a host of vital questions that are not currently being considered: How does litigation finance affect business competition? What impact does the rise of this new corner of the capital markets have on corporate strategy, including the use of litigation to gain a strategic advantage in the marketplace? Why do some companies finance litigations and other business activities with third-party litigation funding, rather than with more traditional third-party debt and equity financing? Who wins—and who loses—in the business arena when we impose regulations designed to restrict access to litigation finance? How do the answers to these questions bear upon the existing debate about funding?

One reason these questions about litigation finance have not yet been explored is that legal scholars do not have an accepted framework for analyzing how companies engage with litigation for strategic business purposes. We provide that framework by drawing on foundational business scholarship about “nonmarket strategies,” which provides an account of how companies leverage the courts, legislatures, and other “nonmarket” institutions to jockey for position in the market.⁶ The nonmarket strategy literature speaks directly to how companies interact with the judicial process to gain an advantage in the market, yet it has been almost entirely ignored by legal scholars.⁷ Although we introduce a nonmarket strategy approach in the context of how companies engage with litigation finance, this framework holds the promise of influencing legal scholarship across the waterfront of issues pertaining to business litigation.⁸

Analyzing litigation finance through the lens of nonmarket strategies, we highlight three ways the use of litigation finance affects competition in the market square. First, companies use litigation finance not only to finance litigation but also to raise working capital to support business growth, leveraging the courts (a nonmarket institution) to strengthen their capital position in the market. In this way, litigation finance is simply a new dimension of the financial markets and one that is especially likely to provide a lifeline to small and medium-sized enterprises (“SMEs”) that have relatively thin access to traditional equity and debt capital markets.⁹ Second, companies use litigation finance to pursue litigation as a nonmarket strategy—that is, they use litigation to obtain a strategic advantage relative to other marketplace actors, the same way well-resourced companies have done since long before the advent of the modern litigation finance industry.¹⁰ Third, we recast lobbying efforts to regulate litigation finance and the actions of related trade associations to support or attack litigation finance as, themselves, nonmarket strategies used by companies that stand to lose or gain from the growth of litigation finance.¹¹

These insights provide a fresh perspective on debates about litigation funding. First, we identify an entire set of funding’s policy implications that scholars and policymakers have overlooked. Existing discussions of litigation finance present only one view of the cathedral.¹² Litigation finance’s impact on litigation is explored at length but its impact on finance and business strategy is ignored. Scholars and policymakers cannot fully understand or effectively address litigation finance unless they explore its implications for both litigation and finance. Indeed, one could set aside entirely the debate about whether litigation finance is good for the legal system and still be left with a host of questions about whether litigation finance is good for business and finance.

Our study of the business and finance implications of litigation finance reveals that almost all companies use some form of third-party financing—“other people’s money”—to pay for litigation and other legitimate business pursuits.¹³ Some companies use traditional debt and equity financing. But for many companies—primarily SMEs—structuring a capital raise as a litigation finance investment is the most efficient, or even the only, way to raise new third-party capital. Litigation finance is thus used disproportionately by SMEs to pursue nonmarket strategies that might allow those firms to better compete against larger incumbent players. Regulation of modern commercial litigation finance may undermine SMEs’ ability to compete in the marketplace, likely diminishing welfare.

Second, our study of the finance implications of litigation finance also brings fresh insights to the existing debate about how litigation finance impacts the civil justice system.¹⁴ The traditional debate first defines third-party litigation funding and then zooms in on its impact on the legal system. We instead zoom out and place the modern litigation finance industry in the broader context of the many ways companies use third-party capital to finance litigation and other legitimate business pursuits. When we do this, we show that many arguments that third-party litigation finance adversely affects the civil justice system—that it might promote frivolous litigation, invite foreign control of litigation, and impair the principle of party control—apply equally or even more forcefully to the many other ways claimholders raise third-party capital to support litigation (for example, via traditional debt and equity capital). These insights both expose existing efforts to regulate litigation funding as vastly underinclusive relative to their stated goals and help us see the (mostly negative) welfare effects of targeting only one specific form of third-party funding—that is, the kind of third-party funding supplied by the modern litigation finance industry and especially demanded by SMEs.

This Article proceeds in five parts. Part I describes litigation finance and how it has been framed in the scholarly and policy debate, demonstrating that the narrow focus on litigation finance as a purely “litigation” phenomenon has led to ad hoc regulations and confusion by legislatures on how to manage litigation finance. Part II introduces the concept of nonmarket strategies and describes the various “nonmarket” strategic behaviors that companies pursue. Part III identifies three ways companies use litigation finance (and the regulation of funding) as a nonmarket strategy to jockey for position in the financial and commercial markets. Part IV offers policy implications of this new framework. Part V draws out implications of our framework for legal and business scholars.

I. Today’s Debate About Litigation Finance

We first provide a background on litigation finance, defining what it is and reviewing its scholarly and public policy debate.

A. What is Litigation Finance?

Imagine you are the CEO of a small, family-owned technology company. You invented high-flying weather balloons that operate as airborne communication systems. A much larger company suggests a joint venture, signs a nondisclosure agreement, and learns your trade secrets. In the end, no deal happens—but the larger company soon copies your tech anyway and recreates its own version of your weather balloons.¹⁵

Assume that to rebuild you need $15 million, including $5 million to bring a $150 million trade secret misappropriation case against your one-time joint venture partner and another $10 million to research and develop a next-generation weather balloon transceiver. You have a strong, and therefore valuable, legal claim.¹⁶ But you do not have $15 million. You approach the traditional debt or equity markets, but you experience the same problems many SMEs face: a thin capital market, high lending rates, and reluctant equity investors.¹⁷ What can you do?

An emerging solution is litigation finance, the practice where a third party provides capital to a litigant or law firm in exchange for an interest in the potential recovery of a legal claim.¹⁸ “Litigation funding agreement[s],” one court recently acknowledged, “are a fact of contemporary complex litigation.”¹⁹ Instead of trading away equity in the company or pledging assets to a traditional lender, you can pledge expected proceeds from your legal claim as collateral for the $15 million you need.

Litigation finance investments are typically “non-recourse,” which means the litigation funder receives its return only if the case succeeds.²⁰ If the case loses, the funder receives nothing.²¹ The non-recourse nature of litigation finance can make it attractive even to companies that can access the traditional equity and debt capital markets, because (unlike new equity investment) litigation finance does not dilute existing shareholders,²² and (unlike debt finance) funders do not have the right to regular payments of interest and principal or the power to put the company into bankruptcy or sue for recovery if those payments are not made.²³

The key insight, then, of the modern litigation finance industry is an insight not so much about the civil justice system but about corporate finance: legal claims are assets against which companies can secure financing, no different than inventory, real estate, and accounts receivable. In short, litigation funders are asset-based investors, and the asset is law.²⁴

Asset-based investing typically requires specialized expertise,²⁵ and litigation finance is no different. Instead of valuing a company’s real property or inventory, litigation finance companies expend great time and effort studying the merits of legal claims before advancing capital against those claims.²⁶ The need for subject-matter expertise has led to specialization among litigation funders.²⁷ Some litigation finance companies invest primarily in business-to-business disputes. These “commercial litigation funders” include publicly-traded companies like Burford Capital and Omni Bridgeway, multi-strategy hedge funds like the D.E. Shaw Group, and privately-held groups like Parabellum Capital and Certum Group.²⁸ Other financiers focus instead on financing mass tort claims, where they typically help law firms advertise for clients who have been injured in a particular mass tort.²⁹ Still other entities are consumer litigation funders, primarily providing small-dollar advances to individuals with personal injury and medical malpractice claims.³⁰

Commercial litigation finance companies typically undertake months-long due diligence processes before they invest in a case.³¹ Funders are staffed with highly experienced lawyers who develop specialized expertise in evaluating whether a case is a winner or loser.³² Funders frequently consult subject matter experts to assist with their evaluation, including outside diligence counsel and third-party damages experts.³³ The net effect is that commercial funders invest in only a tiny fraction of cases they see—typically less than 10% of opportunities.³⁴ In the end, it is likely that a funder’s evaluation process is even more rigorous than the evaluation provided by contingent fee law firms or by companies deciding whether to pursue a case with their own retained earnings.³⁵

In this Article, we focus on the commercial litigation finance space, which is by all accounts the largest and most prominent segment of the litigation finance industry and is also the emerging target of regulation by policymakers.³⁶ In 2023, there were an estimated thirty-nine active commercial litigation finance companies, with a total of $15.2 billion in assets under management.³⁷ These companies made $2.7 billion in new litigation finance commitments that year, with funding distributed across 353 new deals.³⁸ Commercial litigation finance companies invest in a range of business-to-business disputes, including contract, business tort, antitrust, patent infringement, trademark, copyright, and trade secret misappropriation cases.³⁹ Commercial litigation funders can finance either claimants or law firms,⁴⁰ and they can invest at any stage of the case, from pre-suit through appeal and post-judgment proceedings.⁴¹

Litigants and law firms can use litigation finance in two different ways: to pursue their legal claims and to raise general-purpose working capital. To begin with the first point, litigation is very expensive.⁴² Many litigants are liquidity-constrained: they lack access to the thousands or even millions of dollars it takes to pursue litigation.⁴³ Even if prospective litigants have the money to pursue the case, they may be risk-constrained: that is, they may not want to risk their capital in an uncertain litigation.⁴⁴ Law firms can litigate cases in exchange for a contingent fee—effectively operating as a third-party funder—but law firms are usually uniquely ill-suited to invest in litigation, for reasons that scholars have explored at length.⁴⁵ Litigation finance provides an alternative path for litigants and law firms to finance their cases.

The second way litigants can use litigation finance is by using the funding as working capital to finance general corporate endeavors, including to hire new workers, build new products, or invest in research and development.⁴⁶ In this sense, litigation funders operate similarly to traditional equity and debt providers, advancing capital in return for an interest in potentially valuable assets.⁴⁷ Although the focus of this Article is the use of litigation funding directly by claimholders, law firms may also use litigation finance as working capital—drawing down funding against

existing contingent fee matters to hire new employees and expand client services.⁴⁸

While commentators typically distinguish between funders’ supply of fees and costs funding on the one hand and working capital on the other hand, it is important to remember that money is fungible.⁴⁹ A dollar of third-party financing allocated for one purpose frees capital for other purposes.⁵⁰ Thus, even if a claimholder obtains third-party litigation funding that may be used only to pay its lawyers in a case, this financing frees up the company’s remaining capital to pursue other legitimate corporate purposes like paying employee wages, delivering goods and services, and so on.⁵¹ Similarly, when funders support law firms, this funding typically enables lawyers to enter into a “full contingency” relationship with their clients (with the firm’s fees partially funded by the litigation funder), enabling the claimholder to pursue a case without having to devote its finite resources to paying lawyers.⁵² Thus, even funding directed to law firms helps corporate claimholders free up capital for general corporate purposes.

B. The Scholarly Debate

Legal scholars are paying attention to what Maya Steinitz calls “likely the most important development in civil justice of our time.”⁵³ The scholarship about litigation finance is vibrant and growing. Yet virtually the entire collection treats litigation finance as fundamentally a litigation phenomenon. That is, scholars study litigation finance almost solely as a development in “civil justice,” examining how funding impacts the legal system.⁵⁴ The unit of analysis is the legal system, with proponents of litigation finance arguing that funding creates a better legal system and opponents arguing that funding hurts civil justice.⁵⁵ Indeed, even articles that apply an economic lens to litigation finance apply that lens to study how funding impacts litigation, not how funding impacts the financial markets or the broader business world.⁵⁶

Existing scholarship studies the litigation effects of litigation finance from many different and important angles. Scholars have debated whether litigation funding increases the amount of litigation and whether it results in the filing of frivolous lawsuits.⁵⁷ They have studied how litigation funding affects litigants’ access to the courts⁵⁸ and the price at which claims settle.⁵⁹ Scholars have studied how funding impacts the price of legal services and how it injects competition into the market for legal services.⁶⁰ They have explored whether litigation funding violates background legal rules about champerty and maintenance.⁶¹ They have studied whether litigation funding runs afoul of the legal ethics rules⁶² and whether funders interfere with (or strengthen) the attorney-client relationship.⁶³

An especially large body of scholarship studies whether litigation funding agreements and communications should be disclosed to the court and defendants during litigation, both as a policy matter and under the attorney work product doctrine and attorney-client privilege.⁶⁴ Control is another hot topic, with scholars debating whether funders should be allowed to control litigation strategy decisions.⁶⁵

This scholarship is important, but it studies litigation finance through a narrow lens: the effect that litigation finance has on the legal system. A few scholars have discussed the causes of litigation finance—that is, why companies use third-party litigation funding to finance their cases. But that scholarship (which includes our own) is mostly limited to explaining that companies typically use litigation funding because they are either liquidity-constrained—that is, they do not have the capital to pursue the case—or they are risk-constrained—that is, they do not want to risk their capital on litigation.⁶⁶ This explanation is true as far as it goes, but it goes only far enough to explain why companies would use third-party capital rather than retained earnings to finance litigation or working capital needs. While commentators have recognized the valuable non-recourse nature of litigation finance, no one has studied at depth why companies might use third-party litigation finance rather than the host of other ways they can raise third-party capital like traditional debt or equity finance to support their litigation and business endeavors.⁶⁷

Moreover, the emphasis on the litigation effects of litigation finance has also led to the near-exclusive study of litigation finance as a tool to finance the fees and costs of litigation. But, as explained above, that is only half the story: companies also use litigation finance to raise working capital that can be used to support non-litigation business needs like hiring employees.⁶⁸ And because money is fungible, “fees and costs” funding also frees up other capital for managers to reinvest in a company’s core market pursuits.⁶⁹ Scholars sometimes mention in passing that funding can be used to raise working capital, but the market impact of funding’s role as a source of general business capital has not been analyzed.⁷⁰

The existing scholarship about litigation finance is insightful and important—but it tells only half the story. To fully understand litigation finance, we must study its implications not just for litigation but also for finance—its implications for competition not only in the courtroom but also in the market square.

C. The Policy Debate

Alongside this scholarship stands a four-front policy debate about litigation finance. This policy debate tracks the scholarship by focusing on

funding’s impact on the civil justice system while ignoring its impact on the marketplace.

First, opponents of litigation finance are asking federal and state legislative bodies to enact regulations of litigation finance.⁷¹ While there are not yet any federal regulations that specifically target litigation funding, several states have acted. The first round of state statutes were essentially consumer protection statutes that targeted consumer litigation finance agreements, that is, agreements that typically concerned smaller-dollar advances to personal injury tort plaintiffs. State regulations in this mold were enacted in Arkansas, Indiana, Nebraska, and Vermont, among other states.⁷² These consumer-rights statutes require consumer litigation funders to register with the state,⁷³ provide funded parties with certain disclosures in the litigation finance contract,⁷⁴ and sometimes limit the interest rates funders can charge customers.⁷⁵ With respect to disclosure during litigation, those older regulations state that litigation funding documents are protected by the attorney-client privilege, thus making it harder for defendants to obtain information on a plaintiff’s funding agreements.⁷⁶

More recent “second wave” regulations focus on the commercial rather than consumer sector, and they demand more rather than less disclosure of litigation funding agreements. Emblematic second wave regulations include newly-enacted laws in Indiana⁷⁷ and Louisiana⁷⁸ and a failed bill in Florida.⁷⁹ The United States Chamber of Commerce, a business advocacy group, was a chief proponent of these bills.⁸⁰ While earlier consumer litigation funding statutes confirmed enhanced protection for litigation funding documents, the Indiana and Louisiana statutes, and the failed Florida bill, all provide that commercial litigation funding agreements are subject to discovery and disclosure to opposing parties.⁸¹ The statutes also contain other regulations designed to restrict litigation finance. For example, Indiana’s statute prohibits funders from exercising any control or even “influence” over litigation decisions,⁸² while the Louisiana statute requires litigation funders to be responsible for costs imposed on funded litigants⁸³ and provides that any violation of the statute renders a litigation finance contract unenforceable by the funder.⁸⁴

Advocacy groups, like the Chamber of Commerce, have recently argued that litigation funding may present a national security risk. They argue that foreign adversaries may use funding to harm American companies and obtain access to U.S. corporate trade secrets.⁸⁵ Supporters of litigation funding have pushed back against this narrative, claiming it is a scare tactic without basis in fact.⁸⁶ However, in response to these concerns, some states have enacted new laws. Indiana’s new law bans litigation funding from foreign adversaries of the United States, including China, Russia, and North Korea,⁸⁷ and Louisiana’s statute requires disclosure of anyone entitled to receive, pursuant to a funding agreement, any information affecting national defense or security disclosed during a litigation.⁸⁸

Second, in addition to the policy fight among legislators, there is a push to have judges themselves enact disclosure rules that target litigation funding.⁸⁹ In 2021, the U.S. District Court for the District of New Jersey became the first federal district court to adopt a disclosure rule targeting litigation finance companies’ involvement across all cases.⁹⁰ Chief Judge Colm Connolly of the U.S. District Court for the District of Delaware has also adopted the rule.⁹¹ This rule requires parties to disclose to the court if any non-party is funding the matter on a non-recourse basis.⁹² If such a funder exists, the litigant must disclose the identity of the funder, “[w]hether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval,” and “[a] brief description of the nature of the financial interest.”⁹³ The rule also states:

The parties may seek additional discovery of the terms of any such agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.⁹⁴

Lawmakers opposed to litigation funding have also asked the Judicial Conference—the judicial branch’s national policymaking body for the federal courts—to investigate whether mandatory disclosure of litigation finance agreements should be required.⁹⁵ In response, the Judicial Conference has formed a working group to study whether the Federal Rules of Civil Procedure should address litigation funding.⁹⁶

Third, alongside efforts to persuade lawmakers and judges to enact regulations, the practice of litigation funding continues to be tested during litigation. Defendants routinely seek disclosure of litigation funding agreements and communications from plaintiffs.⁹⁷ Most courts reject these attempts, concluding that the communications are either not relevant to the case or protected by the work-product doctrine or attorney-client privilege.⁹⁸ But some courts have allowed some disclosure of litigation funding information, concluding that funding agreements may be relevant to issues including the adequacy of class counsel or the value of the plaintiff’s claim.⁹⁹ Courts have also addressed related legal questions including whether litigation finance violates prohibitions against champerty¹⁰⁰ and whether funders can exercise control over settlement decisions.¹⁰¹

Fourth, bar associations and legal ethics committees are increasingly being asked to decide whether litigation funding agreements violate applicable ethics rules. In 2020, the American Bar Association released a set of “Best Practices” for third-party litigation funding, which addressed topics including the handling of confidential information, the rule against fee sharing, and funding contracts.¹⁰² In addition, bar association ethics committees have weighed in on topics including whether agreements between funders and law firms violate the rule against lawyers sharing fees with non-lawyers,¹⁰³ whether litigation counsel should advise clients in the negotiation of litigation funding agreements,¹⁰⁴ how lawyers should approach the sharing of confidential information with litigation funders,¹⁰⁵ and whether lawyers may refer their clients to litigation funders.¹⁰⁶

On all four fronts, the policy debate has tracked the scholarly debate and suffers the same limitations. That is, the policy debate studies litigation finance solely as a litigation phenomenon, with one side arguing that litigation funding promotes a more level litigation playing field and the other side arguing that funding perverts the civil justice system. A simple illustration: litigation finance is discussed by congressional judiciary committees but wholly ignored by financial services committees.¹⁰⁷ One congressional committee debate in June 2024 exemplifies the narrow scope of the debate about funding, with the supporters of funding emphasizing its positive impact on the legal system and the detractors of funding alleging its detrimental effects on civil litigation.¹⁰⁸

The lobbying groups on either side of the debate similarly focus on the litigation effects of funding. As noted, the Chamber of Commerce is probably the most vocal critic of litigation funding and a driving force behind much of the recent state regulation of funding.¹⁰⁹ The Chamber has issued a number of attacks against litigation funding, and they all focus on funding’s impact on the courtroom, not the marketplace or the capital markets.¹¹⁰ Indeed, although the Chamber usually supports deregulating the capital markets and expanding small businesses’ access to capital,¹¹¹ the Chamber has not addressed how litigation finance might impact those goals. Meanwhile, the International Legal Finance Association—the trade association for the litigation finance industry—has likewise articulated the case for litigation funding as fundamentally about access to the courtroom, not access to the capital markets or the business marketplace.¹¹²

* * * * *

Existing scholarship and policy debates discuss funding’s impact on litigation but largely ignore its effect on finance and business strategy. When we reframe the debate about litigation finance around business strategy, we pave new paths to study litigation finance, its use cases, and its impact on society. These are questions that have not simply gone unanswered—they have gone unasked.

II. Nonmarket Strategies: A Primer

We explained in Part I that scholars and policymakers have largely overlooked litigation finance’s implications for corporate finance and business strategy. We believe this has happened in part because legal scholars lack a widely adopted framework for analyzing how companies strategically engage with litigation. In Part II, we provide that framework by drawing on a robust body of literature in business academia concerning “nonmarket strategies.” While business scholars pay great attention to nonmarket strategies, legal scholarship has almost entirely ignored the topic, despite its intimate connection to not only litigation finance specifically but also litigation more generally.¹¹³ In this section, we define and describe nonmarket strategies, identify different forms of nonmarket strategies, and discuss why companies use these nonmarket strategies.¹¹⁴

A. What Are Nonmarket Strategies?

Companies seek to maximize value for their shareholders and other stakeholders. This theme resonates in legal, ethics, and business scholarship¹¹⁵ The actions a company takes to maximize value are called strategies.¹¹⁶

Business research has long focused on how companies use the marketplace in which they operate to extract and maximize value. These behaviors are considered market strategies.¹¹⁷ Market strategies are “a concerted pattern of actions taken in the market environment to create value by improving economic performance.”¹¹⁸ The key element here is the use of the private market environment, which “includes those interactions between the firm and other parties that are intermediated by markets or private agreements. These interactions typically are voluntary and involve economic transactions and the exchange of property.”¹¹⁹ When companies operate with market strategies, they perform business activities like producing goods, hiring workers, contracting with counterparties, and engaging in mergers and acquisitions.

Recall the weather balloon company we discussed earlier. That company surely engaged in a host of market strategies to grow. These market strategies might include offering competitive wages to attract talented employees, conducting research and development into new technologies, entering into joint ventures and other strategic partnerships with other companies, contracting with suppliers, and marketing products. Each of these behaviors relies on private commercial markets, including the markets for labor, supplies, and customers.

The rise of institutional economics has drawn attention to strategic behavior beyond the market environment.¹²⁰ Business scholars have increasingly recognized that, in addition to traditional “market strategies,” companies also engage in strategies that use the “nonmarket.”¹²¹ The nonmarket environment “includes those interactions that are intermediated by the public, stakeholders, government, the media, and public institutions. These institutions differ from those of the market environment because of characteristics such as majority rule, due process, broad enfranchisement, collective action, and publicness.”¹²² The nonmarket environment includes the courts, the lawmaking process, interest group activities, and social and cultural institutions.¹²³

A nonmarket strategy, then, is a set of actions that utilizes the nonmarket environment to drive economic value.¹²⁴ These institutions create the “rules of the game” for competition in the marketplace.¹²⁵ Companies engage in nonmarket strategies when they leverage nonmarket institutions (for example, courts) to compete more effectively in the marketplace.¹²⁶

Our weather balloon company is likely to pursue a host of nonmarket strategies alongside more traditional market strategies. For example, it might lobby lawmakers for subsidies, sue companies engaging in anticompetitive behavior, or challenge government regulations adverse to its business interests.

B. The Types of Nonmarket Strategies

Business scholars have identified three types of nonmarket strategies that firms might pursue: adaptive strategies, transformative strategies, and additive strategies.¹²⁷ We discuss each in turn.

Adaptive Strategies

Adaptive strategies are nonmarket strategies that take the state of existing institutional nonmarkets as a given and attempt to either leverage or circumvent those nonmarket institutions to the actor’s advantage.¹²⁸ One common example is the use of litigation by a company to attack the market position of a direct or indirect competitor.

The Lanham Act is a common locus of adaptive nonmarket strategies, as it provides companies with a cause of action to sue a direct or indirect competitor for false advertising.¹²⁹ One leading Lanham Act case involved Johnson & Johnson’s false advertising suit against Procter & Gamble concerning over-the-counter (“OTC”) heartburn medication.¹³⁰ In 2003, Procter & Gamble launched the OTC heartburn drug Prilosec OTC, which was poised to compete with Johnson & Johnson’s incumbent Pepcid offering.¹³¹ Procter & Gamble’s marketing campaign suggested that one pill of Prilosec OTC would provide twenty-four hours of heartburn relief.¹³² Johnson & Johnson challenged this statement as false advertising, because the pill took up to five hours to start working.¹³³ A federal district court agreed with Johnson & Johnson and granted a preliminary injunction against the advertising campaign, ruling that Procter & Gamble’s advertisements were “literally false and certainly convey[ed] a false message.”¹³⁴

Johnson & Johnson’s litigation may be described as an adaptive nonmarket strategy because, rather than competing through the market system (for example, by using comparative advertising, a well-studied and researched marketing strategy¹³⁵), the company used existing legal institutions—specifically, the court system and liability rules—to gain market share from Procter & Gamble. Lawsuits like these help the plaintiff firm extract economic value from the marketplace, regardless of whether the competitor suit is welfare-enhancing for consumers.¹³⁶

Transformative Strategies

Companies may also engage in transformative nonmarket strategies, which are strategies that seek to alter a nonmarket institution that impacts the company.¹³⁷ In these cases, companies seek to lobby politicians, regulators, and courts to transform the rules of the game.¹³⁸

Lobbying is a classic example of a transformative nonmarket strategy. Ample work has examined the nature of lobbying as it relates to political processes and the law.¹³⁹ When companies lobby, their goal is frequently to have lawmakers (re)write the rules of the game in their favor.¹⁴⁰ For example, when the federal government responds to lobbying efforts by granting tax subsidies that offset the cost of installing electric vehicle chargers, the government effectively reduces the purchase price of electric vehicles. This gives electric vehicle manufacturers, like Tesla, a competitive leg up over manufactures of more traditional gas-powered vehicles.¹⁴¹

Transformative nonmarket strategies may also be directed toward the civil justice system. A company sometimes lobbies lawmakers to change court rules to favor itself. One recent example is illustrative: after Apple lost two prominent patent cases before the U.S. International Trade Commission (“ITC”), the company asked Congress to change the rules governing how the ITC adjudicates complaints and enforces penalties.¹⁴² These rules, if adopted, would make it more difficult for parties to prevail in ITC suits against Apple, giving the company a competitive advantage in the marketplace.¹⁴³

Litigation can also be a form of transformative nonmarket strategy. We discussed above how litigation functions as an adaptive nonmarket strategy when a company uses it to enforce existing rules against competitors. By contrast, litigation is used as a transformative nonmarket strategy when companies bring court challenges to government regulations that impair their business efforts. From one perspective, these litigations simply ask courts to affirm that an inferior law must give way to a supreme law.¹⁴⁴ From another perspective, however, these litigations are nonmarket strategies that ask courts to transform the legal “nonmarket” environment in which firms operate.

For a recent example of litigation as a transformative nonmarket strategy, consider the Chamber of Commerce’s lawsuit challenging the Federal Trade Commission’s rule banning non-compete agreements between employers and employees.¹⁴⁵ Although the Chamber does not disclose its individual donors, the Chamber is financed by corporations and engages in strategic litigation on their behalf.¹⁴⁶ To satisfy standing requirements, the Chamber invokes the associational standing doctrine, which allows the Chamber to vindicate its members’ interests.¹⁴⁷ The Chamber’s challenge to the rule against non-competes is a transformative nonmarket strategy because it seeks to use the nonmarket environment of courts to create a market environment in which companies have greater leverage over their employees, giving them a potential competitive advantage in the marketplace.

Thus, litigation can be used as part of both adaptive and transformative nonmarket strategies. The distinction between the two generally tracks the distinction between the enforcement of “private law” and “public law.”¹⁴⁸ “Private law” refers to litigation that ordinarily occurs between private individuals or companies.¹⁴⁹ As Abram Chayes has explained, private law litigation is typically retrospective—that is, it involves a controversy over an “identified set of completed events” and in which the right and remedy are interdependent. The typical remedy is “that the plaintiff will get compensation”—money damages—“measured by the harm caused by the defendant’s breach of duty.”¹⁵⁰ Adaptive nonmarket strategies typically take this form, with one company litigating a private law claim against another company.

Transformative nonmarket strategies typically involve litigation over the validity of laws and regulations themselves. In such cases, the defendant is usually a governmental body and the primary relief sought is almost always declaratory or injunctive, not retrospective damages. Companies usually engage in public law litigation as part of a transformative strategy to require or prevent the enforcement of laws on issues of public concern—such as civil rights, environmental law, or administrative law.¹⁵¹

Additive Strategies

Additive nonmarket strategies work “by supplementing [existing institutional] structures with new, decentralized ones to which participants commit voluntarily rather than in response to a mandate from the state, thus creating a polycentric institutional structure.”¹⁵² Rather than simply take the institutions as a given, companies seek to augment institutional structures to give themselves a competitive advantage.¹⁵³

In one common additive strategy, companies engage in self-regulation, either acting alone or in concert with competitors. For example, companies may band together into an industry trade association and sign on to certain “standards of conduct,”¹⁵⁴ or they may all agree to certain voluntary business practices.¹⁵⁵ When acting alone, companies may act solely to reduce a perceived negative externality with the hope of setting an industry norm, resulting in benefits to the firm.¹⁵⁶ Traditional corporate social responsibility (“CSR”) behaviors also fall into this nonmarket strategy.¹⁵⁷ CSR strategies include, for example, voluntary environmental and socially-sustainable practices.¹⁵⁸ Companies frequently undertake these behaviors with the hope that stakeholders will reward the company and hence further enhance the firm’s economic value. But additive strategies also seek to anticipate or influence institutional changes. Companies may voluntarily take costly behaviors in anticipation that regulators will eventually enact rules of conduct that the firm has already adopted, leaving the firm better positioned to succeed in the market.¹⁵⁹

C. The Choice Among Nonmarket Strategies

Not all strategies are created equal. Companies consider a range of internal and external factors when deciding whether and how to use nonmarket strategies.

External factors include the nature of both market and nonmarket institutions.¹⁶⁰ Some jurisdictions, including the United States, have clear laws and regulations that allow for relative predictability in outcome.¹⁶¹ Other jurisdictions, including many developing countries, may have no laws, or either unclear or incomplete laws, governing business conduct.¹⁶² Whether an institution is relatively “complete” or “captured” (as in the United States) or relatively “incomplete” (as in many developing countries)¹⁶³ influences which type of nonmarket behavior a company may engage in.

Internal factors also affect which strategies a company may use. For example, some companies may develop a comparative advantage in implementing certain nonmarket strategies over others.¹⁶⁴ These so-called firm-specific capabilities drive which nonmarket strategies firms pursue.¹⁶⁵ Research on firm-specific capabilities analyzes a company’s unique strengths and asks what strategies the company may use to leverage these unique strengths.¹⁶⁶ The goal is to create sustained, long-term competitive advantages in the marketplace.

Consider, for example, a company that can recruit former politicians into its ranks.¹⁶⁷ Relative to its competitors, that company has a comparative advantage in transforming the institutional rules in which it operates. The firm’s political connections provide it with superior insight into how certain regulations will be interpreted and implemented. These capabilities may also

give the firm a comparative advantage in influencing which regulations are made or unmade. Such a firm is more likely to use transformative strategies, as it has unique capabilities to influence regulations.¹⁶⁸

A firm’s capabilities will also help predict whether a company will use a market or a nonmarket strategy in the first place.¹⁶⁹ Certain companies, as we describe using examples below, can more cheaply and efficiently engage in nonmarket strategies in comparison to more traditional market ones. As we argue, SMEs may find it cheaper to engage in capital funding using nonmarket strategies than market ones.

III. Litigation Finance as a Nonmarket Strategy

Litigation finance is an important development not only for the civil justice system but also for the capital markets and marketplace at large. Companies use litigation finance to compete not only in the courthouse but also in the market square. Drawing upon the nonmarket strategy literature discussed above, we illustrate three ways companies engage with litigation finance to help themselves better compete in the marketplace.

The chart below provides a roadmap for our discussion. This chart indicates the types of strategies, the result each strategy seeks to achieve, an example of the strategy, and the business benefit the strategy creates. We also note that some of these strategies involve the use of litigation finance while others involve the regulation of funding.

A. Litigation Finance as Corporate Finance: An Adaptive Strategy

The best things in life may be free, but everything else costs money. Corporate finance is the discipline that studies how companies finance their business pursuits.¹⁷⁰ We first provide a brief overview of the traditional ways companies finance their activities. We then demonstrate how litigation finance operates as an alternative “nonmarket” way to access investment capital and finance business pursuits, including but not limited to the financing of litigation. Using litigation finance in the way we describe below is a type of adaptative nonmarket strategy.

“Market” Methods of Corporate Finance

Companies need money to pursue the waterfront of legitimate corporate activities, including hiring employees, manufacturing products, marketing their goods, investing in research and development, and yes, sometimes pursuing litigation. Firms use one of three broad categories of finance: retained earnings, equity, and debt.¹⁷¹ All three involve the company appealing to traditional market institutions: the marketplace for goods and services to obtain revenue that can then be used to finance future business activities, or the capital markets, in which third parties provide debt or equity capital in exchange for an anticipated return on their investment.¹⁷²

Recall the weather balloon company that needs $15 million in financing, including $5 million to pursue litigation and $10 million for research and development. To come up with the cash, first, the company could use its retained earnings, that is, profits or revenue in excess of expenses.¹⁷³ Second, the company might raise debt from third parties. These loans can be either unsecured or secured.¹⁷⁴ Unsecured loans rely on the borrower’s creditworthiness and future cash flows.¹⁷⁵ Secured loans are backed by company assets.¹⁷⁶ Secured loans may be further categorized: some are secured by all company assets, while others are “asset-based” loans secured by only a specific subset of the company’s assets.¹⁷⁷ Third, the company might raise equity financing, selling ownership interests in the firm in exchange for capital.¹⁷⁸

Several points bear emphasis. First, both debt and equity financing usually involve companies raising capital from third party investors.¹⁷⁹ Creditors remain third parties after the transaction is consummated; that is, they do not become first-party owners of the company.¹⁸⁰ Equity investors, by contrast, are third parties relative to the company before making their investment and come inside the company as first-party owners after the transaction is consummated. Thus, if a firm like our weather balloon company needs capital to fund litigation and research, there is a good chance it would approach the capital markets and raise capital from third-party investors, with those investors expecting their return to come from some or all of the firm’s assets.¹⁸¹

Second, a firm’s choice between using retained earnings, debt, and equity to finance business endeavors is typically driven by questions of corporate finance and business strategy. Classical corporate finance theory teaches that, in perfect markets without transaction costs, firms should be indifferent between using retained earnings, debt, and equity.¹⁸² In reality, markets are not perfect and firms are not indifferent.¹⁸³ There is an entire discipline—corporate finance—devoted to studying firms’ decisions about how to finance their business activities.

A corporate finance literature review is beyond the scope of this Article. It is sufficient for present purposes to identify a few tradeoffs that companies face when deciding whether to finance their business activities through retained earnings, debt, or equity.¹⁸⁴

For example, companies may prefer to use retained earnings because they can act quickly when they see an investment opportunity, avoiding the time-consuming and scrutiny-inducing process of raising money in the capital markets.¹⁸⁵ On the other hand, existing shareholders may prefer to receive those earnings as dividends today and shift the risk of tomorrow’s success onto third-party debt or equity capital.¹⁸⁶ Debt finance frequently has tax advantages,¹⁸⁷ and it usually caps creditors’ upside, ensuring shareholders receive any surplus profits generated when the company invests the loan.¹⁸⁸ On the other hand, debt instruments usually saddle the debtor with relatively inflexible payment obligations, requiring the company to regularly generate cash to pay interest on the debt.¹⁸⁹ An advantage of equity financing is that equity investors have fewer downside protections than lenders, which means equity is usually “riskier capital” than debt.¹⁹⁰ Thus, early-stage companies and other businesses without a proven track record can raise third-party capital in the equity markets even when the debt markets are closed to them.¹⁹¹ On the other hand, raising new equity dilutes existing shareholders, who may prefer not to have their ownership interest and decision-making power reduced.¹⁹²

The upshot for our purposes is that firms select their method of corporate finance for reasons very specific to that firm and the firm’s regulatory environment. Preferences and market access will vary according to a host of factors, including the firm’s size and strength, its industry, its geography, and the regulatory landscape.

Third, while all companies in principle can use retained earnings or obtain third-party debt or equity, in practice, SMEs usually do not have access to substantial retained earnings or to liquid debt and equity markets.¹⁹³ There is a robust literature explaining how and why SMEs face challenges accessing traditional capital markets.¹⁹⁴

Again, a comprehensive literature review is beyond the scope of this Article. It is sufficient to repeat the oft-made insight that information asymmetries, transaction costs, and other market inefficiencies result in SMEs either being totally cut off from the debt and equity markets or facing much higher costs of capital relative to more established incumbent players.¹⁹⁵ Prospective investors in smaller companies face much larger information asymmetries compared to when they invest in larger companies that are publicly traded and have armies of analysts studying their every move.¹⁹⁶ Increased information asymmetry means increased risk, and increased risk means higher borrowing costs.¹⁹⁷ In short, it is generally much harder for SMEs to find willing investors or lenders, and when they do, they typically face a much higher cost of capital compared to larger companies.¹⁹⁸ Similarly, SMEs almost by definition do not have significant retained earnings to invest in business-critical projects, including research and development, launching new products, or paying lawyers for bet-the-company litigation.

When SMEs can access third-party capital, they tend to gravitate towards bank loans with personal guarantees or towards higher-cost secured credit, in which a third-party investor lends against discrete collateral and has the right to foreclose on that collateral if the debtor fails to repay the loan.¹⁹⁹ With asset-backed transactions, the financier treats the collateral as the primary or, indeed, sole source of repayment and thus does not need to rely on the counterparty’s general creditworthiness, enabling loans to go to companies that cannot qualify for unsecured debt or equity investments.²⁰⁰

We thus have a rough hierarchy of firms’ ability to access the capital markets. Larger, more established firms generally have the best access to equity and debt markets. SMEs often have thin or no access to the capital markets. But SMEs with high-quality assets can frequently obtain secured loans even when unsecured lending or equity investment is not an option.

Litigation Finance as a “Nonmarket” Method of Corporate Finance

Enter litigation finance. We explained earlier that the central insight of the modern litigation finance industry is an insight about corporate finance—namely, that a strong legal claim is a valuable asset that can be used to secure third-party financing. Litigation finance may be characterized as asset-based finance in which the asset is a legal claim, and the financing can be used either to secure financing to pursue the legal claim itself or to secure working capital that can be used for general corporate purposes. Put differently, if a company needs money to invest in litigation, research, or any other legitimate business pursuit, it can use retained earnings, it can raise equity investment, it can raise traditional types of secured or unsecured debt—or it can raise litigation finance.

But we just explained that (a) companies face tradeoffs when deciding whether to use retained earnings, debt, or equity finance, and (b) not all companies have equal access to all of these forms of capital. The same holds true for litigation funding. The latter point is easier to make: litigation finance is only available to companies with strong legal claims that typically involve plaintiff-side litigations with sizable damages potential.²⁰¹ If you do not have a litigation claim, you cannot obtain litigation finance.

As for tradeoffs, there are pros and cons to the use of litigation finance. Many of the drawbacks concern the high transaction costs inherent in litigation funding deals. Because commercial litigation funders perform comprehensive diligence into funded matters, funded deals often take months to close. Companies that need financing quickly—whether because their case has a statute of limitations issue, they urgently need capital to hire new employees, or they have some other reason—may prefer to use readily available retained earnings, or existing access to equity or debt investors, rather than wait months for litigation funders to complete their work.²⁰²

As we explained, litigation funders typically perform more comprehensive diligence on a company’s legal claim compared to other forms of financing.²⁰³ Companies that use retained earnings do not have to subject their decision to pursue a legal claim to the discipline of the market.²⁰⁴ Meanwhile, traditional equity or debt financiers do not usually invest based on the value of legal claims and thus are unlikely to scrutinize the legal claim before providing financing.

The regulatory landscape concerning litigation funding also imposes transaction costs. Litigation funders typically request to see case confidential information before investing in a lawsuit. And defendants typically seek disclosure of litigation finance agreements and communications, in part to gain a strategic advantage in the litigation.²⁰⁵ The early statutes regulating consumer litigation finance deals recognized this fact and reacted by ensuring that communications with funders do not impair the protections of the work product doctrine or attorney-client privilege.²⁰⁶ Ironically, the more recent statutes recognize this fact, too, except that they mandate rather than prohibit litigation finance disclosure.²⁰⁷ Regulations that impede funders’ access to full and transparent communication from prospective funded parties, present lurking regulatory challenges, and limit funders’ ability to control litigation all effectively increase the funder’s risk and thus increase the price funded parties must pay for litigation funding.

Against these drawbacks stand the benefits of using litigation finance. Such funding is typically non-recourse, which means the company can secure financing backed only by a discrete legal asset.²⁰⁸ Litigation finance is thus frequently preferable to debt, since the funder does not have an absolute right to be repaid and the attendant enforcement rights that creditors have. And funding is frequently preferable to equity, as litigation funding does not dilute existing shareholders.²⁰⁹ Funders, like other asset-backed lenders, also have specialized expertise, which can help the company maximize the value of its legal assets. Moreover, because traditional debt and equity financiers are not trained in valuing legal claims, they are likely to undervalue legal claims relative to litigation funders.

But perhaps the most important reason many companies—especially SMEs—use litigation finance is simply that these businesses have no other choice. Most companies do not have millions of dollars in retained earnings to invest in litigation or research and development. Most companies are not publicly traded and do not have investment bankers who help them access liquid pools of debt and equity capital. Traditional equity and debt financing is either prohibitively expensive or effectively unavailable to these many enterprises. And most companies do not have substantial assets like inventory, machinery, or real property that can serve as the basis for asset-backed loans.²¹⁰

For these reasons, SMEs are leading consumers of litigation finance.²¹¹ They use litigation finance not only to finance their cases but also to obtain lower-cost capital than they could access in the traditional capital markets.²¹² Simply put, companies most likely to use litigation finance are SMEs that have difficulty accessing capital in the more traditional capital markets.

The implications for the scholarly and political debate about funding are significant. Companies use litigation finance not simply because it gives them better access to the courts. They use litigation finance because it gives them better access to the capital markets. Companies use litigation finance as an adaptive nonmarket strategy, leveraging their legal claims to secure financing that allows them to grow their businesses and better compete in the marketplace. This is especially true when a company secures litigation finance to obtain general working capital, for in that sense, litigation finance companies serve an identical function to financiers in other corners of the capital markets: they are third parties who provide investments secured by company assets. This insight holds true when they secure funding to pay the fees and costs of litigation: money is fungible, and by obtaining financing for their litigation, they free up other cash to invest in their core business.

B. Litigation Finance to Pursue Litigation: Adaptive and Transformative Strategies

We explained earlier that businesses frequently seek a competitive market advantage by engaging in litigation, including by bringing suit against competitors, customers, suppliers, or regulators. Companies use the court system to gain a strategic advantage in the marketplace and drive economic value to themselves.²¹³ Winning the litigation is a secondary consideration, or more precisely, a necessary antecedent to the ultimate goal of winning in the marketplace. Companies use litigation as an additive nonmarket strategy when they use litigation to enforce existing rules and regulations against other market participants in the hope of achieving an advantage in the marketplace.²¹⁴ These litigations are typically “private law” disputes seeking money damages. By contrast, companies use litigation as a transformative nonmarket strategy when they use the court system to transform the rules and regulations that affect their business, typically by challenging the legality of laws and regulations.²¹⁵ These litigations are typically “public law” disputes seeking declaratory and injunctive relief.

If a company wants to use litigation as a nonmarket strategy, it needs money to pursue that claim. Litigation is expensive, and some firms (generally, SMEs) are at a comparative disadvantage in terms of their ability to use retained earnings to file suit or to access traditional capital markets to raise debt or equity capital that can be used to finance litigation.

A firm’s relative inability to use litigation as a nonmarket strategy puts the firm at a comparative disadvantage in its ability to compete in the marketplace. Compared to larger players, the firm is relatively unable to pursue private law claims against other market participants to bolster its position in the market, and it is also comparatively less able to pursue public law claims that attack unfavorable government regulations. Thus, litigation finance helps level the playing field in the marketplace by enabling SMEs to have greater ability to use litigation as a nonmarket strategy. The battle over litigation finance must then be understood at least in part as a battle over which companies have access to litigation as a nonmarket strategy.

Our argument here does not presume that any and every nonmarket strategy is necessarily welfare-enhancing. Indeed, scholars have questioned the value of litigation through a host of normative lenses. For example, some have argued that private law litigation between two parties does not maximize welfare for either the parties to the litigation or society as a whole.²¹⁶ Likewise, the use of lobbying—a transformative strategy—has been challenged as inefficient rent-seeking.²¹⁷ While resolution of these underlying questions is beyond the scope of this Article, we offer three relevant comments.

First, the question for purposes of this Article is not whether litigation (or lobbying for that matter) should be used as a nonmarket strategy. Litigation has been used for strategic business reasons since long before the rise of the modern litigation finance industry, and well-resourced companies will continue to use litigation as a nonmarket strategy even if third-party litigation finance is stamped out of existence. The question instead is whether the ability to use litigation for strategic purposes should primarily be the domain of companies more likely to rely on retained earnings or traditional capital markets to pursue litigation or whether it should also be the domain of smaller firms more likely to use third-party litigation finance.²¹⁸ Put differently, even if one believes the “first-best” policy would be for no one to use litigation as a nonmarket strategy, the second-best solution is not necessarily to allow well-resourced incumbents to use nonmarket strategies while stripping smaller competitors of the means to do so too.²¹⁹

Second, there are good reasons to believe that cases funded by litigation funders are less likely to exacerbate broader concerns about the use of litigation as a nonmarket strategy. We previously discussed funders’ rigorous due diligence process, which tests a case’s merits in the courtroom, not its impact on the plaintiff’s market position.²²⁰ Because funders need their return to come from a court settlement, they generally do not benefit if a funded case results in a small monetary settlement but a significant market advantage for the funded party. Put differently, litigation funders are less likely to back cases that help companies win in the marketplace unless the company is also likely to win in the courtroom. Thus, although some critics of litigation finance argue that funders may promote frivolous litigation, the opposite is more likely to be true: cases funded by litigation funders are probably less likely to be weak, competitor-bullying cases than are most other cases, because funded cases are subject to more pre-filing scrutiny than other cases.

Third, litigation finance is more likely to be used in contexts where litigation is used as an adaptive rather than a transformative strategy. Because litigation funders invest on a non-recourse basis, receiving their recovery only from case proceeds, they typically only invest in cases where the plaintiff seeks money damages, not injunctive relief.²²¹ Thus, litigation funders frequently finance competitor suits like patent suits, false advertising cases, unfair competition suits, and so on, all of which are within the domain of adaptive nonmarket strategies. But litigation funders are highly unlikely to finance cases that pursue transformative strategies, as those suits are more likely to be cases brought against governmental entities seeking declaratory and injunctive relief, usually in the form of a court order finding a particular regulation unenforceable.

Larger firms that do not need litigation finance (for example, the Apples and Intels of the world) are more likely to pursue litigation as a transformative strategy rather than an adaptive strategy. In a related context, scholars have studied the different litigation preferences of repeat players compared to “one shotters.”²²² Larger corporations tend to be repeat players, whereas smaller firms and individuals tend to be one-shotters.²²³ And larger companies are more likely to be sued than to sue for violations of patent, antitrust, unfair competition, trademark, and copyright laws. For this reason, they are less likely to pursue meritorious plaintiff-side cases involving those underlying legal theories because they do not want to establish precedent that expands liability in those domains. For example, a victory in a specific patent case for Apple may be Pyrrhic if it expanded Apple’s liability for patent infringement in dozens of other cases.

Litigation used as a transformative strategy—that is, as a strategy to invalidate rules and regulations—presents a different story. In general, larger firms will be more comfortable with plaintiff-side litigation that develops precedent in ways that restrict the power of regulatory bodies, such as precedent overruling the Chevron doctrine or invalidating agency regulations. This insight helps explain why the Chamber of Commerce strongly opposes modern commercial litigation finance even as it actively pursues public law litigation to benefit its own financiers.²²⁴

In sum, (a) large and small companies can use litigation as a nonmarket strategy, (b) litigation finance is primarily used by smaller companies to implement adaptive nonmarket strategies, and (c) larger companies that have less of a need for litigation finance are more likely to pursue transformative strategies and disfavor litigation involving adaptive strategies. From these points emerges an important implication for the policy debate about litigation finance: regulations of litigation finance, with their focus on third-party funders’ receipt of money damages rather than injunctive relief, target the use of litigation as an adaptive strategy, primarily as employed by SMEs. If the battle over litigation finance is partly a battle over which companies can use litigation as a strategy to better compete in the marketplace, then the regulation of litigation finance will generally tend to give larger companies a comparative advantage over smaller companies.

C. Lobbying and Trade Associations: Transformative and Additive Strategies

Litigation finance has become a contentious policy issue, with regulations being considered by state and federal lawmakers and judges alike. The opponents of litigation finance are lobbying lawmakers and judges, asking them to impose regulations that range from mandatory disclosure rules and registration requirements to rate caps and even bans on funding.²²⁵ These efforts are led by the United States Chamber of Commerce, a business lobby, and by major corporations that have found themselves as defendants in funded cases.²²⁶ The supporters of funding have launched their own counter-offensive, trying to stave off the regulations they believe will hinder the industry’s growth.²²⁷ The funding community’s efforts are led by the International Legal Finance Association (“ILFA”), a nonprofit organization whose mission is to promote litigation finance and represent funders’ interests before lawmaking bodies like the United States Congress.²²⁸

As we have demonstrated, participants in the policy debate focus on funding’s impact on the civil justice system.²²⁹ Our analysis suggests a different interpretation: the policy fight itself must be understood at least in part as a nonmarket strategy where the stakes are success in the market. Many companies stand to either win or lose in the marketplace when litigation finance becomes widely available. Efforts by groups like the Chamber of Commerce and businesses to impose burdensome regulations on the litigation finance industry represent a classic example of that common transformative nonmarket strategy: lobbying.²³⁰ These enterprises are trying to transform the laws and regulations governing funding to essentially increase the transaction costs associated with third-party litigation finance, with the goal of ultimately giving larger firms a comparative advantage in the marketplace.

Litigation funders have also responded by forming ILFA, a trade association. ILFA engages in lobbying as its own transformative strategy in response to efforts to regulate litigation funding. ILFA has also promulgated a set of best practices for funders, which includes an emphasis on clarity, avoidance of conflicts of interest, confidentiality, respect for court rules, and capital adequacy.²³¹ ILFA’s members voluntarily commit to these standards.²³² Trade associations that set standards for an industry present prime examples of additive nonmarket strategies.²³³ Companies voluntarily sign onto these trade associations, they fund them, and ultimately, they follow the advice of these trade associations.²³⁴ The goal is frequently to insulate an industry from further external regulation through self-regulation.²³⁵

By voluntarily committing to the standards set by ILFA, financiers can accomplish several strategic goals. By self-regulating, they may avoid “being subject to government rules which may be more onerous or less efficient than the rules defined locally by the actors themselves.”²³⁶ The legal profession itself is largely self-regulating through the code of legal ethics, allowing lawyers primarily to regulate themselves rather than being subject to external government regulation.²³⁷ Moreover, by organizing behind a group like ILFA, funders can signal to stakeholders that they take seriously their obligations to justice and the legal system. The goal here is to create a system where financiers are “rewarded for establishing a norm of better behavior, either by those who benefit from their actions directly, or from those who value responsible behavior more generally.”²³⁸

IV. Policy Implications of Litigation Finance as Nonmarket Strategy

We have demonstrated that litigation finance has powerful implications not only for the legal system, but also for finance and business competition. The primary contribution of this Article is thus to identify a new dimension of study for scholars and policymakers who wish to understand the welfare effects of litigation finance. We provide a nonmarket strategy framework for understanding how litigation funding impacts finance and business.

We now provide some initial observations for how our insights affect debates about funding. First, we identify implications related to funding’s impact on the marketplace. Second, we draw implications for the existing debate about funding’s impact on the civil justice system.

A. A New Dimension to the Policy Debate

Companies use litigation finance to compete not only in the courtroom but also in the marketplace. Scholars and policymakers cannot fully understand and effectively regulate litigation finance unless they account for these overlooked welfare impacts.

A Regulation of the Capital Markets

Recent efforts to regulate “third party litigation finance” cannot be understood as efforts to broadly regulate the practice of third parties funding lawsuits in the civil justice system. Rather, the proposed regulations are targeted at a particular corner of the capital markets—and a corner more likely to be used by SMEs.

Consider two enacted regulations: a federal court’s local rule requiring disclosure of certain third-party financing agreements, and an exemplary state law regulating certain third-party financing arrangements. These regulations do not target third-party funding writ large. Rather, they target very specific types of corporate transactions.

We begin with the District of New Jersey’s Local Rule requiring mandatory disclosure of certain litigation funding arrangements, which has been copied verbatim by Judge Colm Connolly in the District of Delaware. The rule requires disclosure of any

person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.²³⁹

Subtle nuances in the Rule’s language work to require disclosure only of certain forms of third-party finance. The rule covers entities that are “not a party” to the litigation and provide finance “on a non-recourse basis.” These limitations carve out traditional equity and debt financing. If a company raises equity financing from third parties with the goal of using that money to pursue litigation, disclosure is not required because the third-party investor essentially becomes a first-party owner. This new equity holder could very well hold voting rights to control the company’s activities, including its litigation. Meanwhile, the reference to “non-recourse” financing carves out traditional forms of unsecured or secured credit, which typically rely on the firm’s general creditworthiness (unsecured loans) or discrete assets like receivables or machinery (secured loans).

The Rule also excludes from disclosure instances where a company finances a third party seeking injunctive relief, as when companies provide financing to entities like the Chamber of Commerce so that the Chamber can seek declaratory and injunctive relief in public law cases. Companies that finance third parties seeking injunctive relief do not retain “a contingent financial interest” in the litigation, nor do they finance in exchange for “a non-monetary result that is not in the nature of a personal or bank loan, or insurance.” They simply finance the pursuit of injunctive relief that will necessarily benefit their business.

A similar analysis may be applied to a recent law enacted in Louisiana, SB355, which requires disclosure of litigation financing agreements and prohibits funders from controlling litigation.²⁴⁰ The statute has a lengthy definition of “third-party litigation funder” that excludes from its coverage many entities that are in fact third-party litigation funders. The statute’s 300-plus word definition of “litigation financing” provides:

“Third-party litigation funder” means any person or entity that provides funding intended to defray litigation expenses or the financial impact of a negative judgment related to a civil action and has the contractual right to receive or make any payment that is contingent on the outcome of an identified civil action by settlement, judgment, or otherwise or on the outcome of any matter within a portfolio that includes the action and involves the same counsel or affiliated counsel. This term does not apply to:

(a) The named parties, counsel of record, or law firm of record providing funding intended to defray litigation expenses related to the civil action.

(b) A person or entity providing funding solely intended to pay costs of living or other personal or familial expenses during the pendency of such civil action where such funds are not used to defray litigation expenses.

(c) Counsel of record, or law firm of record, or any referring counsel providing legal services on a contingency fee basis or to advance his or her client’s legal costs where the services or costs are provided by counsel of record or law firm of record in accordance with the Rules of Professional Conduct.

(d) A health insurer, medical provider, or assignee that has paid, is obligated to pay, or is owed any sums for health care for an injured person under the terms of a health insurance plan or other agreement.

(e) A financial institution providing loans made directly to a party, counsel of record, or a law firm of record when repayment of the loan is not contingent upon the outcome of such civil action or on the outcome of any matter within a portfolio that includes such civil action and involves the same counsel or affiliated counsel.

(f) A nonprofit legal organization exempt from federal income tax under 28 Section 501(c)(3) of the Internal Revenue Code, or any person providing funding to a nonprofit legal organization that represents clients on a pro bono basis. This Subparagraph does not affect the award of costs or attorney fees to a nonprofit legal organization or related attorney.²⁴¹

Each of the exclusions in subsections (a) through (f) is in fact an instance of third parties to the litigation that provide financing to support the litigation. Subsection (b) exempts third-party funding provided for a particular use of funds. Ignoring that money is fungible, the statute permits funders to provide capital that is specifically used for “costs of living or other personal or familial expenses,” so long as that money is not diverted “to defray litigation expenses.” Subsection (b) does not permit funders to provide capital used for corporate working capital, thus ensuring that the statute regulates discretionary financing to companies but not to individuals.

The remainder of the exclusions carve out various entities that provide third-party funding. Subsections (a) and (c) exempt lawyers (third parties to the litigation) who finance the litigation on a contingent fee basis, while subsection (a) also allows one party to the litigation to finance the litigation of their co-plaintiffs. Subsection (d) exempts insurers. Subsection (e) carves out all third-party investments that are non-recourse and limited only to the legal claim. In other words, subsection (e) recognizes that many companies use general-recourse third-party debt and equity financing to back their litigation, but it excludes those entities from having to disclose their funding. Meanwhile, subsection (f) excludes nonprofit entities organized under section 501(c)(3).

The definition of “third-party litigation funder” also only covers entities with a “contractual right to receive or make any payment” from the funded case.²⁴² This definition therefore excludes all funders that seek declaratory or injunctive relief in public law matters (as opposed to money damages relief in private law matters). This exclusion applies, for example, to organizations like the Chamber of Commerce’s Litigation Center, a 501(c)(6) organization that raises money from donors to pursue injunctive relief against government entities (pursuing transformative nonmarket strategies on behalf of its backers). The Chamber’s proposed regulations of third-party funding carve out the form of third-party funding that the Chamber uses.

In sum, the New Jersey disclosure rule and Louisiana statute, which are emblematic of other proposed and enacted regulations,²⁴³ do not broadly regulate the practice of third parties financing the pursuit of legal claims. Rather, they target specific forms of third-party funding, with a definition based on the corporate form of the transaction and the parties thereto. The regulations turn primarily on the financier’s corporate status (e.g., whether it is a law firm, nonprofit, or profit-seeking funder), the collateral for the financier’s investment (e.g., whether it is broad-recourse equity or debt, or recourse only to the litigation), and whether the financier’s expected return is tied directly to a monetary result in a case. Certain types of companies are more likely to prefer the narrow category of third-party funding regulated by these rules and statutes. Specifically, SMEs are more likely to structure their third-party capital raises using modern commercial litigation finance, regardless of whether they use the litigation funder’s investment to pursue litigation or as general corporate working capital.

Implications for Business Competition

Efforts to regulate or deregulate litigation finance must be viewed as a battle for an edge not just in the courthouse but also in the marketplace. When companies lobby for regulations of litigation funding, they are pursuing transformative nonmarket strategies to give themselves a market edge by discouraging litigation funding. And when the funding industry forms its own lobbying and standard-setting body, it is pursuing transformative and additive nonmarket strategies to combat the anti-funding transformative strategy.

This Article has also shown that companies use litigation finance to pursue nonmarket strategies in both adaptive and transformative ways. Regulations that promote or discourage litigation finance will impact firms’ ability to avail themselves of these nonmarket strategies. This insight raises important but overlooked welfare concerns that scholars and policymakers must consider when evaluating litigation finance.

First, consider the use of litigation finance to pursue litigation as an adaptive strategy (e.g., to pursue an antitrust suit against a competitor) or as a transformative strategy (e.g., to challenge a regulation that targets the company’s business model). If policymakers curtail access to funding, then companies that rely on litigation funding to pursue litigations with adaptive or transformative purposes will be less likely to pursue those litigations, or they will have fewer resources to effectively prosecute those litigations.²⁴⁴

In the first instance, the normative impact of litigation finance regulations will likely depend on whether one views the pursuit of these nonmarket strategies as a good or bad thing. For example, if one thinks the patent laws are under-enforced and the antitrust laws promote a healthier market, then diminished access to litigation finance may be a bad thing because it means fewer firms will be able to pursue patent and antitrust suits as an adaptive nonmarket strategy. If one takes a different view—that litigation involving the existing patent and antitrust laws diminishes welfare—then one might view the regulation of litigation finance as a good thing.

But the analysis is more complicated than this. Many companies do not need modern litigation finance to pursue litigation as an adaptive or transformative nonmarket strategy. Ban litigation funding, and they still have access to retained earnings and traditional debt or equity capital to pursue litigation designed to give them an edge in the courthouse. Regulating litigation finance thus only prohibits some players from deploying these nonmarket strategies. Put differently, if one prohibits some (mostly smaller) firms from accessing litigation finance, other (mostly larger) firms that do not need litigation finance can still pursue litigation for adaptive and transformative purposes, putting them at a comparative advantage in the marketplace. Policymakers must consider the welfare implications that flow from firms’ unequal ability to pursue litigation as a nonmarket strategy.²⁴⁵

Second, in addition to the use of litigation for adaptive and transformative purposes, this Article also demonstrated that companies can use litigation finance as an adaptive strategy by leveraging their legal claims to raise capital. Many companies use third-party financing writ large not simply to pay their lawyers on legal cases, but also to raise general working capital to fund their business activities.²⁴⁶ Larger companies often structure these transactions as third-party equity investments, or third-party debt investments that are either unsecured or secured by assets other than litigation claims. Smaller companies have more difficulty accessing these traditional markets, so they often turn to litigation finance instead.²⁴⁷

Put differently, large companies are more likely to finance their litigation and other business activities through third-party capital that falls within the safe harbors provided by the nascent regulations of litigation funding such as the New Jersey disclosure rule and Louisiana statute discussed above. They are more likely to raise general recourse debt or equity capital, and they are more likely to have the financial wherewithal to finance transformative litigation through a third party like the Chamber of Commerce.

To see the patchwork results, recall the weather balloon company that needs $15 million to finance litigation and develop new products. If the company has retained earnings or is able to raise traditional third-party debt or equity financing, it need not disclose its financing in litigation. Yet if the most efficient fundraise for the company is a commercial litigation finance fundraise, then the litigation finance regulatory structure kicks in. Meanwhile, if the company’s interests lie not in enforcing a claim against a competitor for money damages, but rather in invalidating a government regulation via declaratory and injunctive relief, then the company is not subject to the litigation finance disclosure regime either. This is so regardless of whether the company sues in its own name or if it finances a third party like the Chamber of Commerce to pursue the litigation.

One’s perspective on these insights may depend on the normative lens applied. As an example, consider the impact of limiting companies’ ability to raise capital via litigation funding. Assuming one values marketplace efficiency, current calls for regulation of litigation finance likely move the marketplace away from efficiency.²⁴⁸ This is because current litigation finance regulations hamper small businesses’ ability to access the litigation finance capital markets to fund various strategic business endeavors. These regimes thus favor larger companies, who have ample access to other capital markets and have less need for litigation funding.

And assuming one believes that it is better when most industries have many firms competing against each other, then the use of litigation finance as an adaptive strategy to raise capital likely improves societal outcomes. Litigation finance allows more companies to raise capital to produce, market, and sell their goods. Increased competition usually reduces prices for consumers and moves the market towards a more competitive equilibrium.²⁴⁹

B. Implications for the Civil Justice System

In addition to identifying a new dimension in the debate about litigation funding—how funding affects parties’ ability to compete in the marketplace—our study also brings a fresh perspective to the existing debate about how funding affects the civil justice system.

First, one significant question in the existing policy debate is whether litigation funders spur frivolous litigation. Opponents of litigation funding argue that funders will seek high-value claims even if they are frivolous, with the hopes of forcing settlements. Proponents of funding respond that financiers who invest in bad cases will soon be out of business.²⁵⁰

Our analysis sheds new light on that question by inviting a comparison of the scrutiny applied to cases that are funded via third-party litigation finance, as compared to funding via retained earnings or traditional third-party debt and equity financing. Before commercial litigation finance companies invest in cases, they apply extensive, months-long due diligence that is characteristic of asset-based lenders in general.²⁵¹ By contrast, funding litigation with retained earnings does not result in rigorous third-party scrutiny of the value of the litigation. Indeed, corporate finance scholarship has identified the agency problem inherent when managers use retained earnings to pursue new investments. Retained earnings avoid investor accountability because, by not raising external funds, “managers avoid a capital markets inspection of their past performance and the need to persuade the capital markets of the soundness of their proposed projects.”²⁵² By contrast, the use of project finance—and litigation finance is project finance for law—can “discipline management” because it “allows the investors, not the managers, to decide where the free cash flow will be invested. If the managers want to make new investments, they must raise the capital from outside investor.”²⁵³ Meanwhile, while raising more traditional equity or debt capital does invite investor scrutiny, it is not usually scrutiny specifically focused on the value of the legal claim. It follows that if companies want to pursue frivolous litigation, third-party litigation funding is probably least likely to result in approval to pursue the case.

Second, another important question in the existing debate about funding is whether third-party funders should be able to control litigation strategy and settlement decisions. Third-party funders state that they generally do not exercise control rights over litigation decisions, and many publicly-disclosed financing agreements bear this out, but there is one notable exception: after Burford Capital provided $140 million in working capital to Sysco, secured against several antitrust suits the food company had brought against suppliers, Burford attempted to veto Sysco’s decision to settle those cases for an amount below Burford’s liking.²⁵⁴ Meanwhile, litigation finance regulations have targeted control, with recent regulatory efforts trying to prohibit funders from controlling litigation, and court rules promulgated by the District of New Jersey and the Chief Judge of the District of Delaware requiring parties to disclose if they have provided a third-party funder with litigation control rights.²⁵⁵

If policymakers are concerned about control, there are many ways that financiers can accomplish control, and indeed standing as a third-party funder may be a uniquely inferior way to obtain control. For example, a third-party financier could become a controlling equity investor in the company and thus take over control of all the company’s operations, including the litigation.²⁵⁶ This approach might be particularly feasible for smaller claimholders in financial distress whose value is tied primarily or entirely to the value of litigation. Similarly, traditional creditors usually have powerful levers of control, including the power to force the company into bankruptcy or sue for payment on a loan.²⁵⁷ Creditors may use these rights to influence litigation. Yet the proposed regulations of litigation funding capture none of these instances of control via equity or traditional debt investment.

Third, a more recent issue in the litigation finance debate is whether litigation finance might present a national security risk. Opponents of litigation finance argue that funding can provide a conduit for foreign adversaries like China and Russia to impair the competitiveness of American companies by forcing them to defend against costly litigation and by gaining access to sensitive trade secrets during discovery.²⁵⁸ Supporters of litigation finance argue that there is little evidence of such foreign interference, and that China and Russia have much more effective ways of hurting America than corrupting the judicial system from the position of a third-party funder.²⁵⁹

Our analysis offers a different perspective. If foreign adversaries want to gain a competitive edge by accessing secrets through litigation, they can do so much more effectively by simply taking control of the plaintiff company, or by pursuing any of the other third-party financial methods that are not captured by the proposed regulations. In those circumstances, none of the onerous proposed regulations of litigation finance would capture their participation. The enacted and proposed regulations are highly underinclusive relative to the stated goal of ferreting out foreign influence.

Fourth, the disclosure of litigation finance agreements has emerged as a leading regulatory proposal in the existing debate. Proposed regulations of funding almost universally include a requirement that plaintiffs disclose the presence of litigation funding to the court and defendants.²⁶⁰ Proponents of disclosure argue that it is necessary to unearth whether the funder is violating any applicable ethical or legal rules, and to avoid judicial conflicts of interest.²⁶¹ Opponents of disclosure argue that it invites discovery side-shows and gives defendants a strategic advantage by disclosing whether the plaintiff has funding (and potentially disclosing much more, too).²⁶²

But again, there are myriad ways in which third parties finance another company’s litigation, and these financing methods are not commonly disclosed to courts or litigation opponents. Indeed, the federal rules provide very thin corporate disclosure, mandating that private companies need only disclose the identity of a parent corporation and of any publicly held corporation that owns ten percent or more of its stock.²⁶³ These limited disclosures were no mere oversight but a deliberate choice. The Rules Committee acknowledged that “[f]raming a rule that calls for more detailed disclosure will be difficult” and could create “[u]nnecessary disclosure requirements” that “place a burden on the parties and on courts.”²⁶⁴ The new regulations of litigation finance thus impose burdensome disclosure requirements on only one form of corporate finance, with the inquiry turning not on the type of litigation or the intent of the financier, but rather simply on the type of corporate form that makes most sense for the regulated party.²⁶⁵

In sum, almost all companies raise third-party capital to finance litigation and other business pursuits. Sometimes they raise equity from third-party investors. Sometimes they raise traditional third-party debt on a secured or unsecured basis. And sometimes—if it makes sense for the company given its size, strength, and regulatory environment, among other factors—they raise modern “litigation finance.” Efforts to regulate only a subset of the many ways claimholders raise third-party capital to finance litigation suggest that many proposed regulations of funding are underinclusive relative to their stated goal. Our nonmarket strategy framework suggests strategic business motivations for these proposed regulations.

V. Scholarly Benefits of the Nonmarket Strategy Framework

In addition to reframing how scholars and policymakers should approach litigation finance, our framework also holds value for both the law and business academies. First, our analysis answers recent calls by legal scholars for work that combines the scholarly disciplines of law and strategy. Second, our framework creates new insights for business scholars, especially concerning the types of strategic endeavors that firms engage in.

A. Legal Scholars

Legal scholarship does not usually focus on strategic business decision-making.²⁶⁶ “The notion that law may be a source of competitive advantage remains largely unexplored.”²⁶⁷ This is so even though law has a tremendous impact on business strategy, and even though many of the most contentious contemporary legal questions have high stakes for business interests.²⁶⁸

Scholars have recently called for a change. “If scholars can better understand the characteristics of firms and the attitudes of managers that promote legal strategy,” Robert Bird has argued, “both scholars and managers can devise ways to capture value from the legal environment that have never been previously considered.”²⁶⁹ He concludes that “law and strategy research can contribute much to both disciplines and can produce beneficial insights for scholars, practitioners, and managers alike.”²⁷⁰ For example, a full picture of the interaction between corporate counsel and regulators must account for business strategy decisions.²⁷¹ Fortunately, a law-and-strategy line of legal scholarship is emerging.²⁷² Other scholars (including one of us) similarly contend that laws and legal principles are important for marketing and product developers to understand so that they may better drive consumer demand to their products.²⁷³ Still others have argued that litigation can be a type of bullying to capture market power.²⁷⁴

This Article responds to the call of various legal scholars to engage with strategic decision-making in addition to legal decision-making.²⁷⁵ We provide a new lens for legal scholars to study how laws impact business strategy. This framework can help scholars address business litigation writ large, including private law disputes (such as the antitrust, patent, and Lanham Act disputes we have discussed) as well as high-profile public law disputes that grab headlines at the Supreme Court.²⁷⁶

B. Business Scholars and Businesses

Just as legal scholars have mostly ignored business scholars’ insights about law and strategy, the business and finance academy has mostly overlooked litigation finance.²⁷⁷ This Article contends that litigation finance is ripe for business scholarship, too.

A few avenues of research are likely to be fruitful. First, litigation finance is relatively unique in the nonmarket strategy context as it implicates adaptive, transformative, and additive strategies. Most business scholarship focuses on corporate strategies that are one-dimensional. Litigation finance is also unique because it is the subject of a push-and-pull of nonmarket strategies: some companies are using litigation finance as a nonmarket strategy to improve their market position, while others are pushing back against funding to preserve their own position.

Second, there is a dearth of empirical scholarship on litigation finance.²⁷⁸ The literature that has explored the instrument empirically has, unsurprisingly, focused on dependent variables relevant to the legal system, including the number, type, and outcome of funded cases.²⁷⁹ The framework presented in this Article suggests business scholars should also explore various business-focused dependent variables, including investment returns, weighted cost of capital, market power, and so on. Our framework can be a foundation on which scholars can evaluate the efficacy of these nonmarket strategies.

In addition to business scholarship, our framework here should provide businesses themselves with new strategies to create economic value. We have identified for firms the types of nonmarket strategies they can leverage. While we have identified several ways companies leverage litigation finance to drive economic value, we suspect that there are many unexplored strategies. By retooling litigation finance as a strategic endeavor and not just a legal one, companies may improve their ability to compete not only in the courtroom but in the market too.

Conclusion

This Article shifts the vantage point for analyzing litigation finance from the courthouse to the market square. The extensive scholarship on litigation finance has focused only on funding’s impact on the civil justice system. We argue that scholars and policymakers must also grapple with funding’s impact on capital markets and the business marketplace. To make this point, we use an interdisciplinary approach, drawing on business strategy literature about nonmarket strategies that has been largely ignored by legal scholars. Our framework identifies an entire set of funding’s policy implications in the market. It also offers new insights for the existing debate about how litigation finance affects the civil justice system. This approach provides a new lens for scholars and regulators struggling with how to study and regulate funding.

98 S. Cal. L. Rev. 1379

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Suneal Bedi* & William C. Marra†

*Associate Professor of Business Law & Ethics, Jerome Bess Faculty Fellow, Indiana University Kelley School of Business.

†Lecturer in Law, University of Pennsylvania Carey Law School. For helpful comments, we are grateful to Tom Baker, Mathew Caulfield, Brian Fitzpatrick, Todd Haugh, Donald Kochan, Samir Parikh, Tony Sebok, Maya Steinitz, and Maria Glover. The authors would also like to thank the law review editors for their helpful edits and comments.

California Code of Civil Procedure Section 998: An Offer to Compromise Between the American and English Rules for Fee-Shifting?

September 2024April 2025Jaime Fong

Imagine you bring a personal injury claim seeking damages of $950,000. At the end of trial, the jury finds the defendant negligent and awards you $375,000. Although you prevailed at trial, the court orders you to pay a portion of the defendant’s litigation costs. Accordingly, you lose your entire award and are required to provide an additional payment of $18,000 to the defendant. If you are confused by this hypothetical situation, you are not alone. This seemingly backwards scenario is made possible by California Code of Civil Procedure section 998 (“section 998”),¹ a cost-shifting statute that has perplexed California litigators for decades.

When it comes to the determination of which party is responsible for paying legal fees in a litigation, there are two prominent models: the “English rule” and the “American rule.”² The majority of the Western world implements the English rule,³ which embodies a loser-pays system in which litigation costs, including attorney’s fees, are shifted to the losing party.⁴ Conversely, in America, absent bad faith or a statutory or contractual provision to the contrary, the general rule is no fee-shifting.⁵ In other words, unless a lawsuit involves bad faith, a contractual dispute and the contract at issue contains a fee-shifting provision, or a statute that provides for recovery of costs, each party bears their own litigation costs, irrespective of the outcome.⁶

Each model has its pros and cons. On the one hand, a loser-pays system—the English rule—discourages nuisance litigation and promotes settlement, but may subsequently reduce access to litigation,⁷ even for those with meritorious claims.⁸ Conversely, a system that does not generally allow for fee-shifting—the American rule—enables individuals to have their fair day in court, avoiding the English rule’s “potential chilling effect on meritorious litigation.”⁹ The American rule, however, may subsequently decrease the likelihood of settlement and open the door for increased nuisance litigation, which may overwhelm court systems.¹⁰

Because the American rule may lack distinct incentives for parties to settle or to refrain from bringing frivolous claims that create a backlog in courts, the American justice system has devices to encourage parties to settle their claims and resolve disputes as quickly and efficiently as possible. One such device includes offer-of-judgment rules: a type of fee-shifting statute that provides an exception to the general rule against fee-shifting. Offer-of-judgment rules are offer-based fee-shifting rules that allocate costs according to pretrial settlement offers.¹¹ Thus, under an offer-of-judgment rule, if a litigant rejects a pretrial settlement offer and subsequently receives a less favorable judgement at trial, they must compensate the offeror for certain post-offer costs.

Section 998 is California’s offer-of-judgment rule. Section 998 is a cost-shifting statute designed to encourage settlement of litigation, without the need for a trial, by shifting certain costs to a party that rejected a 998 “offer to compromise” from their opponent and subsequently failed to obtain a better result at trial.¹² The California legislature and courts have made clear that the fundamental policy behind section 998 is to encourage the settlement of lawsuits prior to trial. However, statutory and case law analyses may indicate that 998’s policy also encompasses promoting settlement without unduly limiting access to courts.

The effectiveness of section 998 remains an ongoing debate among civil litigators. Application of section 998 is exceedingly difficult to understand and there is concern that it may not offer a high enough incentive to settle since the statute allows only a limited amount of recoverable costs. On the other hand, even if section 998 does not result in settlement as frequently as anticipated, it is a beneficial tool that provides a financial incentive for parties to settle that might not otherwise exist. As the debate over section 998’s efficacy continues, the California legislature and courts will likely be increasingly confronted with proposed amendments and judicial disputes over its applicability. Accordingly, in the future, these state actors may wish to consider how section 998 may be a powerful vehicle to relieve overburdened courts without overly deterring claimants from protecting their rights or interests.

This Note considers the extent to which section 998 can genuinely be considered a compromise between the English and American rules for fee-shifting, rather than just a tool to promote settlement. In particular, this Note asks whether section 998 seeks to promote settlement without unduly limiting access to courts, and if so, to what extent.. Although section 998 may be used in trial and arbitration,¹³ this Note focuses on section 998 in the context of litigation and trial. To help inform this Note’s discussion of the underlying policy tradeoffs behind different fee-shifting rules and the significance of promoting settlement prior to trial, Part I provides an overview of the mechanics, principal stages, and costs of civil litigation. Part II discusses section 998 relative to the competing models of the English rule and the American rule, including general policy tradeoffs and impact on litigation strategy. Part III provides an overview of the statutory framework of section 998 and its underlying policy considerations. Part IV examines section 998 legal developments and whether if, and to what extent, judicial determinations are not only promoting section 998’s purpose of encouraging settlements but also doing so without unduly limiting access to courts. A conclusion with final considerations follows.

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Slouching Towards San Francisco: Opioid Addiction as Public Nuisance

July 2024July 2024Andrew B. Workman*

INTRODUCTION

The opioid epidemic has afflicted Americans for twenty years, from California to the New York island. What began as an idealistic effort to alleviate chronic pain turned into a national nightmare: powerful, FDA-approved painkillers, liberally prescribed in the late 1990s and early 2000s, unleashed a Pandora’s box of dependance and demand that south-of-the-border cartels have answered with heroin and fentanyl.¹ In 2021, more than 107,000 Americans died of drug overdoses, and an astounding 71,000 of these deaths involved fentanyl and other synthetic opioids.² The economic costs have been staggering: in 2020 alone, the opioid epidemic cost the United States an estimated $1.5 trillion.³

To help redress this catastrophe, every state in the Union, along with countless localities and tribes, has sued opioid manufacturers, distributors, and dispensers.⁴ These public plaintiffs have pursued multiple claims, but public nuisance is “a central feature of the litigation and a key to its momentum.”⁵ To establish a public nuisance, plaintiffs must demonstrate an unreasonable interference with a right common to the public.⁶ A typical interference in the early days of public nuisance consisted of blocking a highway or waterway,⁷ but in the twentieth and twenty-first centuries, plaintiffs have argued that mass harms from products such as tobacco, lead paint, and handguns also interfere with public rights.⁸ In these actions, the alleged interference with public rights enables states or localities to sue on behalf of the public.⁹

But while these suits have generated billions of dollars in settlements,¹⁰ some courts have rejected these claims on the basis that any harms caused by a legal product interfere with private rights rather than public rights.¹¹ These courts cite previous attempts to characterize handguns and lead paint as public nuisances to conclude that the misuse of a product rarely interferes with the public rights traditionally protected by the doctrine, such as the right to use a public highway without interference.¹² Moreover, these courts portend a flood of lawsuits concerning legal products should public nuisance provide a valid basis of recovery against product manufacturers for harms that should instead be redressed under product liability law.¹³

However, a successful public nuisance action brought by the City Attorney of San Francisco against Walgreens in federal district court counters the claim that legal products can cause only private harms. In August 2022, Judge Charles Breyer entered judgment in a bench trial against Walgreens for substantially contributing to a public nuisance in San Francisco by failing to comply with federal regulation in filling opioid prescriptions.¹⁴ While California has a broader view of public nuisance than other states, the evidence at trial presented in compelling detail the social havoc that opioid addiction has inflicted on the city.¹⁵

To my knowledge, this Note is the first to examine this trial in detail, and I do so to demonstrate how opioid addiction interferes with public rights traditionally protected by common law public nuisance. Specifically, I examine how opioid addiction interferes with public space and public morals, forcing local governments to incur abatement costs and exposing residents to offensive activity in broad daylight. Because of this interference, courts should not categorically dismiss public nuisance claims against product manufacturers in the name of tradition.

This Note complements the scholarship of Professors Leslie Kendrick and David Dana, who have both argued that the opioid epidemic has interfered with public rights,¹⁶ by examining this interference with public rights in greater detail. In making this argument, this Note urges skeptical courts to adopt a middle-road doctrinal approach between the broad, inclusive understanding of public nuisance in California and the narrow, traditionalist understanding in states such as Oklahoma. This middle-road approach should be more amenable to states in the traditionalist camp because it retains public nuisance’s common law contours but maintains its flexibility to protect public rights from novel interferences caused by harmful products that bypass regulatory oversight.

Part I will provide a brief history of public nuisance in England, the United States, and California. Part II will discuss the opioid epidemic and the litigation it has spawned. Part III will review the evidence submitted at the successful bench trial in California to highlight how opioid addiction has affected San Francisco. Lastly, Part IV will argue that opioid addiction interferes with public rights traditionally protected by common law public nuisance and address various counterarguments.

I. PUBLIC NUISANCE: A BRIEF HISTORY

A. Common Law Origins in England

Nuisance developed in the English common law as a non-trespassory tort against the land, or more specifically, an interference with the use or enjoyment of land, or with a right of easement or servitude over the land.¹⁷ This remedy allowed private parties to seek relief from non-trespassory interferences with the use and enjoyment of their land and is the origin of the law of private nuisance today.¹⁸ An interference with the property of the King also constituted a nuisance, and hence public nuisance was born.¹⁹ The earliest cases concerned obstructing the King’s road—a criminal infringement on the rights of the Crown and redressable by a suit brought by the King’s justices—thereby interfering with a public right of way.²⁰ By the same reasoning, blocking a waterway constituted a public nuisance.²¹ By the mid-1300s, public nuisance extended more broadly to other infringements on public rights, such as “interference with a market, smoke from a lime-pit, and diversion of water from a mill.”²²

While obstructing a public road or waterway remains the canonical example of public nuisance, the doctrine eventually encompassed “a large, miscellaneous and diversified group of minor criminal offenses, all of which involved some interference with the interests of the community at large.”²³ For example, a description of “common nuisances” (later referred to as public nuisances) by William Sheppard in the 1660s included “pollution from noxious trades,” “victuallers who [sell] unwholesome food,” and “lewd ale-houses.”²⁴ Similarly, William Blackstone’s 1769 catalogue of common nuisances included “the keeping of hogs in any city or market town,” “[c]ottages . . . erected singly on the waste, being harbours for thieves and other idle and dissolute persons,” the “making and selling of fireworks,” and “[a]ll disorderly inns or ale-houses, bawdy-houses, gaming-houses, stage-plays unlicensed, booths and stages for rope-dancers, mountebanks, and the like.”²⁵

Another significant feature of public nuisance in the English common law was the relator action. Public nuisances had traditionally been prosecuted in the courts of leet, local criminal courts that handled “public welfare offences.”²⁶ But by the late eighteenth and early nineteenth centuries, people began seeking injunctions on behalf of the Attorney General in civil court.²⁷ Plaintiffs sought this civil remedy because “irreparable damage” might occur by the time lengthier criminal proceedings concluded and also because of the difficulty in prosecuting corporations responsible for pollution.²⁸ Accordingly, by the end of the nineteenth century, civil actions replaced criminal prosecutions in standard public nuisance cases concerning “general health hazards” and highway obstructions.²⁹ Separately, private citizens could also sue for damages if they received a “special injury” from a public nuisance.³⁰

B. Public Nuisance in the United States

American courts inherited public nuisance from their English forebears, and the doctrine continued to evolve to address changing social conditions. The early American cases largely fell into two groups: obstruction of public highways and navigable waterways, and a “loose amalgamation of minor offenses involving public morals or the public welfare,” including gambling, “keeping a disorderly house or tavern,” and “enabling prostitution.”³¹ But as the economy industrialized, courts applied public nuisance to new conditions such as air and water pollution.³² In the late nineteenth and early twentieth centuries, state legislatures responded to this changing landscape by adopting statutes that defined public nuisance in broad language or enumerated activities constituting a public nuisance.³³ These statutes enabled public authorities to use public nuisance as a “stopgap measure” and abate unforeseen activities that “might injure or annoy the general public.”³⁴ However, beginning in the Progressive Era, state governments adopted comprehensive statutes and regulations that diminished their reliance on public nuisance as a stopgap measure, thus resulting in fewer public nuisance actions.³⁵

By the early twentieth century, individual states as parens patriae—“parent of the country”—sued parties in federal court to enjoin or abate public nuisances.³⁶ Parens patriae standing rests on a state’s “interest in the abatement of public nuisances, instances in which the injury to the public health and comfort [is] graphic and direct.”³⁷ Parens patriae standing later provided the “architecture” of the tobacco litigation in the 1990s and the opioid litigation in the twenty-first century, with “an official (such as a state’s attorney general or a locality’s district attorney) suing on behalf of the public.”³⁸

In 1979, the American Law Institute published the influential Restatement (Second) of Torts (“Second Restatement”), which included a comprehensive overview of public nuisance.³⁹ Section 821B states:

(1) A public nuisance is an unreasonable interference with a right common to the general public.

(2) Circumstances that may sustain a holding that an interference with a public right is unreasonable include the following:

(a) Whether the conduct involves a significant interference with the public health, the public safety, the public peace, the public comfort or the public convenience, or

(b) whether the conduct is proscribed by a statute, ordinance or administrative regulation, or

(c) whether the conduct is of a continuing nature or has produced a permanent or long-lasting effect, and, as the actor knows or has reason to know, has a significant effect upon the public right.⁴⁰

The Second Restatement further defines a “public right” as a right “common to all members of the general public. It is collective in nature and not like the individual right that everyone has not to be assaulted or defamed or defrauded or negligently injured.”⁴¹ Scholars have criticized the Second Restatement’s definition of public nuisance as overly broad, vague, and partially responsible for the subsequent increase in public nuisance lawsuits involving novel harms, such as those caused by products.⁴²

In the decades that followed the Second Restatement and in the backdrop of a burgeoning environmental movement,⁴³ some states successfully sued defendants under a public nuisance theory for creating an injurious and ongoing condition even though the defendants no longer contributed to the condition or, because they had sold the land, could no longer abate it.⁴⁴ In one prominent case, United States v. Hooker Chemicals & Plastics Corp., a federal district court ruled that a chemical company’s formerly owned toxic-waste dump, from which hazardous chemicals later seeped into surrounding surface and groundwater, was a public nuisance and that the company was liable to the State of New York for abatement costs.⁴⁵ The court rejected the chemical company’s argument that upon its sale of the property to the City of Niagara Falls Board of Education—which included notice of the waste in the deed—its liability ended.⁴⁶ The court instead adopted a rule that the creator of a harmful condition cannot evade restitution liability for abatement costs simply by selling the land.⁴⁷ Hooker II and its progeny gave states a framework to recover public health expenditures, incurred to abate an alleged public nuisance, as damages.⁴⁸

Hooker II also exemplifies how damages, as opposed to an injunction, emerged as a viable remedy in public nuisance actions brought by states. At the common law, only plaintiffs who suffered “harm [from a public nuisance] of a kind different from that suffered by other members of the public” could recover damages.⁴⁹ In the nineteenth and twentieth centuries, some courts did allow government entities to recover damages by demonstrating “peculiar and special damage” from a public nuisance.⁵⁰ Kendrick has argued that these earlier cases seem “analogous to contemporary courts allowing governmental entities to pursue damages for the extensive funds that they have spent on treating and seeking to remediate harms such as opioid addiction and tobacco-related illnesses.”⁵¹

Public nuisance famously provided a breakthrough in twentieth-century tobacco litigation. After four decades of unsuccessful personal injury suits brought by individual plaintiffs,⁵² the tide turned when state attorneys general sued tobacco companies on a variety of claims, including public nuisance, to recoup public health costs.⁵³ These suits survived early dismissal and got to discovery, unearthing incriminating evidence of Big Tobacco’s dishonest marketing practices.⁵⁴ As a result, the tobacco companies first settled individually with four states, and then in 1998, collectively settled with the remaining forty-six states—known as the Master Settlement Agreement—for $206 billion.⁵⁵ While the public nuisance claims were not tried on the merits in these suits, their success incentivized states to pursue similar claims against companies that make and sell handguns, lead paint, carbon-emitting energy, and opioids.⁵⁶

C. Public Nuisance in California

California’s expansive view of public nuisance can be traced to the broad definition of “nuisance” in its 1872 statute:

Anything which is injurious to health, including, but not limited to, the illegal sale of controlled substances, or is indecent or offensive to the senses, or an obstruction to the free use of property, so as to interfere with the comfortable enjoyment of life or property, or unlawfully obstructs the free passage or use, in the customary manner, of any navigable lake, or river, bay, stream, canal, or basin, or any public park, square, street, or highway . . . .⁵⁷

Section 3480 further defines a “public” nuisance as one that “affects at the same time an entire community or neighborhood, or any considerable number of persons, although the extent of the annoyance or damage inflicted upon individuals may be unequal.”⁵⁸ To establish a public nuisance in California, a plaintiff must prove that a defendant knowingly created or assisted in the creation of a substantial and unreasonable interference with a public right.⁵⁹

In 1997, the California Supreme Court clarified the meaning of a “public right” by quoting the Second Restatement’s five categories that are protected from interference: “[T]he public health, the public safety, the public peace, the public comfort or the public convenience.”⁶⁰ In upholding an injunction against disruptive gang activity in a San Jose neighborhood, the court articulated the purpose of public nuisance: “[T]o protect the quality of organized social life.”⁶¹ The gang activity at issue included open drug use and dealing, loud music, appropriation of public space, vandalism, and violence.⁶²

This understanding of public rights underpins the enduring use of public nuisance in California to abate problem properties. In 2015, the Second District Court of Appeals affirmed the classification of a restaurant as a public nuisance because of ongoing loitering, drinking, drug dealing, prostitution, and violence that occurred on the property.⁶³ The court dismissed the owner’s argument that he should not be held responsible for the crimes of third parties in a high-crime area because the owner failed to make reasonable operational changes to discourage such activity.⁶⁴ In other words, the owner was liable for the blighted condition of his property since it attracted morally offensive and dangerous behavior that degraded the quality of life of the surrounding community.

California’s broadly worded nuisance statute and expansive understanding of public rights set the stage for successful public nuisance suits involving products. In People v. ConAgra Grocery Products Co., the Sixth Court of Appeals held that three companies created a public nuisance by promoting lead-based paint in the past and remanded the case to the trial court to recalculate abatement damages.⁶⁵ Looking exclusively to California’s public nuisance statute and prior precedent, the court was not persuaded by the defendants’ argument that lead-paint poisoning causes “private harm” that, even in the aggregate, does not interfere with public rights.⁶⁶ Rather, the court held that lead paint interferes with the “community’s ‘public right’ to housing that does not poison children,” and that “[r]esidential housing, like water, electricity, natural gas, and sewer services, is an essential community resource.”⁶⁷ The defendants ultimately settled for $305 million.⁶⁸

Other states have refused to follow California in holding that lead paint poisoning is a public nuisance. In 2008, the Rhode Island Supreme Court reversed a trial court judgment against lead paint manufacturers and a trade association, holding that, among other reasons, the Attorney General had failed to prove that lead poisoning interferes with a public right.⁶⁹ In the court’s view, lead poisoning harms a private right rather than public right, which it defined as a right to “indivisible resources shared by the public at large, such as air, water, or public rights of way.”⁷⁰ The court reasoned that to conclude otherwise would be antithetical to the common law, extend liability to any legal product that interferes with a private right, and blur the boundaries between public nuisance and product liability law.⁷¹

Commentators also share this traditionalist stance and find support in the Second Restatement’s description of a public right as “collective in nature and not like the individual right that everyone has not to be . . . negligently injured.”⁷² Thus, some scholars contend that a product might violate a person’s right to not be negligently injured, but this harm cannot, in aggregate, violate a public right.⁷³ More fundamentally, they view these public nuisance claims involving products as democratically illegitimate attempts to bypass state product liability law, which state legislatures have set forth in statutes.⁷⁴ The Restatement (Third) of Torts similarly states that mass harms caused by dangerous products should be redressed through the law of product liability.⁷⁵

II. THE OPIOID EPIDEMIC

A. A Brief History

The origin of America’s opioid epidemic can be traced to 1995 when the FDA approved OxyContin, a powerful prescription painkiller made by Purdue Pharma L.P. (“Purdue”).⁷⁶ In the late 1980s, Purdue began developing a replacement for its successful painkiller MS Contin, a morphine pill with a patented controlled-release mechanism that was soon to expire.⁷⁷ Purdue’s chemists applied this controlled-release mechanism to oxycodone, an opioid twice as powerful as morphine, and named the resulting pill OxyContin.⁷⁸ The delayed-release feature enabled Purdue to sell the pill in high dosages and convince the FDA to allow a package insert suggesting OxyContin was less prone to abuse.⁷⁹ Following FDA approval, Purdue launched an unprecedented marketing campaign that successfully persuaded doctors to prescribe OxyContin as a general treatment for chronic pain.⁸⁰ Colossal returns followed: annual sales of OxyContin reached $1 billion within five years and ultimately generated $35 billion for the company.⁸¹

But Purdue’s bonanza birthed a national catastrophe. OxyContin initiated an epidemic of addiction from the hollers of West Virginia to the hills of San Francisco. Patients prescribed OxyContin soon learned that its advertised twelve-hour relief lasted eight hours, causing them to experience withdrawal symptoms and seek more pills at higher doses.⁸² The pills could also be crushed into powder, removing their delayed-release coating, that could then be ingested or, when mixed with water, intravenously injected for an immediate, euphoric high.⁸³ As a result, OxyContin made many unsuspecting patients addicted and was widely abused.⁸⁴

In response, Purdue ultimately reformulated the drug in 2010 to make it nearly impossible to crush, and doctors reversed their liberal prescribing habits, but this did little to ameliorate the damage done: users turned to illicit alternatives such as heroin and fentanyl for their fix. Even though opioid prescriptions from retail pharmacies fell from a peak of 255 million in 2012 to about 143 million in 2020,⁸⁵ overall opioid overdoses increased, first with heroin,⁸⁶ and then to a much greater degree with fentanyl.⁸⁷ In total, from 1999 to 2021, nearly 645,000 people died from overdoses involving prescription and illicit opioids.⁸⁸

B. The Opioid Litigation

Opioid litigation has followed a similar trajectory to tobacco litigation. Individual plaintiffs pursued the first claims against Purdue, alleging the company breached its duty of care in deceptively promoting a drug with inadequate warnings and defective design, but these suits rarely survived summary judgment.⁸⁹ In contrast, public nuisance claims fared much better. West Virginia’s Attorney General brought the first public suit alleging multiple claims, including public nuisance, that induced Purdue to settle for $10 million in 2004.⁹⁰ Purdue settled similar suits in 2007, paying $19.5 million to twenty-six states and the District of Columbia, and $24 million to Kentucky.⁹¹

Starting in 2014, a new wave of litigation ensued against a wider group of defendants—other opioid manufacturers, distributers, and retail pharmacies—and filed by a more diverse group of public plaintiffs—cities, counties, states, and tribes.⁹² This litigation has occurred in both federal and state courts and features a range of claims, including public nuisance and violations of the Controlled Substances Act (“CSA”).⁹³ In federal court, three thousand federal lawsuits were consolidated into a multidistrict litigation (“MDL”) in Ohio.⁹⁴ The magnitude of potential liability facing these defendants has encouraged many to settle. Drugmaker Johnson & Johnson and distributors AmerisourceBergen, Cardinal Health, and McKesson finalized a nationwide settlement in February 2022.⁹⁵ Purdue, which has since declared bankruptcy, and its owners, the Sackler family, reached a nationwide settlement in March 2022.⁹⁶ And lastly, Walgreens, Walmart, and CVS agreed to a nationwide settlement in November 2022.⁹⁷

For the few cases that have gone to trial, courts have disagreed on whether the opioid epidemic constitutes a public nuisance. For example, following a bench trial in Oklahoma that resulted in a $465 million judgment against Johnson & Johnson, the Supreme Court of Oklahoma reversed, holding that the district court erred in extending Oklahoma’s public nuisance statute to harms from prescription opioids.⁹⁸ Likening opioids to lead paint and handguns (the subjects of previous public nuisance litigation), the court explained that the harm from a legal product does not interfere with a public right, which it defined as a “right to a public good, such as ‘an indivisible resource shared by the public at large, like air, water, or public rights-of-way.’ ”⁹⁹ Rather, the court viewed the essence of the state’s claim as “a private tort action for individual injuries sustained from use of a lawful product and in providing medical treatment or preventative treatment to certain, though numerous, individuals.”¹⁰⁰ The court also expressed concerns that if it affirmed the trial court, then the misuse of any prescription medicine or legal product could give rise to a public nuisance claim.¹⁰¹

Following the decision in Oklahoma, two bench trials also held defendants not liable for public nuisance. In a bellwether bench trial in the Ohio MDL,¹⁰² a federal district court in West Virginia followed the traditionalist reasoning of the Oklahoma Supreme Court in finding that the distribution of prescription opioids does not interfere with a public right.¹⁰³ Similarly, a state court in California entered judgment in favor of various opioid manufacturers but did so because the People did not present evidence that the manufacturer’s allegedly false marketing caused medically inappropriate prescriptions.¹⁰⁴ But unlike the district court in West Virginia, the court made clear that the opioid epidemic was a substantial interference with “collective social interests” and that a showing of unreasonable conduct could constitute a public nuisance.¹⁰⁵

However, two other bellwether MDL cases succeeded on the merits: City & County of San Francisco v. Purdue Pharma L.P., discussed in Part III, and County of Lake, Ohio v. Purdue Pharma L.P.¹⁰⁶ In the former, Walgreens was found to have substantially contributed to an opioid epidemic in San Francisco,¹⁰⁷ and in the latter, CVS, Walmart, and Walgreens were found liable for contributing to an opioid epidemic in Ohio.¹⁰⁸

III. THE OPIOID EPIDEMIC IN SAN FRANCISCO

The San Francisco City Attorney filed claims in the U.S. District Court for the Northern District of California against dozens of opioid manufacturers, distributors, and dispensers, and by the trial’s close in July 2022, only Walgreens remained.¹⁰⁹ The city pursued a single public nuisance claim at trial.¹¹⁰ Judge Charles Breyer held that the city proved by a preponderance of the evidence that Walgreens knowingly engaged in unreasonable conduct that was a substantial factor in creating an opioid epidemic in San Francisco.¹¹¹ A subsequent remedies trial was scheduled to begin on November 7, 2022, but Judge Breyer vacated this date after Walgreens announced a tentative nationwide opioid settlement for nearly $5 billion.¹¹² Separately, Walgreens settled with the city for $230 million to be paid across fifteen years.¹¹³

Judge Breyer’s lengthy opinion described a city under siege from opioid addiction. The epidemic in San Francisco unfolded in three waves.¹¹⁴ The first wave, from 2000 to 2010, consisted of an increase in opioid addiction and overdose deaths following a rise in opioid prescriptions.¹¹⁵ By 2010, San Francisco’s rate of opioid overdoses was 2.23 times the national average despite the city’s “significant investment in public health programs designed to combat opioid abuse.”¹¹⁶ In the second wave, beginning in the early 2010s, prescriptions declined while heroin use and overdose deaths increased.¹¹⁷ The city had faced a heroin problem in the late 1990s, but in this second wave, the problem became “significantly worse.”¹¹⁸ Evidence suggests heroin returned to the city because of prescription-opioid addiction. The Chief of Emergency Medicine at Zuckerberg San Francisco General Hospital testified that “approximately two-thirds of the patients who present[ed] to the [emergency department] with an opioid-related medical condition report[ed] that their addiction started with pills.”¹¹⁹ The third wave began in 2015 with the arrival of fentanyl, a dangerous synthetic opioid fifty times more potent than heroin.¹²⁰ All in all, the demand for prescription opioids, heroin, and fentanyl caused deaths to skyrocket: from 2015 to 2020, opioid-related emergency room visits tripled, and overdoses increased 478%, from 101 in 2015 to 584 in 2020.¹²¹

The evidence at trial revealed the epidemic’s tremendous toll on city workers and resources. The Fire Department’s Emergency Medical Services (“EMS”) team received so many overdose calls that it created a special response team to answer them.¹²² Encountering unconscious individuals on the streets, many of whom were “frequent callers who rotate from the street to the emergency room and back to the street,” became the “new normal” for EMS.¹²³ Similarly, Public Works faced a “significantly more challenging” job cleaning streets and sidewalks because of the large number of opioid users who “often vomit, have diarrhea, and leave used needles in public right of ways.”¹²⁴ These crews collected 95,000 used syringes annually in recent years, often encountered people experiencing overdoses, and sometimes came across deceased opioid users on their rounds.¹²⁵

The epidemic especially impacted San Francisco’s public parks. The Recreation and Parks Department (“RPD”) created special teams to respond to the harms caused by opioid use in the city’s parks.¹²⁶ Its outreach team engaged with homeless individuals living in parks, and according to Sergeant Maja Follin, a Head Park Ranger in RPD, the “vast majority” of these individuals suffer from substance abuse.¹²⁷ Meanwhile, RPD’s environmental services team removed biohazards such as used syringes and human feces.¹²⁸ In 2019, the team recovered 10,360 syringes from Golden Gate Park.¹²⁹ Their work could be high-stakes and laborious: at Dolores Park, needles were thrown into a children’s play area, requiring RPD to “sift through the sand” and recover them.¹³⁰ Because of these biohazards, RPD regularly closed off sections of parks.¹³¹ And at Jose Coronado Park, so many people “obstruct[ed] the sidewalk using drugs and spending the day . . . lying across the sidewalk and making it impossible for people to . . . access the park or . . . walk down the sidewalk” that the city had to install barricades to create safe passage for park goers.¹³²

The San Francisco Public Library (“SFPL”) system also faced “serious health and safety risks for library visitors and staff” due to the opioid epidemic.¹³³ Library staff routinely discovered patrons using and overdosing on opioids outside the building, in the stacks, and in the bathrooms.¹³⁴ Similarly, staff found needles in the stacks, in bathrooms, on shelves, inside of books, and in children’s reading areas.¹³⁵ On occasion, staff were even stuck with used syringes.¹³⁶ Damage to plumbing from flushed syringes caused multiple library closures and cost tens of thousands of dollars to fix.¹³⁷ Because of the epidemic, SFPL incurred additional expenses, such as hiring a full-time social worker to connect those suffering from opioid addiction with support services.¹³⁸ SFPL also contracted with the San Francisco Police Department to provide officers to patrol the libraries and help respond to the proliferation of drug use and overdoses.¹³⁹

At the trial, the aforementioned evidence demonstrated that the opioid epidemic, defined as “high rates of opioid abuse, addiction, and overdoses,” constitutes a public nuisance that interferes with all five categories of public rights recognized by the California Supreme Court: the public health, the public safety, the public peace, the public comfort, and public convenience.¹⁴⁰ The city also successfully proved that Walgreens had knowledge that its unreasonable conduct caused the nuisance.¹⁴¹ As the “last line of defense” against the diversion of controlled substances,¹⁴² the pharmacy failed to perform due diligence on over 1.2 million red flag prescriptions in a fifteen-year period.¹⁴³ Large volumes of these prescriptions came from “rogue pain clinics and rogue doctors”: from 2006 to 2020, Walgreens pharmacies in the Bay Area filed 161,696 prescriptions from prescribers who later “faced discipline for their prescribing practices and several of whom lost their medical licenses.”¹⁴⁴ This failure to perform due diligence violated CSA regulation, so the court concluded this failure was unreasonable.¹⁴⁵ Moreover, the CSA’s regulatory scheme was sufficient to demonstrate that Walgreens “must have known” about the harms of opioid diversion, notwithstanding external Drug Enforcement Agency (“DEA”) investigations and internal correspondence among executives that revealed Walgreens executives had actual notice of harms from prescription-drug abuse.¹⁴⁶

The court also held that the evidence proved factual and proximate causation. “[C]ircumstantial evidence of sufficient substantiality”—namely that Walgreens, the largest dispenser of opioids in San Francisco, had failed to perform due diligence on thousands of suspicious prescriptions from 2006 to 2020 as the city experienced an opioid epidemic—satisfied causation in fact.¹⁴⁷ And the “cycle of addiction,” and its downstream burden on the city and the public, was foreseeable.¹⁴⁸ As a part of its proximate cause analysis, the court concluded that extending liability to Walgreens would not open the “floodgates” of litigation against any seller of a product with a known risk of harm because Walgreens’s liability stemmed from its unique fifteen-year failure to comply with federal regulation.¹⁴⁹

IV. OPIOID ADDICTION INTERFERES WITH PUBLIC RIGHTS

The decision in City & County of San Francisco v. Purdue Pharma L.P. rebukes the traditionalist, categorical stance that public nuisance should not be extended to products. As demonstrated in San Francisco, opioid addiction interferes with public rights because addiction drives behavior that obstructs public space, forcing local government to incur substantial abatement costs. Moreover, this behavior can essentially turn entire neighborhoods into dangerous public drug dens featuring behavior that is offensive to witness.

Because California broadly defines public nuisance and public rights, the court did not base its judgment on a finding that Walgreens’s conduct interfered with public rights as traditionally understood in the common law.¹⁵⁰ This Note seeks to do so in order to demonstrate how products such as opioids can interfere with traditionally protected public rights in the hopes that states that have rejected public nuisance suits against product-caused harms in the name of tradition might be persuaded otherwise.

A. Opioid Addiction Interferes with Public Space

Courts have refused to extend public nuisance liability in the opioid epidemic because opioids, like lead paint, do not interfere with public rights. For example, the Supreme Court of Oklahoma viewed the state’s public nuisance claim as a “private tort action for individual injuries sustained from use of a lawful product.”¹⁵¹ This rationale largely stems from the Second Restatement’s definition of a public right as “collective in nature and not like the individual right that everyone has not to be assaulted or . . . negligently injured.”¹⁵²

But the opioid epidemic cannot be reduced to individual cases of private injury. It is frequently observed that a public nuisance is a condition rather than conduct,¹⁵³ so it should be emphasized that, here, the condition is opioid addiction. Addiction inflicts private harm, especially in instances of overdose and death, but as demonstrated in San Francisco, it also inflicts substantial civic harm.

An aspect of opioid addiction’s civic harm resembles a classic common law public nuisance. The archetypal public nuisance is obstruction of a highway,¹⁵⁴ and this is often referred to as an interference with the “public convenience” because the highway’s purpose is to improve travel for the public.¹⁵⁵ Similarly, municipalities set aside space for the public convenience: sidewalks make it easier to walk around town safe from motor vehicles; parks provide a place of respite and leisure from concrete city blocks; and libraries facilitate free access to information in a quiet environment.

Opioid addiction interferes with the public’s right to use these spaces as intended. In San Francisco, residents must navigate sidewalks strewn with health hazards, such as feces and needles, and obstructed with the bodies of individuals who are unconscious, and sometimes deceased, from opioid use.¹⁵⁶ Similarly, the prevalence of biohazards in parks impacts the safety of residents, especially infants.¹⁵⁷ This is not an abstract danger: in November 2022, a ten-month-old toddler was hospitalized after being exposed to fentanyl in a San Francisco park.¹⁵⁸ Moreover, these biohazards cause closures until they can be removed.¹⁵⁹ People addicted to opioids can also obstruct access while in an opiated stupor, as shown in one park where the city built a barricade to provide safe access for parkgoers because of the number of opioid users lying about.¹⁶⁰ And in libraries, visitors who seek quiet access to books and computers must contend with people overdosing outside the building, in the stacks, and in the bathrooms; needles left everywhere from bookshelves to children’s reading areas; and closures due to plumbing damage from flushed syringes.¹⁶¹

1. Opioid Addiction and Homelessness

Opioid addiction’s interference with public space stems from, at least in part, its significant relationship with homelessness. In making this connection, I do not intend to dehumanize homeless individuals; I simply point out the obvious impact a substantial, concentrated homeless population can have on a city’s public space and resources. While homelessness has many causes, the evidence at trial made clear that many of San Francisco’s homeless residents suffer from addiction. RPD’s outreach teams submitted that the vast majority of the homeless people living in San Francisco’s parks struggle with substance abuse.¹⁶² Similarly, the Fire Department’s EMS team described “frequent callers who rotate from the street to the emergency room and back to the street,” also suggesting that many of those suffering from opioid addiction are homeless.¹⁶³ The EMS team further noted that a majority of individuals who die of overdose deaths in the city had prior contact with EMS.¹⁶⁴ This underlines the terrifying power that opioids hold over the addicted when one considers that repeated overdose emergencies failed to stop these individuals from abusing opioids.

Unsurprisingly, the opioid epidemic in San Francisco corresponded with an increase in its homeless population. Between 2005 and 2020—the same period of time in which Walgreens’s conduct was examined at trial—the estimated homeless population in San Francisco rose from 5,404 to 8,124, and the unsheltered homeless population rose from 2,655 to 5,180.¹⁶⁵ And between 2010—the year of OxyContin’s reformulation, which contributed to an increase in heroin use¹⁶⁶—and 2020, the number of calls to the city’s 311 line complaining about used hypodermic needles rose from 224 to 6,275.¹⁶⁷ Assuming that housed opioid users would not be discarding needles in public spaces, this increase in 311 complaints may indicate greater opioid use among the homeless population. Similarly, from 2013 to 2016, complaints about homeless encampments also increased from two per day to sixty-three per day.¹⁶⁸ While correlation does not equal causation and many persuasively argue that the primary driver of homelessness in California is a lack of affordable housing,¹⁶⁹ it cannot be disputed that a relationship exists between the city’s visible increase in homelessness and drug use, as addiction can cause a person to spurn employment, housing, and family assistance.

Moreover, homelessness has become one of California’s top issues among voters, reflecting, at least in part, a public exasperated with ubiquitous encampments that feature harrowing spectacles of suffering and depravity. In a 2021 poll conducted by Los Angeles County—before the pandemic and then inflation became top concerns—94% of respondents said homelessness was “a serious or very serious problem.”¹⁷⁰ And in a 2022 survey asking California voters to rank the top issue in California, 13% selected homelessness, just below the 15%—the largest cohort in the study—who selected “inflation or the rising cost of living.”¹⁷¹ The fact that voters expect the government to take greater action on homelessness highlights the issue’s public impact, much like a traditional public nuisance.¹⁷²

2. Opioid Addiction and Methamphetamine Use

One might counter that the increase in homelessness in cities such as San Francisco owes more to the concurrent rise in street use of the psychostimulant methamphetamine. Beginning in the mid-2000s, DEA chemists noticed a new form of street methamphetamine, one made with phenyl-2-propanone (“P2P”), which can be created in a lab using variety of legal, cheap chemicals that have various industrial uses.¹⁷³ An unlimited supply of P2P spurred industrial-scale production by Mexican cartels, making this new form of methamphetamine plentiful and cheap across America.¹⁷⁴

Alarmingly, this new methamphetamine is far more debilitating to the mental health of its users: professionals who work with recovering addicts and homeless people have noticed a startling spike of severe, methamphetamine-induced psychosis, even in those with no prior history of mental illness.¹⁷⁵ Methamphetamine also causes paranoia and antisocial behavior that might explain the visible increase in tent encampments in San Francisco and Los Angeles, since tents provide privacy.¹⁷⁶ As a result, this new methamphetamine has presented difficulties for homeless-service workers and has thus complicated city efforts to abate the obstruction of public space caused by encampments.

However, “the increases in methamphetamine availability and harms are intertwined with the ongoing opioid overdose crisis.”¹⁷⁷ Opioid involvement in psychostimulant overdoses increased from 34.5% of overdose deaths in 2010 to 53.5% in 2019.¹⁷⁸ Surveys of recovering addicts reveal that methamphetamine, a stimulant, is often used with opioids, a depressant, to achieve a synergistic high and counteract the negative effects that arise once the opioid high subsides.¹⁷⁹ Thus, the rise in methamphetamine use and its severe mental health effects, at the least, cannot be understood independent of the opioid epidemic and, at the most, can be understood as a direct outgrowth of the epidemic. In either interpretation, opioid addiction has played a significant role in the recent increase of homelessness and the related rise in methamphetamine use that has made government efforts to convince people to accept services and leave encampments a Sisyphean challenge.

3. Opioid Addiction and the High Cost of Abatement

Because of the opioid epidemic and the related interference with public space and rise in homelessness, San Francisco has incurred significant abatement costs. In 2019, the city spent nearly $100 million on street cleaning—an amount four times more than Chicago, which has 3.5 times as many people and a surface area 4.5 times as large.¹⁸⁰ Opioid related conditions “overwhelm the city’s hospitals” and “tax[] the city’s emergency service teams.”¹⁸¹ San Francisco’s Fire Department, Public Works, Recreation and Parks, and Public Library all have created special teams and allocated resources to respond to the unique challenges presented by the epidemic.¹⁸² Additionally, the city has made a “significant investment in public health programs designed to combat opioid abuse.”¹⁸³ Moreover, because of the link between opioid addiction and homelessness in San Francisco, the staggering $367.7-million budget for the city’s Department of Homelessness and Supportive Housing for 2019–2020 also reflects some of the costs of the opioid epidemic.¹⁸⁴

Because of this significant investment, the opioid epidemic also underlines the enduring, important role of public nuisance as a stopgap measure when regulation fails to protect the public. Scholars have argued that public nuisance no longer serves an important stopgap measure in an era of comprehensive regulation.¹⁸⁵ But, as Dana has noted, “[t]he administrative state has never been perfect at protecting the public from harm, but we do appear to be living in a time when notable regulatory failure and inaction is becoming more, not less, common.”¹⁸⁶

The opioid epidemic thus reveals the important role of public nuisance in the event of such regulatory failure:

[I]n opioids, an alphabet soup of federal governmental agencies (including the FDA, DEA, and Department of Justice) had significant authority to address the burgeoning opioid problem. In creating a comprehensive regulatory scheme, the legislative branch seemingly did its work. But numerous agencies nevertheless stood by, even as pill mills proliferated, the death toll spiked, and millions of painkillers were pumped into, and decimated, certain communities.¹⁸⁷

Even though Walgreens paid $80 million to settle investigations brought by the DEA and Department of Justice for CSA violations at a distribution center and six retail pharmacies in Florida,¹⁸⁸ the company failed to adequately reform its operations and prevent opioid diversion.¹⁸⁹ In other words, despite extensive regulation, Walgreens’s San Francisco pharmacies, more likely than not, failed to conduct due diligence on red flag prescriptions from 2006 to 2020, an oversight that forced San Francisco to foot the bill.¹⁹⁰

B. Opioid Addiction Interferes with Public Morals

Opioid addiction also interferes with community interests in a manner that resembles problem properties, which were traditionally treated as public nuisances in England and America. William Sheppard identified “lewd-ale houses” as a common nuisance in the 1660s,¹⁹¹ and William Blackstone in 1769 listed as public nuisances “all disorderly inns or ale-houses, bawdy-houses, gaming-houses” and “cottages . . . erected singly on the waste, being harbors for thieves and other idle and dissolute persons.”¹⁹² Similarly, early public nuisance cases in America addressed not only obstructions of highways and waterways but also a “loose amalgamation of minor offenses involving public morals or the public welfare.”¹⁹³ William Prosser, who served as reporter of the Second Restatement, categorized problem properties—“houses of prostitution, illegal liquor establishments, [and] gaming houses”—as interfering with public morals.¹⁹⁴ Thus, the common law in England and America treated properties that attracted illicit, immoral behavior as public nuisances because they were offensive and disruptive to the surrounding community.

California courts have long abated the type of immoral, illicit activity associated with problem properties in public nuisance claims. In 1997, the California Supreme Court upheld an injunction against a San Jose gang for open drug use and dealing, loud music, appropriation of public space, vandalism, and violence.¹⁹⁵ Despite widespread criticism of the case among academics,¹⁹⁶ the court persuasively articulated that the purpose of public nuisance is to “protect the quality of organized social life.”¹⁹⁷ This principle justified the abatement of problem properties in the days of Sheppard and Blackstone and thus marks a common law continuance, not a departure. And in 2015, the Second District Court of Appeals in Benetatos v. City of Los Angeles affirmed the classification of a restaurant as a public nuisance because its operation created a condition of lawless blight that attracted loitering, drinking, drug dealing, prostitution, and violence on the property.¹⁹⁸

Opioid addiction has similarly ravaged the quality of organized social life in cities by turning parks and neighborhoods into lawless dens of drug use, petty crime, and antisocial behavior. In San Francisco, open-air drug markets have taken over the Tenderloin neighborhood and United Nations Plaza, exposing local residents and visitors to blatant drug deals and drug use in streets strewn with garbage, feces, and needles.¹⁹⁹ Judge Breyer even noted that “outside this courthouse, people suffering from severe opioid addiction buy, sell, and use opioids in plain sight.”²⁰⁰ At United Nations Plaza, street vendors sell allegedly stolen goods on the sidewalk,²⁰¹ and some commentators have attributed San Francisco’s increase in property crimes such as larceny, beginning in 2012, to people seeking money to purchase drugs.²⁰²

Opioid conditions thus interfere with the public morals by facilitating the type of petty criminality and vice that justifies the abatement of problem properties. One might criticize a common law conception of “public morals” as antiquated in the twenty-first century; certainly, public sentiment is far more understanding and lenient towards drug use and prostitution and far more critical of moralistic judgment. But even so, people still seem to respond negatively to illicit behavior in public. To provide just one example, in Benetatos v. City of Los Angeles, the record included a citizen’s declaration from nearby residents and business owners lamenting the violence and prostitution outside the restaurant.²⁰³ In fact, the Los Angeles Police Department launched its nuisance investigation in response to “recent complaints,”²⁰⁴ presumably from neighbors. And in San Francisco, the successful recall in June 2022 of progressive San Francisco District Attorney Chesa Boudin, who was criticized as being soft on crime, suggests an increasing frustration among residents with quality of life and lawless behavior that the government has failed to address.²⁰⁵

C. Distinguishing Opioids with Other Products

The courts and critics that categorically refuse to apply public nuisance to products might be right to note that California’s recognition of a public right “to housing that does not poison children”²⁰⁶ is essentially the same as a right to not be negligently injured, which the Second Restatement explicitly characterizes as a private, rather than public, right.²⁰⁷ This reasoning adheres to a traditionalist understanding of public nuisance and distinguishes it from legislatively authorized product liability law.

Other critics have argued the history of public nuisance paints a more complicated picture. Kendrick has looked to the “common nuisances” William Sheppard listed in the 1660s—“victuallers, butchers, bakers, cooks, brewers, maltsters and apothecaries who sell products unfit for human consumption”—and questioned whether “there [is] some fine distinction between the activity of selling products and products themselves.”²⁰⁸ And Dana has argued that while product liability law has been legislatively authorized, it is also a “common law creation of the courts,” so courts should have the authority to “interpret it to leave space for products-based public nuisance claims.”²⁰⁹

But this Note primarily argues that opioid addiction has obstructed public space much like the canonical highway blockage and offended public morals much like the canonical problem property. Opioids can therefore be readily distinguished from other products such as lead paint. The former causes tangible harm to the public square, while the latter causes harm within the privacy of the home. The condition of opioid addiction, not unlike the toxic waste in Hooker II, has spilled over onto public sidewalks, parks, and libraries, requiring expensive clean up, emergency response, and social services to abate. And as in Hooker II, in which the chemical company was still liable after selling the toxic dump site, those responsible for the opioid epidemic should not escape liability on the basis that they no longer control the condition that gave rise to the nuisance. Accordingly, the categorical stance against products fails to protect long-recognized public rights from interference.

Thus, the California court of appeal holding in ConAgra Grocery Products, that lead paint interferes with a public right “to housing that does not poison children,”²¹⁰ is incongruous with the common law understanding of public nuisance. But California’s flexible treatment of public rights should not encourage other states to dismiss public nuisance claims concerning products if those products interfere with traditionally recognized public rights, as opioids do.

D. Addressing Counter Arguments

This Section will address three counterarguments²¹¹: (1) opioid defendants are not the proximate cause of the interference with public rights, (2) misguided city policy, rather than opioid addiction, is responsible for the public nuisance in San Francisco, and (3) a flood of litigation will ensue if public nuisance is extended to harms caused by legal products.

1. Proximate Cause Objection

This Note argues that opioid addiction interferes with public rights; nonetheless, even accepting that such an interference has taken place, one might counter that defendants such as Walgreens are not the proximate cause of the interference. In California, proximate causation is an element of a prima facie public nuisance claim,²¹² and in a typical action, the causal chain is quite clear: a defendant’s unreasonable conduct creates a harmful condition, and that condition interferes with public rights. For example, a man who digs a ditch in a road has created a condition that interferes with public convenience. However, a defendant’s conduct in opioid cases—whether that be misleading advertising by manufacturers or negligent supervision of red-flag prescriptions by pharmacies—results in an interference with public rights only because of the intervening action of opioid users. The principle of novus actus interveniens would suggest that opioid manufacturers and pharmacies could not be held liable for the behavior of opioid users because their independent wrongdoing marks a break in the causal chain.

However, the stranglehold of opioid addiction can cause a person to spurn employment, family, shelter, and ultimately life itself, distinguishing opioids from other products such as guns that bear no influence over the free will of their user. As Judge Breyer noted, opioids can ensnare even unsuspecting patients into helpless addiction, making downstream consequences such as “crime, homelessness, and destruction of city property” foreseeable.²¹³ Moreover, just as the crimes of intervening third parties did not absolve the restaurant owner in Benetatos v. City of Los Angeles of public nuisance liability because the owner failed to ameliorate the blighted condition of his property, here, the intervening behavior of opioid addicts should not absolve manufacturers, dispensers, and pharmacies from contributing to the underlying condition that perpetuates this behavior.

2. The Role of Public Policy

One could also argue that progressive policies, rather than manufacturers and pharmacies, are the cause of the interference with public rights in San Francisco. At least since the Summer of Love in 1967, San Francisco has earned a worldwide reputation for being tolerant towards drug use and homelessness.²¹⁴ But following the punitive and, in retrospect, controversial state response to the 1980s crack-cocaine epidemic and the violence it generated, California voters embraced policies more lenient towards drug possession and use. In 2000, voters passed Proposition 36, which required that “people convicted of the possession, use, or transportation of controlled substances and similar parole violations, except sale or manufacture of drugs, receive probation and drug treatment, rather than incarceration.”²¹⁵ Similarly, in 2014, voters passed Proposition 47, which recategorized a variety of nonviolent crimes, including personal use of most illegal drugs and shoplifting of property less than $950, as misdemeanors.²¹⁶ And beginning in 2009, cities such as Los Angeles and San Francisco implemented a “Housing First” approach to homelessness that offers housing with no condition on sobriety.²¹⁷ Critics of these policies argue that it has prevented law enforcement from compelling drug treatment for offenders and from policing crimes such as shoplifting and petty theft that provide those suffering from addiction with the cash to fund their drug use.²¹⁸

While these policies have likely exacerbated the opioid epidemic’s impact on civic order, evidence suggests that opioid addiction has inflicted similar community harm in other states. For example, in the red state of Kentucky, a “county-level survey commissioned by Purdue . . . revealed that ‘[9] out of 10 [people surveyed] agreed that OxyContin had a ‘devastating effect’ on the community.’ ”²¹⁹ Thus, it would be inaccurate to categorically claim that opioid addiction does not interfere with public rights.

3. Concerns About a Flood of Litigation

Many critics contend that if courts extend public nuisance to opioids, then courts would be flooded with product liability suits disguised as public nuisance suits for potentially any legal product that, when misused, causes harm. The middle-road understanding of public nuisance that this Note champions recognizes two primary constraints that should assuage this concern.

First, a product must interfere with a public right to create a public nuisance. As Dana has noted, this requirement distinguishes public nuisance from product liability law because the latter is “focused on the harms specifically borne by discrete individuals, such as individual loss of earning power, medical expenses, and pain and suffering.”²²⁰ By categorically refusing to apply public nuisance to harms from products, courts may hamper government ability to counteract actual infringements on public rights.

Opposing this categorical view, some critics argue that a dogmatic, traditionalist understanding of public nuisance inhibits the doctrine’s potential as a stopgap measure when regulation fails to protect the public. Kendrick has stated that courts and scholars should “interpret the concept of ‘public rights’ more loosely” and believes that an aggregation of a large number of private harms from products should support a public nuisance claim.²²¹ Citing early common law cases and broadly worded public nuisance statutes in America, she argues “contemporary formalist tendencies have gone too far.”²²² California’s statute supports her view.²²³

Kendrick’s approach, while persuasive, would likely not convince skeptical courts concerned about a flood of litigation. Such concerns are warranted: in the decades following the successful Master Settlement Agreement with tobacco companies, public nuisance claims have proliferated against companies for harms the doctrine has not traditionally redressed.²²⁴ Take opioids: the consolidated MDL litigation in federal court consists of 3,000 lawsuits brought by tribes, municipalities, counties, and states as of October 2022 while separate actions have been brought in state court.²²⁵ Unlike the tobacco litigation, in which the attorneys general of all fifty states sued tobacco companies and coordinated an all-encompassing settlement, the opioid litigation features a far greater number of plaintiffs and defendants, complicating an efficient pathway to settle all future claims. Understandably, this litigation presents a “genuinely terrifying” prospect for defendants.²²⁶

The public nuisance litigation against Juul Labs Inc., which allegedly marketed its e-cigarette and fruit-flavored vapor to youth and downplayed the vapor’s high nicotine content, is another example. Even though these lawsuits have garnered over $1 billion in settlements with forty-seven states and territories and more than five thousand individuals, school districts, and local governments, once Juul withdrew many of its popular flavors in response to regulatory and public pressure, competitors swarmed the market with fruit-flavored alternatives, presenting “an enforcement dilemma” for the FDA, which has only authorized “fewer than two dozen vaping products.”²²⁷ Unlike the centralized state-led tobacco litigation, plaintiff lawyers representing school districts joined the fray and shared in the settlements under a tenuous public nuisance theory, and now these plaintiff lawyers and school districts are bringing similar actions against social media companies.²²⁸

Thus, critics hold legitimate concerns that public nuisance gives plaintiff lawyers “the ability to intimidate market participants and reshape the economy without ever scoring a conclusive win in a courtroom (never mind a legislature).”²²⁹ Indeed, the uncoordinated nature of the opioid and Juul litigation and the substitution of prescription opioids and Juul e-cigarettes with alternatives that evade a similar state crackdown raise important questions about whether these suits are more about abatement or more about sharing in the spoils of a company’s downfall, like some communal feast on the savanna after a large lion is outnumbered and slain. Because a public nuisance doctrine in which a large number of private injuries could satisfy the public rights element might result in even more litigation, public nuisance should only redress harms that interfere with traditional public rights.

Second, the other elements in a prima facie public nuisance claim should prevent a flood of litigation against makers of legal products. For example, in California, public nuisance claims require a showing that a party has “knowledge that its unreasonable conduct caused a substantial interference with a right common to the public.”²³⁰ Even if a state can prove a defendant interfered with a public right, the state still must demonstrate the defendant’s conduct was unreasonable and the cause of the interference. For example, a California state court held that opioid manufacturers were not liable for creating a public nuisance because the state’s evidence of a statistical increase in statewide prescriptions did not prove that false marketing caused medically inappropriate prescriptions.²³¹ With no evidence of inappropriate prescriptions, the court found that the marketing was reasonable because the social utility of medically appropriate prescriptions outweighs any harm they might cause.²³² The Second Restatement and many states also require, at a minimum, knowledge of unreasonable risk for a defendant to be liable for public nuisance, so this same burden of proof applies elsewhere.²³³ Therefore, if a product has social utility and is sold legally, then a plaintiff must satisfy a high burden of proof to show a defendant acted unreasonably.

CONCLUSION

A daunting drug epidemic confronts the United States and its institutions. Drug overdose deaths are at historic highs, and more than four out of five Americans who need treatment for illicit drug use do not receive it.²³⁴ Voracious demand for drugs has poured billions into coffers of drug traffickers, who internationally “threaten[] global stability” and domestically “contribute to public health challenges and violence.”²³⁵ City & County of San Francisco v. Purdue Pharma L.P. provides an indelible account of the impact of addiction on civic order. Those who argue that legal products cannot interfere with public rights need only visit San Francisco’s sidewalks, parks, and libraries. There, opioid addiction interferes with public rights by obstructing public space and exposing residents to illicit behavior that, at the least, is offensive to witness in broad daylight and, at the most, poses a legitimate threat to safety and health.

While the opioid litigation appears to be in its final phase,²³⁶ public nuisance should have the flexibility to address infringements on traditional public rights—even if caused by a legal product. Future products may pose novel threats to public rights and, like opioids, may require action from all branches of government. The middle-ground approach to public nuisance outlined in this Note would achieve this end.

97 S. Cal. L. Rev. 767

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Andrew B. Workman*

* University of Southern California Gould School of Law, Class of 2024. I am grateful to Professor Gregory C. Keating for his excellent seminar on public nuisance and for his personal guidance and feedback on this Note. I am also grateful to my fellow members of the Southern California Law Review, especially Jack Frisbie, Class of 2023, who provided helpful feedback on early drafts, and the editors on Volume 97 who helped edit and refine this Note for publication.

Calling the Shots: Multistate Challenges to Federal Vaccine Mandates

September 2023February 2024Elysa M. Dishman

Multistate litigation brought by state attorneys general (“AGs”) frustrated the Biden administration’s efforts to combat the COVID-19 pandemic by vaccinating workers. Nationwide injunctions played an important role in halting the implementation of vaccine mandates in multistate actions. State challenges to vaccine mandates are consistent with AG lawsuit trends against recent presidential administrations.¹ These challenges also reveal new emerging patterns that shed light on the future of multistate litigation and nationwide injunctions. State vaccine mandate lawsuits have continued to raise criticisms of nationwide injunctions and, at the same time, provide insights on pathways forward for reform.

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Life Story Rights Litigation: Negotiating for a Happy Ending

May 2022May 2022Kendall Ota*

Filmmakers, television writers, and authors alike have made millions of dollars in the entertainment industry by telling stories that have already been lived by real people. Not only do these creative works force enormous public exposure upon the real people portrayed, but they often portray these real-life inspirations in inaccurate, or even harmful ways. Furthermore, without an agreement to sell their life story rights, many of these real-life inspirations receive no compensation from the use of their life story in these highly successful creative works.

* Senior Submissions Editor, Southern California Law Review, Volume 95; J.D. Candidate, 2022 University of Southern California, Gould School of Law; B.A. Communication 2017, University of Southern California. A huge thank you to the editors of the Southern California Law Review for all of your guidance throughout the publication process, and to all of my family and friends for their support throughout law school

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An Empirical Study of the Enforcement of Liquidated Damages Clauses in California and New York by Luca S. Marquard

September 2021March 2022Southern California Law Review Admin

Article | Remedies
An Empirical Study of the Enforcement of Liquidated Damages Clauses in California and New York
by Luca S. Marquard*

From Vol. 94, No. 3
94 S. Cal. L. Rev. 637 (2021)

Keywords: Liquidated Damages, Penalty Clause, California Law, New York Law

A liquidated damages provision is a contract clause that predetermines the measure of damages in case a party breaches an agreement. Liquidated damages clauses are among the most commonly used contract clauses and are standard practice in most commercial agreements.1 Parties typically include such clauses in their contracts in an attempt to minimize anticipated litigation time and cost and to avoid the unpredictability of courts’ damages calculations. The renegotiation leverage gained from a liquidated damages clause provides incentive for a party to bargain for the inclusion of such a clause, especially if the party considers itself likely to be the nonbreaching party in any potential dispute. However, in reality, the security parties get from including a liquidated damages clause in their agreement is far from absolute. While certain types of liquidated damages clauses are more likely to be enforced than others, these clauses cannot confidently be relied on by practitioners. Despite a common perception to the contrary, this Note will show that such unreliability exists across jurisdictions.

American courts distinguish between valid liquidated damages clauses and penalty clauses. Simply put, a valid liquidated damages clause compensates the nonbreaching party in the case of breach, while a penalty clause, as its name suggests, penalizes the breaching party and by its coercive nature serves to induce performance.2 The distinction between these two clauses, which is often difficult to make, is an important one: while liquidated damages clauses are enforceable, penalty clauses are unenforceable as being against public policy.3 Whether courts should continue to follow this distinction has been the subject of extensive scholarly debate. Rather than adding another voice to the clamor, this Note will take the current distinction between liquidated damages and penalty clauses as given.

Instead, this Note will examine and compare how courts in New York, the most important American contract law jurisdiction,4 and in California, the state with the largest economy,5 have applied the distinction in recent years. This Note will discuss trends in enforcement and reasoning gleaned from the detailed study of over fifty of the latest court decisions on the enforceability of liquidated damages clauses in each California and New York. In doing so, this Note will test the validity of two hypotheses. The first hypothesis is that courts across jurisdictions are more likely to enforce liquidated damages clauses if the parties to the agreement are sophisticated. The second hypothesis is that New York courts are more likely than California courts to enforce liquidated damages clauses, and that this difference is most pronounced in consumer contracts.

Part I of this Note will provide an overview of the policy debate regarding whether the law should distinguish between liquidated damages clauses and penalty clauses and thus refuse to enforce penalty clauses. This Part will explain the most important arguments both in favor of and against enforcing penalty clauses and point out an argument regarding the theoretical foundation of liquidated damages.

Part II of this Note will describe the current state of the law of liquidated damages, articulating both the formal doctrine and how recent cases have interpreted it. This Part will outline the research methodology used for this project, give an account of first California and then New York law, before making a preliminary comparison of the approaches taken in the two jurisdictions.

Part III of this Note will discuss current trends in the enforcement of liquidated damages clauses in both California and New York, addressing characteristics of common transaction and clause types.

Part IV of this Note will analyze the importance of parties’ sophistication and the negotiation process to courts’ decisions on the enforceability of liquidated damages clauses.

This Note will make two significant contributions to the legal scholarship in this area. First, by describing the findings of an extensive empirical case survey, this Note will provide practitioners with an on-the- ground view of how courts actually treat liquidated damages clauses. This will give attorneys and their clients a better understanding of whether to include liquidated damages clauses in their agreements, how to phrase them, and, when considering breaching an agreement, whether a clause is likely to be enforced.

Second, this Note will ultimately draw several significant conclusions from this empirical analysis. The first being that there is no significant difference between California and New York courts’ treatment of liquidated damages clauses. Courts in both jurisdictions are more likely to enforce liquidated damages clauses in agreements between sophisticated parties. Further, there is no significant difference between how California and New York courts enforce liquidated damages clauses, both generally and against consumers and unsophisticated parties. This Note argues that this is due, at least in part, to the importance of sophistication and negotiation in courts’ determination of the enforceability of liquidated damages clauses. The absence of a significant difference between California and New York courts’ enforcement of liquidated damages clauses calls into question the widely held belief that New York courts take a formalist approach to contract law and that this makes New York an appealing jurisdiction for parties to business contracts. While New York law is the law of choice for parties to commercial contracts and generally preferred over California law,6 where liquidated damages clauses are concerned, parties choosing New York law likely do not receive the benefits they expect from their choice of law.

*. Senior Editor, Southern California Law Review, Volume 94; J.D. Candidate 2021, University of Southern California Gould School of Law; B.A. Economics 2018, University of California, Irvine. Thank you to Deena and Lora Fatehi for their unwavering support and companionship during the writing process. In addition, thank you to Professor Jonathan Barnett for encouraging me to pursue this topic and for his guidance during the drafting of this Note. Finally, thank you to the talented Southern California Law Review editors for their excellent work.

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From Presentation to Presence: Immersive Virtual Environments and Unfair Prejudice in the Courtroom – Note by Khirin Bunker

January 2019March 2019Southern California Law Review Admin

From Volume 92, Number 2 (January 2019)
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FROM PRESENTATION TO PRESENCE: IMMERSIVE VIRTUAL ENVIRONMENTS AND UNFAIR PREJUDICE IN THE COURTROOM

Khirin Bunker [*]

TABLE OF CONTENTS

Introduction

I. Distinguishing Immersive Virtual Environments

II. Immersive Virtual Environments and the Federal Rules of Evidence

III. Potential Prejudicial Impacts of Immersive Virtual Environments on Jury Decisionmaking

A. Designing Emotion in a Virtual Environment

B. Body Ownership Illusions

IV. Problems with the Current Rules for Demonstrative Computer-Generated Evidence

A. Case Studies

B. Issues with the Court’s Analyses

V. Recommendations

A. Stricter Foundational Requirements

B. Evaluating and Limiting Prejudicial Effects

Conclusion

What if you could transport your jury from a courtroom to the scene of a catastrophic event? . . . Imagine how much more empathy you would feel for the victim of a catastrophic collision if you were to experience the tragedy first-hand.[1]

Introduction

In the courtroom environment, oral presentations are becoming increasingly supplemented and replaced by advancing digital technologies that provide legal practitioners with effective demonstrative capabilities.[2] Improvements in the field of virtual reality (“VR”) are facilitating the creation of immersive environments in which a user’s senses and perceptions of the physical world can be completely replaced with virtual renderings.[3] As courts, lawyers, and experts continue to grapple with evidentiary questions of admissibility posed by evolving technologies in the field of computer-generated evidence (“CGE”),[4] issues posed by the introduction of immersive virtual environments (“IVEs”) into the courtroom have, until recently, remained a largely theoretical discussion.

Though the widespread use of IVEs at trial has not yet occurred, research into the practical applications of these VR technologies in the courtroom is ongoing,[5] with several studies having successfully integrated IVEs into mock scenarios. For example, in 2002, the Courtroom 21 Project (run by William & Mary Law School and the National Center for State Courts) hosted a lab trial in which a witness used an IVE.[6] The issue in the case was whether a patient’s death was the result of the design of a cholesterol–removing stent or a surgeon’s error in implanting it upside down.[7]

During the mock trial, a key defense witness who was present during the surgery donned a VR headset, which re–created the operating room, and then projected to the jury her view of the operation on a large screen as she reenacted her role in the surgery. The demonstration significantly reduced the credibility of the witness when it revealed that she could not possibly have seen the doctor’s hands or wrists.[8]

In another experiment, Swiss researchers successfully used an Oculus Rift headset and Unity 3–D software to render an IVE that made it possible for a viewer to assess how close bullets came to severely injuring a victim during a shooting.[9] Using a laser scan of the crime scene, footage taken from an onlooking security camera, and the final position of the projectiles, researchers were able to reconstruct the scene of the shooting to enable viewers to review the bullet trajectories, visibility, speed, and distance.[10]

Similarly, the Bavarian State criminal office, which currently handles the prosecution of Nazi war criminals tied to the Holocaust, applied laser scanning technology to develop a VR model of the Auschwitz concentration camp.[11] The model was recently adapted into an IVE for future use at trial, allowing jurors to examine the camp from almost any point of view.[12]

As research continues and new applications of IVE technology have been investigated, the use of VR technology is becoming increasingly mainstream and cost–effective,[13] making it more practical to use an IVE in the courtroom. As such, early adapters in civil practice have announced plans to use IVEs at trial,[14] while litigation support providers are beginning to advertise VR development services.[15] Rising use of laser imaging software and body cameras among law enforcement departments, with the capacity to be converted into an IVE format for use at trial,[16] also has significant potential to facilitate the rapid expansion of these technologies in criminal proceedings.

From the standpoint of a legal practitioner, the potential value in applications of IVE use at trial are numerous. As a form of evidence, IVEs have the potential to redefine the way in which litigators can re–create crime and accident scenes for the jury.[17] Rather than having a jury watch a video rendering or review images after-the-fact, an IVE could allow jury members to witness an event firsthand—from any specific moment, angle, or viewpoint.[18] As a demonstrative technology, an IVE can be easily adapted to depict eyewitness and expert testimony, explain highly technical concepts, or transport users into an interactive environment in any given scenario.[19]

While some commentators have welcomed the onset of IVEs into the courtroom as a natural progression and the next step in technological development of visual media,[20] others have argued that IVEs are fundamentally different from prior forms of evidence and warrant heightened caution due to potential prejudicial effects on juries.[21] This Note supports the latter position and, drawing on psychological research, ultimately argues for revisions to be made in the admission of IVEs as demonstrative evidence.

Part I of this Note defines and distinguishes IVEs from other forms of VR and CGE. Part II compares the treatment of substantive and demonstrative evidence under the Federal Rules of Evidence and discusses the relevant evidentiary rules for the use of an IVE as an illustrative aid. Part III outlines applicable psychological and cognitive research and potential prejudicial effects on juries stemming from the employment of IVEs in a trial setting under the current rules. Part IV examines several cases in which computer-generated animations were subjected to lower evidentiary standards and raises further concerns in applying the current rules to an IVE. Part V explains the need for revisions to the procedures for admitting an IVE as demonstrative evidence and concludes by recommending new procedures which should be implemented prior to the proliferation of IVEs in the courtroom.

I. Distinguishing Immersive Virtual Environments

The term “virtual reality” is used in many contexts, and it is important to note the distinctions between VR technologies capable of facilitating IVEs, which are the subject of this Note, and other mediums for virtual environment (“VE”) interaction and display. Computer–generated VEs can be roughly grouped into three broad categories based on the level of user immersion:[22] non-immersive (desktop), semi-immersive, and immersive virtual environments.[23]

Non-immersive systems, which include Fish Tank and Desktop VR, are monitor-based VR systems where users engage with the VE through a basic desktop display using stereoscopic lenses or an inherent autostereoscopic feature.[24] These kinds of displays do not necessitate that the user wear a VR headset or glasses and typically do not surround the user visually.[25] Likewise, semi-immersive systems have similar technologies but use large screen monitors, large screen projector systems, or multiple television projection systems that increase the user’s field of view, thereby increasing the level of immersion.[26]

Separate from these categories are mixed-reality, or augmented reality (“AR”), technologies that combine physical and virtual objects and align them with the real-world environment.[27] AR environments create a local virtuality, which is mapped onto the physical environment around the user, rather than completely replacing the surrounding environment with a virtual one.[28]

An IVE, by contrast, “perceptually surrounds the user.”[29] This is accomplished with a combination of three-dimensional computer graphics, high-resolution stereoscopic projections, and motion tracking technologies that continually render virtual scenes to match the movements and viewpoint of the user.[30] Through the use of a head-mounted display (“HMD”),[31] sensory information from the physical world is replaced with the perception of a computer–generated, three-dimensional world in which the user is free to move and explore.[32] In the context of an IVE, VR can therefore be understood to mean “a computer-generated display that allows or compels the user (or users) to have a feeling of being present in an environment other than the one they are actually in and to interact with that environment.”[33]

The resulting sense of presence felt by the user is described as a function of an individual’s psychology,[34] representing the degree to which that user experiences a conscious presence in the virtual setting.[35] This effect on a user’s state of consciousness has been attributed to the unique vividness and interactivity of an IVE,[36] which distinguishes IVEs from prior forms of CGE.[37] This sense of consciousness created by an IVE also forms the basis for psychological concerns about leading to potential risks of unfair prejudice in using an IVE at trial.[38] However, prior to further discussion of the unique psychological issues raised by IVEs, it is important to understand how an IVE offered for use at trial would be evaluated under the current rules of evidence.

II. Immersive Virtual Environments and the Federal Rules of Evidence

As previously noted, at trial, an IVE could be applied by courtroom attorneys for presentations to the jury that recreate crime and accident scenes, illustrate highly technical procedures, and demonstrate eyewitness or expert testimony. The most practical method of IVE application in the courtroom would be jurors donning individual HMDs during the course of, or simultaneous with, live testimony.

Though the use of IVEs in the courtroom remains largely unprecedented, the process for addressing the question of an IVE’s use at trial will likely be similar to that used for other forms of visual media.[39] At present, the Federal Rules of Evidence fail to make specific reference to any form of CGE, and therefore do not address the concept of an IVE.[40] Yet, in the absence of legislative revision, it is fair to assume that the admissibility of IVE evidence will be evaluated under existing basic evidentiary rules [41] as well as accompanying general principles which have developed among the courts for determining the admissibility of other forms of CGE.[42]

As a form of visual media, an IVE would need to be classified as either demonstrative—also called illustrative—or substantive evidence.[43] In the realm of CGE, courts have generally labeled 3–D renderings as either computer animations (typically treated as demonstrative evidence) or computer simulations (typically treated as substantive evidence).[44] This classification is critical in determining the applicable foundational requirements, which vary due to the differing purposes for which the evidence is introduced.[45]

Substantive evidence is offered by the proponent “to help establish a fact in issue.”[46] Thus, a computer-generated simulation created through the application of scientific principles would be considered to have independent evidentiary value and therefore be evaluated as substantive evidence.[47] If treated similarly, an IVE used to reconstruct the moment of a car accident, created through software that was programmed to analyze and draw conclusions from pre-existing data (such as calculations, eyewitness testimony, and so forth) would be considered substantive evidence.[48]

One of the primary hurdles facing an IVE entered as substantive evidence at trial would be in laying the foundation for its admission.[49] Because of these foundational challenges, the primary method for introducing an IVE as substantive evidence at trial would likely be in a form accompanying expert testimony.[50] This introduction could be done in several ways: as “part of the basis for expert opinion testimony, an illustrative aid to expert testimony, or a stand-alone exhibit introduced through the testimony of an expert involved in creating the IVE.”[51] As substantive evidence, a testifying expert could draw conclusions about the accident based on the IVE simulation, and it might be admitted as an exhibit that would be made available to the jury for review in deliberations.[52] Yet, as such, both the expert who prepared the IVE and the underlying scientific principles and data used in its construction would be subject to validation.[53]

Demonstrative evidence, in contrast, is defined as “physical evidence that one can see and inspect . . . and that, while of probative value and [usually] offered to clarify testimony, does not play a direct part in the incident in question.”[54] Meaning that, in theory, demonstrative evidence itself serves merely to illustrate the verbal testimony of a witness and should not independently hold any probative value to the case.[55] As such, visual aids introduced as demonstrative evidence are not typically allowed into jury deliberations and are not relied on as the basis for expert opinion.[56] Because visual aids offered as demonstrative evidence are not formally admitted as exhibits, courts treat this kind of evidence more leniently than substantive evidence when evaluating its use at trial.[57] An IVE presented as an illustrative aid to expert testimony, rather than as a basis for expert testimony or an independent exhibit, would therefore not be subject to the same level of scrutiny as substantive evidence.[58]

Despite these standards being significantly lowered, an IVE offered as demonstrative evidence would still need to meet basic evidentiary standards of relevancy, fairness, and authentication.[59] However, it is important to note that the extent to which these requirements would be enforced is a question of judicial discretion and ultimately rests with the presiding trial judge.[60]

The initial inquiry into an IVE, regardless of whether it was offered for demonstrative purposes, would determine whether it was relevant under Federal Rules 401 and 402. Rule 401 would require that the IVE have a “tendency to make a fact more or less probable than it would be without the evidence” and be “of consequence in determining the action.”[61] After a preliminary determination of relevancy, and absent any restrictions in Rule 402,[62] a demonstrative IVE would also need to be authenticated using the guidelines of Rule 901.[63]

Rule 901(a) states that to “satisfy the requirement of authenticating or identifying an item of evidence, the proponent must produce evidence sufficient to support a finding that the item is what the proponent claims it is.”[64] With respect to computer-generated animations used as demonstrative evidence, the animation must “fairly and accurately reflect the underlying oral testimony . . . aid the jury’s understanding” and be authenticated by a witness.[65] Thus, an animation used solely to illustrate witness testimony requires only that the witness testify that it was an accurate representation of the testimony and,[66] in the case of an expert witness, that it would help the jury to understand the expert’s theory or opinion.[67] Using the current method for computer–generated animations, a witness with personal knowledge of the event in question or an expert who had been made aware of the circumstances surrounding the event could simply testify that the IVE was a fair and accurate portrayal of the expert’s testimony.[68]

Importantly, some commentators have posited that, as a newer technology, the foundational requirements imposed on an IVE could be higher than those required for existing forms of illustrative aid.[69] This might necessitate that the proponent of an IVE meet some or all of the more difficult foundational hurdles—briefly mentioned above—regarding the use of scientific evidence.[70] As with other questions of admissibility, however, this determination would be made by the trial judge and the imposition of additional requirements, more akin to substantive evidence, should not be taken as a certainty.[71] Though the underlying data in an IVE offered as demonstrative evidence would undoubtedly be challenged by an opposing party, similar challenges were made in the context of computer–generated animations and were rejected by the courts even during the earliest stages of that technology’s introduction into the legal system.[72]

Regardless of the outcome of future methods used for authentication and despite a finding of relevance using Rules 401 and 402, an IVE could still be excluded by the trial judge under the balancing test of Rule 403.[73] Rule 403 states that “[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”[74] These broad standards set out by Rule 403 are a result of the high level of subjectivity required in making an admissibility determination, which essentially dictates a case-by-case analysis.[75] As such, decisions made by the trial judge pursuant to Rule 403 are largely exercises of discretion and are reviewed almost exclusively for abuse of discretion at the appellate level.[76] Although a trial judge might exclude an IVE for any of the above reasons listed under Rule 403, the distinct potential for unfair prejudice created by an IVE is the source of concern for much of the remaining discussion in this Note.

The Rule 403 advisory committee notes define unfair prejudice as “an undue tendency to suggest decision on an improper basis, commonly, though not necessarily, an emotional one.”[77] Broadly speaking, decisions to exclude a piece of evidence for unfair prejudice can be broken down into two primary categories: emotionalism and misuse of evidence.[78] Unfair prejudice caused by overreliance on emotion can be understood as evidence deemed to be “overly charged with appeal to this less rational side of human nature.”[79] Though the goal of Rule 403 is not to exclude all forms of evidence that elicit emotional response, the aim of the trial judge is to moderate the extent to which this response occurs. Aside from emotional concerns, unfair prejudice also results when evidence is misused by the jury after being deemed “admissible for one purpose (or against one party) but not another.”[80] The risk of misuse arises when there is a high likelihood “that the jury will mistakenly consider the evidence on a particular issue or against a particular party, even when properly instructed not to do so.”[81]

In either case, it is necessary for the judge to evaluate whether the probative value of the evidence is substantially outweighed by the risk of a juror’s reliance on an improper basis.[82] To do so, the judge must also take into consideration whether or not the risk can be remedied by issuing a limiting instruction.[83] In making determinations about admissibility, however, it is important for a judge to understand the unique psychological factors implicated by the use of an IVE. Without so doing, a judge may come to a decision which appears on the surface to be well-founded, but ultimately fails to consider the full extent of the risks posed by the use of an IVE. In the next Part, I will discuss several psychological and cognitive factors which should be measured when determining the admissibility of an IVE as demonstrative evidence.

III. Potential Prejudicial Impacts of Immersive Virtual Environments on Jury Decisionmaking

A. Designing Emotion in a Virtual Environment

As discussed in Part I, the element of presence in an IVE distinguishes this form of presentation from other forms of CGE. The concept of presence can be understood to manifest itself in a VE in three ways: via social presence, physical presence, and self presence. This Note is primarily concerned with the latter two.[84] Self presence has been defined as “a psychological state in which virtual (para-authentic or artificial) self/selves are experienced as the actual self in either sensory or nonsensory ways.”[85] Similarly, physical presence has been explained as “a psychological state in which virtual (para-authentic or artificial) physical objects are experienced as actual physical objects in either sensory or nonsensory ways.”[86] Reported experiences of both user self and physical presence in IVEs have led researchers to examine the ways in which IVEs influence user emotion, empathy, and embodiment, each of which will be addressed in turn below.

While research into the effects of IVEs on user emotion remains an active area for experimentation and debate,[87] initial studies have shown significant links between user presence in an IVE and stimulated emotion. One particular area of research has focused on the impact of emotional content in VEs and the relationship between user feelings of presence and actual user emotion.[88] The basic premise behind this type of research follows the logic that “if a dark and scary real-life environment elicits anxiety, so will a corresponding VE if the user experiences presence in it.”[89]

Following this theory, studies have been conducted involving mood induction procedures (“MIPs”), in which VEs have been intentionally designed to provoke specific emotional states.[90] For example, one such study presented participants with three different virtual park scenarios using an HMD with head tracking software and an accompanying joystick to facilitate movement.[91] The three park renderings shared the same virtual structure and objects (for example, trees, lamps, and so forth), but the developers manipulated the sound, music, shadows, lights, and textures with the purpose of inducing either anxiety or relaxation in users. The third park served as a neutral control that was not designed to induce any emotion.[92] Participants were assessed for emotional predisposition prior to the study, and they answered questionnaires regarding emotion and presence throughout the study.[93] The results showed significant variability in user happiness and sadness depending on which park the participant experienced.[94] The anxious park, which contained darker imagery and shadows, reduced user happiness and positive effects, while increasing feelings of sadness and anxiety.[95] In contrast, the relaxing park, which contained brighter imagery, increased user quietness and happiness, while reducing anger, sadness, anxiety, and negative effects.[96] The neutral park, however, did not elicit significant measurable changes.

Building on the same research, a more recent study exposed participants to different virtual park scenarios intentionally designed to elicit one of five specific affective states: joy; anger; boredom; anxiety; and sadness.[97] Effects on participants’ emotional reactions were measured through both physiological responses (monitoring electrodermal activity) and self-reporting. Based on these measures, researchers found they were able to induce the intended emotions in almost all cases and that they could elicit different emotional states by applying only slight changes to the lighting conditions or sounds in the VE.[98] Thus, these measures exhibit further support for the notion that VEs may be specifically designed to induce intended emotional states through various MIPs and alterations to the design elements in a virtual scenario.[99]

In addition to studies on inducing emotional states, others have examined the effects of IVEs on user empathy.[100] As previously noted, a core fundamental difference between traditional CGE and IVEs is in the form of presentation. Any time an image is rendered on a screen, there is a possibility that a viewer will interpret the image objectively because it appears without a human operator (who would be viewed as a subjective party).[101] Yet, in a traditional CGE display, the physical surroundings of the courtroom remain within the perspective of the viewer and the animation or simulation playing on the screen often retains a fixed camera viewpoint.[102] In contrast, through an IVE, the user can effectively take on the role of any specific actor or third-party observer in any given scenario.[103]

A recent study examining the influence of a user’s point of view on his or her assessment of vehicle speed and culpability in a computer animated car crash sequence demonstrates this effect.[104] Participants were presented with three separate animations of a two-car collision from different points of view: overhead (behind and above Car 1), internal (inside Car 1), and facing (looking directly at Car 1).[105] They were then asked to fill out a questionnaire which involved apportioning blame to either Car 1 or Car 2.[106] The study results demonstrated substantial differences in overall culpability assessments depending on the participant’s point of view, with participants apportioning 92% of the blame to Car 1 from the facing position, but only 43% from the overhead view and 34% from the internal view.[107] Though the study acknowledged limitations on ecological validity, the results were in line with Feigenson and Dunn’s hypothesis that small changes and manipulations to an observer’s point of view in a computer-generated animation may “have various legally significant effects.”[108]

In another study, participants were divided into 2 x 2 groups based on levels of immersion and user personality traits.[109] Participants then watched a documentary news series through VR–content-based or flat-screen-based technologies, depending on the immersion group.[110] The study found that presence in the VE positively influenced both empathy and embodiment—meaning that users in a higher immersion setting were more likely to feel a sense of compassion for the subjects of the news story.[111] Importantly, the authors of the study urged that immersion in a VE should be recharacterized “as a cognitive dimension alongside consciousness, awareness, understanding, empathizing, embodying, and contextualizing” rather than as a strong stimulus for facilitating illusion.[112] In other words, instead of viewing IVE technology as an illustrative aid in storytelling, it should be viewed as a factor influencing user cognition in reasoning through a proposed narrative.[113]

Based on current findings in both areas of research and despite ongoing debate regarding specific limitations and interplay between these factors in a VE, the potential for an IVE to be purposefully designed to elicit user emotions and empathy appears to exist. While relying on emotion and empathy in our day-to-day decisionmaking can be an ecologically valid tool of assessment, in the courtroom—an intentionally hermetically sealed universe—it poses a distinct risk of unintended prejudicial effects. Murtha v. City of Hartford provides an example of how these potential effects might be implicated in the trial setting.[114] In 2006, Connecticut Police Officer Robert Murtha was acquitted on all charges relating to his shooting a suspect who was evading police in a stolen car.[115] During the pursuit, the car stalled in snow on the side of the road.[116] As Murtha left his cruiser and approached the car, the suspect attempted to reenter the road and speed off. Murtha fired multiple shots into the driver’s side window that injured the fleeing driver. Dashcam footage from another police cruiser positioned behind Murtha showed him chasing the vehicle and firing into the car as it sped off.[117]

At trial, Murtha argued that his use of deadly force was justified as an act of self-defense because, at the time, he believed that the car was headed towards him.[118] Murtha presented the jury with a hybrid of the dash cam footage and a computer–generated animation to illustrate his point of view.[119] As the driver begins to pull onto the road, the original video freezes and an interspliced animation rotates the field of view from the live–action shot to a recreation of Murtha’s first-person perspective.[120] Comparing the original footage to the animation, there are some clear discrepancies: (1) the car re-enters the road at a sharper angle; (2) Murtha is placed partially within the path of the car and his gun is already drawn and extended; (3) as the car begins to drive off, Murtha moves slowly alongside the car while firing instead of running.[121] However, over the prosecutor’s objections as to the inaccuracy of the animation, the judge determined that the video was a fair and accurate depiction of Murtha’s recollection and issued a limiting instruction that the animation was not meant to depict a precise reenactment.[122]

In creating a computer-generated display, a designer’s decision to provide one viewpoint over another “can potentially alter which ‘character’ in an evidence presentation a viewer identifies with, or aligns themselves with.”[123] Through the animation in Murtha, the jury effectively took on the role of the officer in the shooting. Putting any discrepancies in the animation aside, placing the jurors in the shoes of the officer alone created the potential for unfair prejudice resulting from actor–observer bias. If the same animation in Murtha was presented in the form of an IVE, the additional factor of user presence would further complicate this potential. Based on the above studies, an IVE can be intentionally designed to elicit, or even unintentionally cause, a user to feel strong emotions, empathy, and overall self-alignment, which would significantly magnify the risk of unfair prejudice. Though these potential sources of prejudice may not ultimately have been grounds for reversal in Murtha,[124] they should be recognized as important factors when addressing the question of prejudicial effects in an IVE.

B. Body Ownership Illusions

When an IVE user feels strongly about another person’s emotions or circumstances in a VE, this can translate into a cognitive feeling of embodiment.[125] Thus, in addition to increasing user emotion and empathy through presence, the virtual body experienced by the user can begin to feel like an analog of the user’s biological body generated through user cognition.[126] As a result, the user-tracking technologies used to facilitate an IVE uniquely involve the potential to produce body ownership illusions (“BOIs”).[127] BOIs are created when non-bodily objects (like a virtual projection or prosthetic limb) are experienced as part of the body through a perceived association with bodily sensations such as touch or movement.[128] The first experiment by Botvinick and Cohen introduced the concept of BOIs through a rubber hand illusion.[129] Participants in the original experiment had their hands concealed and a rubber hand with a similar posture was placed in front of them. An experimenter then stroked both the real and rubber hands simultaneously, causing the majority of participants to report feeling that the rubber hand was a part of their own body.[130] This phenomenon, termed the rubber hand illusion, was later shown to activate areas of the brain “associated with anxiety and interoceptive awareness” when “the fake limb is under threat and at a similar level as when the real hand is threatened.”[131] Thus, participants in one study reacted in anticipation of pain, empathic pain, and anxiety when experimenters occasionally threatened a rubber hand with a needle while participants were under the effects of a BOI.[132]

Subsequent experiments have also tested the extent to which certain multisensory factors are necessary to induce BOIs.[133] While the original experiment involved a visuotactile cue (where participants experienced a combination of visual stimulation and physical contact), further experiments have induced BOIs solely through visuomotor input.[134] Visuomotor stimulation involves participants performing active or passive movements while simultaneously seeing the artificial body (or body part) perform the same movements.[135] Most significantly, this phenomenon has been shown to occur in VEs.[136]

For example, in one study, experimenters outfitted participants with an HMD and a hand–tracking data glove and asked them to focus on the movement of a virtually projected right arm which moved synchronously with the actions of their real right arm, hand, and fingers.[137] The participants’ real right arm was located approximately twenty centimeters away from the virtual projection. Participants were then asked to use their left arm, which was not tracked or projected, to point to their right arm.[138] The participants largely tended to misidentify their real hand and instead identify the virtual hand, in some cases even after the virtual simulation had terminated.[139] The results were consistent with prior studies involving the rubber hand illusion and showed that the illusion of ownership could occur as a result of visuomotor synchrony in movements between the real and virtual hand.[140]

Additional studies of BOIs in VR have led to consistent findings that VEs can produce these effects when homogenous body parts are moved synchronously.[141] These studies have found BOIs resulting from the synchronous movement of virtual legs,[142] upper bodies,[143] and even full bodies.[144]

In an IVE, the occurrence of BOIs as a result of visuomotor stimulation has significant implications as a potential source of unfair prejudice. Beyond the concern that user emotion and empathy in an IVE might cause a juror to sympathize more with a party whose perspective he or she shares, BOIs introduce a separate issue: synchrony between a juror’s movements and those of an actor perceived in an IVE could cause the juror to temporarily feel as if he or she is that person. While some psychological studies have highlighted benefits of inducing BOIs through VR in the courtroom, for example in the potential for reducing racial biases,[145] the risk for unfair prejudice is also exceptionally high. From the standpoint of emotional prejudice, BOIs created through an IVE can both cause the viewer to feel anxious or threatened in a scenario [146] and ultimately to identify with the avatar.[147] For example, if the animation in Murtha were presented through an IVE (with jurors wearing an HMD and data gloves), the jurors could feel as if the car was coming towards their own bodies, eliciting fear or anxiety through an apprehension of contact. Moreover, this vivid and emotional experience could cause a juror to disregard conflicting pallid evidence in the case as to the car’s trajectory or the sequence of events and unduly rely on the IVE, despite its being used merely as a representation of the propounding party or witness’s theory of the case.

IV. Problems with the Current Rules for Demonstrative Computer-Generated Evidence

A. Case Studies

When subjecting jurors to an IVE, both presence and the phenomenon of BOIs create a unique potential for unfair prejudice. Even though IVEs are uniquely immersive and extremely vivid when introduced as demonstrative evidence, they could still remain subject to surprisingly low evidentiary standards. While the rules presented in Part II may at face value appear to be a significant burden for the proponent of an IVE, as stated previously, the characterization of an IVE as substantive or demonstrative and the broad discretion afforded to trial judges can significantly impact the extent to which the rules are used to allow the use of IVE at trial. The treatment of CGE in the following cases is illustrative of the more lenient approach applied in many jurisdictions when dealing with demonstrative evidence.[148]

In Commonwealth v. Serge, a defendant found guilty of first-degree murder for killing his wife appealed the State’s use of a computer-generated animation as demonstrative evidence.[149] The animation—introduced to illustrate the expert testimonies of a forensic pathologist and crime scene reconstructionist—purported to show the manner in which the defendant shot his wife.[150] Prior to admitting the animation, the trial court required that it be authenticated as both a fair and accurate depiction of the testimony and that any potentially inflammatory material be excluded.[151] The trial court also issued a lengthy jury instruction at trial cautioning that the animation was a demonstrative exhibit for the sole purpose of illustrating expert testimony and cautioned the jury not to “confuse art with reality.”[152] The defendant challenged the animation as unfairly prejudicial and improperly authenticated under Pennsylvania Rule of Evidence 901(a) given that the depictions were unsupported by the record or the accompanying expert opinions.[153] The Pennsylvania Supreme Court found both that the animation was a proper depiction of the witness testimony and that the limiting instruction and lack of dramatic elements in the animation were sufficient to eliminate any concerns over prejudice.[154] The court affirmed the admissibility of the animation and held that the animation properly satisfied the basic requirements of Pennsylvania Rules of Evidence 401, 402, 403, and 901.[155]

More recently, in a Utah case—State v. Perea—a defendant convicted of two counts of aggravated murder and two counts of attempted murder appealed his sentence, arguing, in part, that computer-generated animations, excluded by the district court, were sufficiently authenticated under Utah Rule of Evidence 901(a).[156] At trial, the defendant attempted to introduce two animations to visually represent the testimony of a crime scene reconstruction expert.[157] The expert testified that “although he did not personally create the animations, they ‘g[a]ve an indication of what [he] believe[d] may have happened,’” making it easier for the jury to understand his testimony.[158] The State objected for lack of foundation and on the grounds that the animations did not accurately represent the facts, because under the State’s theory there was only one shooter.[159] Reversing the ruling of the district court, the Utah Supreme Court held that despite a lack of knowledge about the creation of the animation on the part of the testifying expert, Rule 901 “does not require that the demonstrative evidence be uncontroversial, but only that it accurately represents what its proponent claims.”[160] The district court’s exclusion was an error because the crime scene reconstruction expert confirmed that the animations accurately represented his interpretation of the facts.

In both cases, the computer-generated animations were deemed relevant under Rules 401 and 402, properly authenticated under Rule 901, and passed the balancing test of Rule 403. However, in neither case were the proponents of the animations obligated to meet foundational requirements beyond an assertion that the animation “fairly and accurately” depicted the testimony of the witnesses—despite the fact that the animations were constructed solely using witness testimony about their memories of the event. Additionally, both courts found that the trial court’s issuance of limiting instructions to the jury was sufficient to combat any prejudicial effects. Under examination, the court’s analyses contain multiple flaws which would be further complicated if IVEs were at issue.

B. Issues with the Court’s Analyses

First, in creating computer-generated representations of a witness’s testimony “[n]o matter how much evidence exists, there is never enough to fill in every detail necessary. . . . The expert (or the animator) must make assumptions to fill in the blanks.”[161] In Serge, like in Murtha, the animators took significant liberties in creating the animation.[162] By placing a knife next to the victim and dressing the defendant’s character in red plaid, the animators made decisions that were not necessarily supported by the physical evidence but were then authenticated by the accompanying witness’s memory or an expert’s theory as to what happened.[163]

Like an animation, the creation of an IVE inevitably involves choices by a designer regarding not only what is perceived, but also how it is perceived. Without proper safeguards or consideration, a party at trial could ostensibly introduce an IVE for demonstrative purposes which appeared to be sufficiently limited in emotional content to the eyes of the trial judge but was designed using MIPs to subtly influence jury attitudes towards a given scenario. For example, in arguing a self-defense claim, a party could ask designers of an IVE to select color palettes and illumination levels more likely to elicit fear and anxiety.[164] As explained in Part III, even subtle or indirect changes to factors such as lighting, point of view, level of interactivity, or synchrony of movement can have significant psychological implications for users of an IVE.[165] However, none of these factors are involved in the current analysis for demonstrative CGE in many jurisdictions.[166]

Second, it seems clear that in combatting highly vivid demonstrative evidence, “the opponent of the animation should be allowed [on cross-examination] to demonstrate to the jury that the . . . animation [is] based, at least partially, on assumptions and conjectures, and not on purely objective, scientific factual determinations.”[167] Yet, under the current standards for demonstrative CGE, many jurisdictions do not require the testifying witness to have personal knowledge regarding the creation of the animation.[168] In Perea, for example, the animation was admitted despite the accompanying witness possessing no information about the creation of the animation.[169] A similar decision by a trial judge to admit an IVE as demonstrative evidence, without an accompanying witness having knowledge about the decisions or assumptions made in creating the IVE, would likewise significantly disadvantage an opponent in combatting its highly vivid qualities through cross-examination.

Third, both courts relied heavily on jury instructions to moderate the potential prejudicial impacts of the animations on the jury.[170] Though the general rule is to assume that juries will abide by limiting instructions,[171] the Supreme Court has previously recognized that “there are some contexts in which the risk that the jury will not, or cannot, follow instructions is so great . . . that the practical and human limitations of the jury system cannot be ignored.”[172] Moreover, research in the field of social psychology has “repeatedly demonstrated that . . . limiting instructions are unsuccessful at controlling jurors’ cognitive processes.”[173] While this does not necessitate the presumption that all jury instructions are ineffective, it does call into question whether a jury subjected to the highly vivid and unique psychological effects of an IVE might have trouble following a judge’s directions as to the permissible and impermissible purposes for its use.

V. Recommendations

In anticipation of the onset of IVEs in the courtroom, this Note proposes several changes to the current standards for admissibility, as well as judicial guidelines for best practice in moderating the prejudicial impacts of IVEs.

A. Stricter Foundational Requirements

Though it would be impractical to develop a “one-size-fits-all” method in dealing with the numerous potential contexts and purposes for which an IVE might be offered as demonstrative evidence, uniformly increasing the foundational requirements for admitting demonstrative IVEs would help to combat some of the potential sources for prejudice.

In State v. Swinton, the Connecticut Supreme Court recognized the need for changes in the rules governing demonstrative evidence with regard to evolving computer technologies.[174] Addressing the binary distinction of the courts between computer animations and computer simulations, the court recognized that there are some kinds of evidence which do “not fall cleanly within either category.”[175] Though Swinton addressed the enhancement of photographs through Adobe Photoshop, the court’s discussion is particularly applicable in relation to an IVE.[176] The court found that “the difference between presenting evidence and creating evidence was blurred”[177] and endorsed a previously established general rule requiring that in all cases involving CGE there be “testimony by a person with some degree of computer expertise, who has sufficient knowledge to be examined and cross-examined about the functioning of the computer.”[178] In addition, the court went one step further in setting out factors with which the expert should be familiar and which could be weighed in determining the reliability of, and adherence to, procedural requirements.[179]

Adopting the court’s logic, this Note recommends that as a basic requirement, an expert who prepared the IVE should be present at the trial to testify regarding the expert’s qualifications and the underlying processes used to create the IVE. This would ensure that the opposing party has the opportunity to cross-examine the expert regarding the underlying data and assumptions used in its creation. In continued recognition of the differences between substantive and demonstrative evidence, this would not necessitate that the proponent satisfy all of the requirements for admitting scientific evidence under Rule 702 (and the Daubert or Frye tests).[180] However, this would at least afford the opposing party the opportunity to cross-examine someone with personal knowledge of the IVE technology and its creation.[181]

B. Evaluating and Limiting Prejudicial Effects

While establishing an adequate foundation by requiring the presence of an informed expert works to combat some of the unfairness stemming from reliability and misuse of evidence under the current demonstrative standards, this alone is insufficient to curb the range of significant potentials for prejudice. In addition to raising the foundational requirements, there are several factors which should be considered by a judge in conducting the Rule 403 balancing test. In addressing the potential for juror’s unfair reliance on an IVE, consideration of the factors identified in Part IV—chiefly the role of presence and BOIs—should be a necessary predicate to admission. This would require judges to scrutinize not only the design factors in an IVE, but also the level of interactivity facilitated.

Interestingly, beyond mere consideration of such factors, it may also be possible for judges to take affirmative steps to impose limitations on an IVE which could help to mitigate juror overreliance. As this Note has repeatedly stated, the source of many of the potentials for prejudice created by IVEs is their unique vividness and interactivity, which produce feelings of presence and body ownership in the user.[182] Both psychological–presence research and BOI studies indicate that there may be ways to limit, reduce, or remove the feelings of presence and ownership in a VE.[183] Such phenomenon, termed as “breaks in presence” (“BIPs”),[184] occur when the user’s feelings of ownership or consciousness within the VE are disrupted by perceived virtual or real-world interferences.[185]

Under Rule 611(a), judges have broad authority to regulate the admission of demonstrative evidence.[186] As such, judges could potentially use BIPs to mitigate the prejudicial effects of an IVE. Multiple studies have concluded that BOIs occur in VEs only when the movements depicted are relatively synchronous.[187] Because of this, “[w]hen there is asynchrony the illusion does not occur.”[188] With this knowledge, a judge would have the option to instruct the proponent of an IVE to increase the latency (delay) between the movements of the juror and the avatar, thereby reducing the likelihood that a BOI would occur. In another study, examiners found that replacing a perceived limb with a virtual arrow indicator would similarly reduce the BOI phenomenon.[189] Thus, an alternative option might be to instruct the proponent to limit the realistic qualities of the avatar by replacing human features with indicators. Naturally, as further studies are completed and the concepts of presence and ownership in VEs become better understood, so too will the options available to judges in imposing limitations.

Conclusion

As was recognized by the drafters of the Federal Rules of Evidence, it is difficult to define bright line admissibility rules.[190] Despite these difficulties, it stands that the current treatment of demonstrative evidence in many jurisdictions does not properly accommodate IVEs. Though it may appear contrary to logic to think that an IVE could be treated like a chart or graph in the courtroom, under current standards this might very well become the case in some jurisdictions. This author agrees that “every new development is eligible for a first day in court;”[191] however, we as a legal community should be cognizant of the differences between past and emerging technologies and of the potential prejudicial risks newer technologies may pose. It is inevitable that IVEs will continue to make their way into the courtroom, but they should not proceed unchecked. The proposed increase in authentication requirements, as well as the potential factors for judges in evaluating and moderating the use of IVEs in the courtroom, are but an initial step in integrating IVEs for courtroom use. Thus, it remains essential that further psychological and cognitive studies be conducted with regard to the use of IVEs in the courtroom.

[*] *.. Senior Submissions Editor, Southern California Law Review, Volume 92; J.D. Candidate 2019, University of Southern California Gould School of Law; B.A. 2015, University of California, Riverside. My sincere gratitude to Professor Dan Simon for his guidance and the editors of the Southern California Law Review for their excellent work. I would also like to thank my parents, Pamela and Robert Bunker, for their unwavering support and encouragement.

[1]. High Impact Bringing Virtual Reality to the Courtroom, High Impact, https://highimpact.com/news/High-Impact-to-Bring-Virtual-Reality-to-the-Courtroom (last visited Jan. 23, 2019).

[2]. Damian Schofield, The Use of Computer Generated Imagery in Legal Proceedings, 13 Digital Evidence & Electronic Signature L. Rev. 3, 3 (2016). Some commentators have attributed the increase in use of computer-generated evidence (“CGE”) in the courtroom to three primary factors: (1) we have become a more visual society; (2) people retain much more of what they see than what they hear; and (3) technological advancements and decreasing costs are making this form of evidence more affordable for clients. See Mary C. Kelly & Jack N. Bernstein, Comment, Virtual Reality: The Reality of Getting It Admitted, 13 John Marshall J. Computer & Info. L. 145, 148–50 (1994).

[3]. Carrie Leonetti & Jeremy Bailenson, High-Tech View: The Use of Immersive Virtual Environments in Jury Trials, 93 Marq. L. Rev. 1073, 1073 (2010).

[4]. Compare Betsy S. Fielder, Are Your Eyes Deceiving You?: The Evidentiary Crisis Regarding the Admissibility of Computer Generated Evidence, 48 N.Y.L. Sch. L. Rev. 295 (2003) (discussing potential problems posed by the use of CGE), and Gareth Norris, Computer-Generated Exhibits, the Use and Abuse of Animations in Legal Proceedings, 40 Brief 10 (2011) (weighing the pros and cons of computer-generated animations in the courtroom), with Fred Galves, Where the Not-So-Wild Things Are: Computers in the Courtroom, the Federal Rules Of Evidence, and the Need for Institutional Reform and More Judicial Acceptance, 13 Harv. J.L. & Tech. 161 (2000) (arguing that computer-generated animations are akin to earlier forms of demonstrative media and should be introduced into the courtroom under existing standards).

[5]. See, e.g., Juries ‘Could Enter Virtual Crime Scenes’ Following Research, BBC (May 24, 2016), http://www.bbc.com/news/uk-england-stoke-staffordshire-36363172 (reporting on a £140,000 European Commission grant to the Staffordshire University project for research and experiments on technology and techniques to transport jurors to virtual crime scenes).

[6]. Fredric I. Lederer, The Courtroom 21 Project: Creating the Courtroom of the Twenty-First Century, 43 Judges’ J., Winter 2004, at 39, 42.

[7]. Id.

[8]. Id.

[9]. Lars C. Ebert et al., The Forensic Holodeck: An Immersive Display for Forensic Crime Scene Reconstructions, 10 Forensic Sci. Med. Pathology 623, 624–26 (2014).

[10]. Id. A similar virtual reality (“VR”) reconstruction was developed in the United States by Emblematic Group in 2012 using audio files of 911 calls, witness testimony, and architectural drawings to re-create the events of the widely publicized Trayvon Martin shooting. Emblematic Group, One Dark Night-Emblematic Group VR, YouTube (May 9, 2015), https://www.youtube.com/watch?v
=1hW7WcwdnEg. It is also offered for download in the Google Play and Steam Store. See Mike McPhate, California Today: In Virtual Reality, Investigating the Trayvon Martin Case, NY Times (Feb. 24, 2017), https://nyti.ms/2mflo8f (interviewing one of the creators).

[11]. See Marc Cieslak, Virtual Reality to Aid Auschwitz War Trials of Concentration Camp Guards, BBC (Nov. 20, 2016), http://www.bbc.com/news/technology-38026007.

[12]. Although the immersive virtual environment (“IVE”) version has not yet been used at trial, the same 3-D model was previously utilized in the prosecution of wartime SS camp guard Reinhold Hanning to help assert his point of view from his post at a watchtower in the camp. Id.

[13]. Basic VR headsets can be purchased for under $100 (for example, Google Cardboard and Samsung Gear VR), with more high-end headsets costing around $600 (for example, Oculus Rift and HTC Vive). See John Gaudiosi, Over 200 Million VR Headsets to Be Sold by 2020, Fortune (Jan. 21, 2016), http://fortune.com/2016/01/21/200-million-vr-headsets-2020; see also Stevi Rex, Global Virtual Reality Industry to Reach $7.2 Billion in Revenues in 2017, Greenlight Insights (Apr. 11, 2017), https://greenlightinsights.com/virtual-reality-industry-report-7b-2017 (forecasting global VR product sales to reach $7.2 billion by the end of 2017).

[14]. See, e.g., Lamber Goodnow Legal Team Brings Virtual Reality Technology to the Courtroom, PR Newswire (Jan. 27, 2017), https://www.prnewswire.com/news-releases/lamber-goodnow-legal-team
-brings-virtual-reality-technology-to-the-courtroom-300397710.html (reporting on Arizona personal injury firm advertising use of VR in pending cases) (“In the old days, I’d use demonstrative exhibits, visual aids and witness statements in an attempt to ‘transport a jury to an accident scene.’ With virtual reality, not only can I transport jurors to the accident scene, I can put them in the car at impact.”).

[15]. See, e.g., High Impact Bringing Virtual Reality to the Courtroom, supra note 1.

[16]. See Nsikan Akpan, How Cops Used Virtual Reality to Recreate Tamir Rice, San Bernardino Shootings, PBS News Hour (Jan. 13, 2016, 5:00 PM), https://www.pbs.org/newshour/science/virtual-reality-tamir-rice-3d-laser-scans-shootings-san-bernardino (discussing law enforcement agencies use of laser scanners at crime scenes and current projects to convert these kinds of scans for use with VR headsets) (“That’s what I see coming. We’re going to be putting these goggles on juries and say look around and tell me what you see.”). For more on various types of 3-D laser scanning devices employed by law enforcement in the United States, including use with drone technologies, see Robert Galvin, Capture the Crime Scene, Officer (Jul. 19, 2017), https://www.officer.com/investigations/article
/12339566/3d-crime-scene-documentation-for-law-enforcement.

[17]. See Jeremy N. Bailenson et al., Courtroom Applications of Virtual Environments, Immersive Virtual Environments, and Collaborative Virtual Environments, 28 Law & Pol’y 249, 255–58 (2006).

[18]. Leonetti & Bailenson, supra note 3, at 1076.

[19]. See Bailenson et al., supra note 17, at 258–60.

[20]. Leonetti & Bailenson, supra note 3, at 1118.

[21]. Caitlin O. Young, Note, Employing Virtual Reality Technology at Trial: New Issues Posed by Rapid Technological Advances and Their Effects on Jurors’ Search for “The Truth,” 93 Tex. L. Rev. 257, 258 (2014).

[22]. For further explanation of the concept of immersion in virtual environments (“VEs”), see Mel Slater & Sylvia Wilbur, A Framework for Immersive Virtual Environments (FIVE): Speculations on the Role of Presence in Virtual Environments, 6 Presence 603, 604–05 (1997) (“Immersion is a description of a technology, and describes the extent to which the computer displays are capable of delivering an inclusive, extensive, surrounding and vivid illusion of reality to the senses of a human participant.” (emphasis in original)).

[23]. Patrick Costello, Health and Safety Issues Associated with Virtual Reality – A Review of Current Literature 6–8 (1997), http://www.agocg.ac.uk/reports/virtual/37/37.pdf.

[24]. See Frank Stenicke et al., Interscopic User Interface Concepts for Fish Tank Virtual Reality Systems, in 2007 IEEE Virtual Reality Conference 27, 27–28 (2007).

[25]. George Robertson et al., Immersion in Desktop Virtual Reality, in Proceedings of the 10th Annual ACM Symposium on User Interface Software and Technology 11, 11 (1997); see also Stenicke et al., supra note 24, at 27. Modern-day desktop VR examples can be seen in video games, like the Call of Duty franchise, where users control their in-game avatars through a handheld controller or mouse/keyboard interface. These kinds of video games can be played from both first-person and third-person perspectives and computer-generated animations are rendered on a monitor (primarily via television and computer screens).

[26]. Stenicke et al., supra note 24, at 27.

[27]. See D.W.F. van Krevelen & R. Poelman, A Survey of Augmented Reality Technologies, Applications and Limitations, 9 Int’l J. Virtual Reality, no. 2, 2010, at 1, 1.

[28]. Id. A popular example of this type of technology can be seen in Niantic’s Pokémon Go, which was released for mobile devices in July 2016. The game utilizes a user’s phone/tablet camera (which functions to depict their surrounding physical environment) and overlays virtual animations of monsters onto the camera image. Users can interact with the monsters through their touch-screen interface and the user’s real-world movements are tracked using their devices GPS services. See Pokémon Go, https://support.pokemongo.nianticlabs.com/hc/en-us (last visited Dec. 28, 2018).

[29]. See Bailenson et al., supra note 17, at 251.

[30]. Id. at 250–53, 259.

[31]. An alternative configuration is a Cave Automatic Virtual Environment (“CAVE”) where the user moves in a room surrounded by rear-projection screens. The user, wearing stereoscopic glasses instead of a head-mounted display (“HMD”), is tracked through an electromagnetic device and updated visual images are reflected on the screens. See id. at 253.

[32]. Id.

[33]. Ralph Schroeder, Social Interaction in Virtual Environments: Key Issues, Common Themes,

and a Framework for Research, in The Social Life of Avatars 1, 2 (2002) (citation omitted).

[34]. For a comprehensive overview of studies on user feelings of presence in IVEs, see generally James J. Cummings & Jeremy N. Bailenson, How Immersive Is Enough? A Meta-Analysis of the Effect of Immersive Technology on User Presence, 19 Media Psychol. 272 (2016) (analyzing meta data collected from eighty-three studies on immersive system technology and user experiences of presence).

[35]. Id. at 274. Of the factors relating to the level of user presence, “results show that increased levels of user-tracking, the use of stereoscopic visuals, and wider fields of view of visual displays are significantly more impactful than improvements to most other immersive system features, including quality of visual and auditory content.” Id. at 272.

[36]. Neal Feigenson, Too Real? The Future of Virtual Reality Evidence, 28 Law & Pol’y 271,

273 (2006). Vividness means the extent to which the display forms a “sensorially rich environment,” and interactivity results from the ability of the user to “influence the form or content of the mediated environment.” Id.

[37]. See Young, supra note 21, at 261.

[38]. See infra Part III.

[39]. Leonetti & Bailenson, supra note 3, at 1077.

[40]. See generally Fed. R. Evid.

[41]. Feigenson, supra note 36, at 276.

[42]. See generally Laura Wilkinson Smalley, Establishing Foundation to Admit Computer-Generated Evidence as Demonstrative or Substantive Evidence, 57 Am. Juris. Proof of Facts 3d 455 (Westlaw 2018) (providing an overview of the various legal foundations for CGE’s admission into evidence).

[43]. Karen L. Campbell et al., Avatar in the Courtroom: Is 3D Technology Ready for Primetime?, 63 Fed’n Def. & Corp. Counsel Q. 295, 296 (2013).

[44]. Id.

[45]. Id. at 298.

[46]. Substantive Evidence, Black’s Law Dictionary (10th ed. 2014).

[47]. Kurtis A. Kemper, Admissibility of Computer–Generated Animation, 111 A.L.R. 5th 529, § 2 (2003).

[48]. Id.

[49]. Leonetti & Bailenson, supra note 3, at 1098–99 (“The impediments that a proponent of an IVE would face, under Rule 403, the best evidence rule, or Rule 901, are chiefly matters of foundation, i.e., the admissibility of an IVE turns on whether the proponent could establish its accuracy, reliability, and authenticity.”).

[50]. Id. For example, a blood spatter analyst could use a recreation of the crime scene to explain her findings.

[51]. Id. at 1099 (footnotes omitted). For a comprehensive view of potential courtroom and pre-trial IVE applications, see generally Bailenson et al., supra note 17.

[52]. Leonetti & Bailenson, supra note 3, at 1099.

[53]. Campbell et al., supra note 43, at 299. Thus, requiring a sufficient showing of:

(1) the qualifications of the expert who prepared the simulation and (2) the capability and reliability of the computer hardware and software used to create the simulation . . . [that] (3) the calculations and processing of data were done on the basis of principles meeting the standards for scientific evidence under Rule 702; (4) the data used to make the calculations were reliable, relevant, complete, and input properly; and (5) the process produced an accurate result.

Id.

[54]. Demonstrative Evidence, Black’s Law Dictionary (10th ed. 2014).

[55]. I. Neel Chatterjee, Admitting Computer Animations: More Caution and New Approach Are Needed, 62 Def. Couns. J. 36, 37 (1995).

[56]. Smalley, supra note 42, § 8.

[57]. Id.

[58]. Despite the fact that an IVE would utilize computer programming to create the illustrative aid, the separate treatment of an IVE as demonstrative or substantive evidence would not depend on whether VR technology was employed to achieve the rendering. See Galves, supra note 4, at 228 (“Although demonstrative animations use programs in design, the substantive result they create is based on the witness’s testimony rather than numerical calculations and other underlying input data.”).

[59]. Feigenson, supra note 36, at 276. Although demonstrative evidence is not technically “evidence” in the context of the Federal Rules, standards of relevance, fairness, and authentication are still enforced by courts in weighing the admissibility of demonstrative evidence through analogy. Id.

[60]. See Fed. R. Evid. 611(a). “The court should exercise reasonable control over the mode and order of examining witnesses and presenting evidence so as to: (1) make those procedures effective for determining the truth; (2) avoid wasting time; and (3) protect witnesses from harassment or undue embarrassment.” Id.

[61]. Fed. R. Evid. 401.

[62]. See Fed. R. Evid. 402. “Relevant evidence is admissible unless any of the following provides otherwise: the United States Constitution; a federal statute; these rules; or other rules prescribed by the Supreme Court. Irrelevant evidence is not admissible.” Id.

[63]. See Fed. R. Evid. 901(a).

[64]. Id.

[65]. Chatterjee, supra note 55, at 37.

[66]. Smalley, supra note 42, § 9.

[67]. See, e.g., Gosser v. Commonwealth, 31 S.W.3d 897, 903 (Ky. 2000) (“[B]ecause a computer-generated diagram, like any diagram, is merely illustrative of a witness’s testimony, its admission normally does not depend on testimony as to how the diagram was prepared, e.g., how the data was gathered or inputted into the computer.”), abrogated on other grounds by Elery v. Commonwealth, 368 S.W.3d 78 (Ky. 2012).

[68]. See Fed. R. Evid. 901(b)(1). Significantly, this would include a re-creation of a scene or accident based on the personal knowledge of a sponsoring witness. See Leonetti & Bailenson, supra note 3, at 1098.

[69]. See Feigenson, supra note 36, at 277.

[70]. Campbell et al., supra note 43, at 299.

[71]. Though, as argued in Part V, subjecting all IVE evidence to more substantive standards could have a moderating effect on some of the concerns raised in Part III.

[72]. See, e.g., People v. McHugh, 476 N.Y.S.2d 721, 722–23 (Sup. Ct. 1984) (rejecting a motion for a pre-trial Frye hearing despite no prior instances of computer-generated animations being used at trial) (“While this appears to be the first time such a graphic computer presentation has been offered at a criminal trial, every new development is eligible for a first day in court.”); see also People v. Hood, 62 Cal. Rptr. 2d 137, 140 (Ct. App. 1997) (holding that the Kelly formulation for “new scientific procedures” does not apply to computer-generated animations when introduced as demonstrative evidence).

[73]. See Fed. R. Evid. 403.

[74]. Id.

[75]. Christopher B. Mueller & Laird C. Kirkpatrick, Federal Evidence § 4:12 (4th ed. 2013) (“Much depends on surrounding facts, circumstances, issues, the conduct of trial, and the evidence adduced already and expected as proceedings move forward.”).

[76]. Id.

[77]. Fed. R. Evid. 403, advisory committee’s notes to 1972 proposed rules.

[78]. Mueller & Kirkpatrick, supra note 75, § 4:13.

[79]. Id.

[E]vidence is unfairly prejudicial in the sense of being too emotional if it is best characterized as sensational or shocking; if it provokes anger, inflames passions, or if it arouses overwhelmingly sympathetic reactions; provokes hostility or revulsion; arouses punitive impulses; or appeals to emotion in ways that seem likely to overpower reason.

Id. (footnotes omitted).

[80]. Id.

[81]. Id.; see, e.g., United States v. Brown, 490 F.2d 758, 764 (D.C. Cir. 1973) (“Despite a limiting instruction to the effect that the evidence is to be considered solely on the issue of the declarant’s state of mind (the proper purpose), there is the ever-present danger that the jury will be unwilling or unable to so confine itself.”).

[82]. Fed. R. Evid. 403, advisory committee’s notes to 1972 proposed rules.

[83]. Id.

[84]. See Kwan Min Lee, Presence, Explicated, 14 Comm. Theory 27, 42 (2004). Though important with respect to the study of co-presence and other social phenomenon experienced in an IVE, social presence falls outside the scope of this Note. Social presence pertains to the way in which virtually rendered social actors are experienced as actual social actors by a user and is an important concept in the understanding of feelings of co-presence between multiple users in a VE. For more on social presence, see id. at 45.

[85]. Id. at 46.

[86]. Id. at 44.

[87]. Julia Diemer et al., The Impact of Perception and Presence on Emotional Reactions: A Review of Research in Virtual Reality, 6 Frontiers Psychol., Jan. 2015, at 1.

[88]. See R.M. Baños et al., Immersion and Emotion: Their Impact on the Sense of Presence, 7 CyberPsychology & Behav. 734, 735 (2004); see also Rosa M. Baños et al., Presence and Emotions in Virtual Environments: The Influence of Stereoscopy, 11 CyberPsychology & Behav. 1, 2–3 (2008).

[89]. Anna Felnhofer et al., Is Virtual Reality Emotionally Arousing? Investigating Five Emotion Inducing Virtual Park Scenarios, 48 Int’l J. Hum.-Computer Stud. 48, 49 (2015) (citation omitted).

[90]. For a seminal text on psychological laboratory designs for mood induction procedures, see generally Maryanne Martin, On the Induction of Mood, 10 Clinical Psychol. R. 669 (1990).

[91]. Giuseppe Riva et al., Affective Interactions Using Virtual Reality: The Link Between Presence and Emotions, 10 CyberPsychology & Behav. 45, 46–47 (2007).

[92]. Id. at 46.

[93]. Id. at 46–48.

[94]. Id. at 47.

[95]. Id. at 49.

[96]. Id.

[97]. See Felnhofer et al., supra note 89, at 50.

[98]. Id. at 53.

[99]. Id. at 54. Interestingly, in contrast to these findings, an experiment performed using a desktop VR system to attempt to assess whether a simulated level of illumination could impact the affective appraisal of users in a VE failed to yield any measurable results. See Alexander Toet et al., Is a Dark Virtual Environment Scary?, 12 CyberPsychology & Behav. 363, 363 (2009). This suggests that the lack of interactivity in a non-immersive environment means that these kinds of systems may not pose the same risks as an IVE in strongly influencing user emotion through design. See id.

[100]. See generally, e.g., Donghee Shin, Empathy and Embodied Experience in Virtual Environment: To What Extent Can Virtual Reality Stimulate Empathy and Embodied Experience?, 78 Computers Hum. Behav. 64 (2017).

[101]. Schofield, supra note 2, at 13.

[102]. See id.

[103]. Id.

[104]. See Gareth Norris, The Influence of Angle of View on Perceptions of Culpability and Vehicle Speed for a Computer-Generated Animation of a Road Traffic Accident, 20 Psychiatry, Psychol. & L. 248, 252–53 (2013).

[105]. Id. at 250.

[106]. Id. at 251.

[107]. Id.

[108]. Id. at 252 (citation omitted).

[109]. Shin, supra note 100, at 66.

[110]. Id.

[111]. Id. (“By experiencing a virtual version of the story location as a witness/participant, and by feeling the perspective of a character depicted in the story, users received specialized access to the sights and sounds (and even to the feelings and emotions) associated with the story.”).

[112]. Id. at 71. Interestingly, the study also found that, despite higher levels of immersion, users with a lower empathy trait had lower levels of reported embodiment and empathy—suggesting that the disposition of certain users may have a correlation on their empathy within a virtual world. Id. at 69.

[113]. Id. at 69 (“VR developers propose immersion but users process it.”).

[114]. See State v. Murtha, CR03-0568598T (Conn. Super. Ct., JD Hartford, 2006); see also Neal Feigenson & Christina Spiesel, Law on Display: The Digital Transformation of Legal Persuasion and Judgment 92–103 (2009) (discussing the case in detail).

[115]. Feigenson & Spiesel, supra note 114, at 92.

[116]. Id.

[117]. Id.

[118]. Id. at 92–93.

[119]. Id. at 93–94.

[120]. Id.; see also NYU Press, Law on Display – Murtha Video, Part One, YouTube (Sept. 23, 2009), https://youtu.be/kWMyBg6Zt-o (showing the original police footage); NYU Press, Law on Display – Murtha Video, Part 2, YouTube (Sept. 23, 2009), https://youtu.be/J0kd-vv9DeM (showing the edited footage with the animation used at trial).

[121]. Feigenson & Spiesel, supra note 114, at 97.

[122]. Id. at 94–95.

[123]. Schofield, supra note 2, at 13.

[124]. Feigenson & Spiesel, supra note 114, at 251 n.113.

[125]. See Konstantina Kilteni et al., The Sense of Embodiment in Virtual Reality, 21 Presence 373, 381–82 (2012).

[126]. Id.

[127]. Natalie Salmanowitz, Unconventional Methods for a Traditional Setting: The Use of Virtual Reality to Reduce Implicit Racial Bias in the Courtroom, 15 U.N.H. L. Rev. 117, 141 (2016) (“Instead of simply personifying an animated character in a digital game, immersive virtual environments can induce body ownership illusions, in which individuals temporarily feel as though another person’s body part is in fact their own.”).

[128]. Konstantina Kilteni et al., Over My Fake Body: Body Ownership Illusions for Studying the Multisensory Basis of Own-Body Perception, Frontiers Hum. Neuroscience, Mar. 2015, at 1, 2.

[129]. Matthew Botvinick & Jonathan Cohen, Rubber Hands ‘Feel’ Touch that Eyes See, 391 Nature 756, 756 (1998).

[130]. Id.

[131]. Kilteni et al., supra note 128, at 4.

[132]. See generally H. Henrik Ehrsson et al., Threatening a Rubber Hand that You Feel Is Yours Elicits a Cortical Anxiety Response, 104 Proc. Nat’l Acad. Sci. U.S. 9828 (2007).

[133]. See, e.g., Kilteni et al., supra note 128, at 3.

[134]. Id. at 5, 8.

[135]. Id. at 8.

[136]. See id. at 11–12.

[137]. Maria V. Sanchez-Vives et al., Virtual Hand Illusion Induced by Visuomotor Correlations, PLoS ONE, Apr. 2010, at 1, 3, https://journals.plos.org/plosone/article/file?id=10.1371/journal.pone
.0010381&type=printable.

[138]. Id.

[139]. Id. at 5 (“[I]n spite of the fact that they saw the virtual hand move, did not feel their hand move, nor move it, they still blindly pointed towards the virtual hand when asked to point where they felt their hand to be.”).

[140]. Id. at 2.

[141]. See, e.g., Kilteni et al., supra note 128, at 9.

[142]. See Elena Kokkinara & Mel Slater, Measuring the Effects Through Time of the Influence of Visuomotor and Visuotactile Synchronous Stimulation on a Virtual Body Ownership Illusion, 43 Perception 43, 56 (2014) (“The results provide evidence that congruent multisensory and sensorimotor feedback between the unseen real and the seen virtual legs can induce sensations that the seen legs are part of the actual body.”).

[143]. See Konstantina Kilteni et al., Drumming in Immersive Virtual Reality: The Body Shapes the Way We Play, 19 IEEE Transactions on Visualization & Computer Graphics 597, 599, 603 (2013) (“Seeing a virtual body from first person perspective, and receiving spatiotemporally congruent multisensory and sensorimotor feedback with respect to the physical body entails an illusion of ownership over that virtual body.”).

[144]. See Domna Banakou et al., Illusory Ownership of a Virtual Child Body Causes Overestimation of Object Sizes and Implicit Attitude Changes, 110 Proc. Nat’l Acad. Sci. 12846, 12849 (2013) (“[I]t is possible to generate a subjective illusion of ownership with respect to a virtual body that represents a child and a scaled-down adult of the same size when there is real-time synchronous movement between the real and virtual body.”); see also Tabitha C. Peck et al., Putting Yourself in the Skin of a Black Avatar Reduces Implicit Racial Bias, 22 Consciousness & Cognition 779, 786 (2013) (“IVR can be used to generate an illusion of body ownership through first person perspective of a virtual body that substitutes their own body. . . . [M]ultisensory feedback, such as visuomotor synchrony as used in our experiment, may heighten this illusion.”).

[145]. See id. at 786 (finding that embodiment of light-skinned people in darker-skinned avatars can lead to comparative reductions in implicit racial bias).

[146]. Ehrsson et al., supra note 132, at 9830.

[147]. See Peck et al., supra note 144, at 786.

[148]. While the following cases are taken from the Pennsylvania and Utah Supreme Courts respectively, the applicable rules of evidence are basically identical to the Federal Rules. See Pa. R. Evid. 403 cmt. (“Pa.R.E. 403 eliminates the word ‘substantially’ to conform the text of the rule more closely to Pennsylvania law.”); see also Pa. R. Evid. 901(a) cmt. (“Pa.R.E. 901(a) is identical to F.R.E. 901(a)”); Utah R. Evid. 901(a), 2011 advisory committee note (noting that the Utah rule is “the federal rule, verbatim.”); Utah R. Evid. 403, 2011 advisory committee note (same). For a general overview and survey of the treatment of computer animations at both the state and federal level, see generally Victoria Webster & Fred E. (Trey) Bourn III, The Use of Computer-Generated Animations and Simulations at Trial, 83 Def. Couns. J. 439 (2016).

[149]. Commonwealth v. Serge, 896 A.2d 1170, 1176 (Pa. 2006).

[150]. Id. at 1179–80.

[151]. Id. at 1175.

[152]. Id.

[153]. Id. 1176.

[154]. Id. at 1187. Notably, the animation was devoid of any “(1) sounds; (2) facial expressions; (3) evocative or even life-like movements; (4) transition between the scenes to suggest a story line or add a subconscious prejudicial effect; or (5) evidence of injury such as blood or other wounds.” Id. at 1183.

[155]. Id. at 1187.

[156]. State v. Perea, 322 P.3d 624, 635–36 (Utah 2013).

[157]. Id. at 632.

[158]. Id. at 635 (alterations in original).

[159]. Id. at 635–637. Stating that

[t]he State objected and the district court refused to admit the animations, finding that “there [was] no foundation for the animation[s]” because Mr. Gaskill did not know “who created [them],” “the background of the people who created [them],” “how [they were] created,” or “what [the animators] relied upon in creating [them].”

Id.

[160]. Id. at 637.

[161]. David S. Santee, More than Words: Rethinking the Role of Modern Demonstrative Evidence, 52 Santa Clara L. Rev. 105, 135 (2012).

[162]. See id. at 136.

[163]. See id. at 136, 136 n.180, 140.

[164]. In thinking about the effect of lighting, one cannot help but remember the first televised Nixon-Kennedy debate in which Richard Nixon refused makeup for the studio camera lighting, instead applying a cheap “coat of [drugstore] Lazy Shave to hide his five o’clock shadow.” Dan Gunderman, The Story of the First TV Presidential Debate Between Nixon and Kennedy—‘My God, They’ve Embalmed Him Before He Even Died’, N.Y. Daily News (Sept. 24, 2016, 4:25 AM), http://www.nydailynews.com/news
/politics/story-televised-debate-nixon-jfk-article-1.2803277. The interesting result being that most viewers who listened to the radio felt Nixon had prevailed, but those viewing the televised debate overwhelmingly found favor with Kennedy, who had subtly applied powder. See id.

[165]. See supra Part III.

[166]. See Webster & Bourn, supra note 148, at 441–42.

[167]. John Selbak, Comment, Digital Litigation: The Prejudicial Effects of Computer-Generated Animation in the Courtroom, 9 High Tech. L.J. 337, 366 (1994).

[168]. See Webster & Bourn, supra note 148, at 441–42.

[169]. See State v. Perea, 322 P.3d 624, 635–36 (Utah 2013).

[170]. As previously mentioned, federal courts are advised to rely on jury instructions to attempt to limit prejudice following the Advisory Committee Notes to Rule 403. Fed. R. Evid. 403, advisory committee’s notes to 1972 proposed rules. At the federal level, most jurisdictions rely on jury instructions which essentially include the following:

(1) an admonition that the jury is not to give the animation or simulation more weight just because it comes from a computer; (2) a statement clarifying that the exhibit is based on the supporting witness’s evaluation of the evidence; and, (3) in the case of an animation, a statement that the evidence is not meant to be an exact recreation of the event, but is, instead, a representation of the witness’s testimony.

Webster & Bourn, supra note 148, at 442.

[171]. Bruton v. United States, 391 U.S. 123, 135 (1968) (“Unless we proceed on the basis that the jury will follow the court’s instructions where those instructions are clear and the circumstances are such that the jury can reasonably be expected to follow them, the jury system makes little sense.” (citation omitted)). But see Krulewitch v. United States, 336 U.S. 440, 453 (1949) (Jackson, J., concurring) (“The naive assumption that prejudicial effects can be overcome by instructions to the jury . . . all practicing lawyers know to be unmitigated fiction.”).

[172]. Bruton, 391 U.S. at 135.

[173]. Joel D. Lieberman & Jamie Arndt, Understanding the Limits of Limiting Instructions, 6 Psychol., Pub. Pol’y & L. 677, 686 (2000).

[174]. See State v. Swinton, 847 A.2d 921, 945–46 (Conn. 2004).

[175]. Id. at 937.

[176]. Id. at 946.

[177]. Id. at 938 (emphasis omitted).

[178]. Id. at 942 (citation omitted).

[179]. Id. at 942–43. These procedural factors included:

(1) the underlying information itself; (2) entering the information into the computer; (3) the computer hardware; (4) the computer software (the programs or instructions that tell the computer what to do); (5) the execution of the instructions, which transforms the information in some way—for example, by calculating numbers, sorting names, or storing information and retrieving it later; (6) the output (the information as produced by the computer in a useful form, such as a printout of tax return information, a transcript of a recorded conversation, or an animated graphics simulation); (7) the security system that is used to control access to the computer; and (8) user errors, which may arise at any stage.

Id. (citation omitted).

[180]. See Fed. R. Evid. 702.

[181]. Therefore, avoiding a situation like in Perea, where the witness cannot speak to the design of the accompanying computer-generated exhibit beyond asserting that it is a fair and accurate depiction of their testimony. See State v. Perea, 322 P.3d 624, 637 (Utah 2013).

[182]. See Cummings & Bailenson, supra note 34, at 273.

[183]. See Mel Slater & Anthony Steed, A Virtual Presence Counter, 9 Presence: Teleoperators & Virtual Environments 413, 426 (2000) (measuring the occurrence of user breaks in presence (“BIPs”) using an HMD); see also Sanchez-Vives et al., supra note 137, at 5; Kokkinara & Slater, supra note 142, at 56 finding that:

[T]he analysis of breaks suggest that asynchronous [visuotacticle] may be discounted when synchronous [visuomotor] cues are provided. . . . [W]e can predict a high or low estimated probability of the illusion solely from knowing which [visuomotor] group (synchronous or asynchronous) the person was in . . . asynchronous [visuotacticle] stimulation combined with asynchronous [visuomotor] stimulation is shown to be incompatible with the illusion.

Kokkinara & Slater, supra note 142, at 56.

[184]. For a further explanation of BIPs, see generally Maria V. Sanchez-Vives & Mel Slater, From Presence to Consciousness Through Virtual Reality, 6 Nature Reviews Neuroscience 332 (2005).

[185]. Take, for example, when a person is deeply engrossed in watching a movie:

Every so often . . . some real world event, or some event within the movie itself, will occur that will throw you out of this state of absorption and back to the real world of the theatre: someone nearby unwraps a sweet wrapper, someone coughs, some aspect of the storyline becomes especially ridiculous, and so on.

Slater & Steed, supra note 183, at 419.

[186]. See Fed. R. Evid. 611(a), advisory committee’s notes to proposed rule (describing the broad powers of the judge to regulate demonstrative evidence).

[187]. See, e.g., Sanchez-Vives et al., supra note 137, at 2.

[188]. Id. at 3.

[189]. See Ye Yuan & Anthony Steed, Is the Rubber Hand Illusion Induced by Immersive Virtual Reality?, in 2010 IEEE Virtual Reality Conference 95, 101 (2010) (“[T]he IVR arm ownership illusion appears to exist when the virtual arm roughly appears in shape and animation like the participant’s own arm, but not when there is a virtual arrow.”).

[190]. See Mueller & Kirkpatrick, supra note 75.

[191]. People v. McHugh, 476 N.Y.S.2d 721, 722 (Sup. Ct. 1984).

Forum Selling – Article by Daniel Klerman and Greg Reilly

January 2016February 2018Rachel Feldman

From Volume 89, Number 2 (January 2016)
DOWNLOAD PDF

Forum shopping is problematic because it may lead to forum selling. For diverse motives, including prestige, local benefits, or re-election, some judges want to hear more cases. When plaintiffs have wide choice of forum, such judges have incentives to make the law more pro-plaintiff because plaintiffs choose the court. While only a few judges may be motivated to attract more cases, their actions can have large effects because their courts will attract a disproportionate share of cases. For example, judges in the Eastern District of Texas have attracted patent plaintiffs to their district by distorting the rules and practices relating to case assignment, joinder, discovery, transfer, and summary judgment. As a result of these efforts, more than a quarter of all patent infringement suits were filed in the Eastern District of Texas in 2014. Consideration of forum selling helps justify constitutional constraints on personal jurisdiction. Without constitutional limits on jurisdiction, some courts are likely to be biased in favor of plaintiffs in order to attract litigation. This Article explores forum selling through five case studies: patent litigation in the Eastern District of Texas and elsewhere; class actions and mass torts in “magnet jurisdictions” such as Madison County, Illinois; bankruptcy and the District of Delaware; ICANN domain name arbitration; and common law judging in early modern England.

89_241

Introduction

I. Today’s Debate About Litigation Finance

A. What is Litigation Finance?

B. The Scholarly Debate

C. The Policy Debate

II. Nonmarket Strategies: A Primer

A. What Are Nonmarket Strategies?

B. The Types of Nonmarket Strategies

Adaptive Strategies

Transformative Strategies

Additive Strategies

C. The Choice Among Nonmarket Strategies

III. Litigation Finance as a Nonmarket Strategy

A. Litigation Finance as Corporate Finance: An Adaptive Strategy

“Market” Methods of Corporate Finance

Litigation Finance as a “Nonmarket” Method of Corporate Finance

B. Litigation Finance to Pursue Litigation: Adaptive and Transformative Strategies

C. Lobbying and Trade Associations: Transformative and Additive Strategies

IV. Policy Implications of Litigation Finance as Nonmarket Strategy

A. A New Dimension to the Policy Debate

A Regulation of the Capital Markets

Implications for Business Competition

B. Implications for the Civil Justice System

V. Scholarly Benefits of the Nonmarket Strategy Framework

A. Legal Scholars

B. Business Scholars and Businesses

Conclusion

98 S. Cal. L. Rev. 1379

INTRODUCTION

I. PUBLIC NUISANCE: A BRIEF HISTORY

A. Common Law Origins in England

B. Public Nuisance in the United States

C. Public Nuisance in California

II. THE OPIOID EPIDEMIC

A. A Brief History

B. The Opioid Litigation

III. THE OPIOID EPIDEMIC IN SAN FRANCISCO

IV. OPIOID ADDICTION INTERFERES WITH PUBLIC RIGHTS

A. Opioid Addiction Interferes with Public Space

1. Opioid Addiction and Homelessness

2. Opioid Addiction and Methamphetamine Use

3. Opioid Addiction and the High Cost of Abatement

B. Opioid Addiction Interferes with Public Morals

C. Distinguishing Opioids with Other Products

D. Addressing Counter Arguments

1. Proximate Cause Objection

2. The Role of Public Policy

3. Concerns About a Flood of Litigation

CONCLUSION

97 S. Cal. L. Rev. 767

From Volume 92, Number 2 (January 2019) DOWNLOAD PDF

From Volume 89, Number 2 (January 2016) DOWNLOAD PDF

From Volume 92, Number 2 (January 2019)
DOWNLOAD PDF

From Volume 89, Number 2 (January 2016)
DOWNLOAD PDF