A civil claims market

Today we attended the UCLA Spring 2007 Faculty Research Lecture by Steve Yeazell. What I found fascinating was the perspective through which legal claims and their resolution through civil litigation could be understood as a market: the defendant, in effect buys the claim from the plaintiff. It strikes me that such a perspective could be taken much further. Much of the civil litigation system could be made into a real market. (One of the questions asked after the talk suggested as much.) Here's how it might work.

The process would start when someone files a claim for damages along with supporting evidence. A date would be set, at which time the evidence submitted by that date would be reviewed by a panel of judges and a value assigned to the claim.

Prior the decision date, the claimant could issue "stock" in his claim and offer the stock for sale. The offer price would reflect the damages claimed. Of course, once the stock was on the market, it could be bought or sold (or sold short) by anyone.

Anyone could, on their own, gather evidence for or against the claim and submit that evidence (under oath) to the court. This could include sworn depositions, videotaped, if one likes, to capture body language. Presumably a person submitting evidence would have bought or sold stock prior to doing so. (Although this is something like encouraging insider trading, it would seem to work in the public interest in this case.)

In effect this would be a way to use market forces to extend the adversarial system. We (apparently) believe that the adversarial system works well to uncover the facts. The two sides are each motivated to discover and present information that supports their respective cases. A market mechanism lets others participate in that process. Anyone with new information (or a clever way of looking at existing information) can monetize that information or argument by buying stock in the claim affected by it.

All the evidence would be public. As it accumulates, the market value of the stock would vary as the market assessed the likely value to be placed on the claim by the judging panel. Such a mechanism would encourage anyone who thinks the market has significantly over or under valued the claim to buy or sell the stock, which would tend to bring the stock's market price closer to the buyer or seller's estimated value.

The plaintiff would have a wide range of options. Similar to a contingency fee arrangement, the plaintiff could use some of his original stock to hire lawyers and investigators, i.e., pay them in stock. More generally, he may at any time sell any or all of his stock, thereby cashing out his claim. Or he could hold on to some or all of it until the very end.

Prior to the decision the defendant would also have a number of options.

1. He could submit arguments and evidence.
2. He could buy the stock himself.
3. He could offer to settle, presumably at something like the current market price. Such an offer would be accepted or rejected by a majority vote of the stockholders of record. This is the most interesting option. Once the market assesses the value of a claim, a settlement at that price should be appealing to both sides, thereby encouraging settlements.

If there were no settlement by the decision date the file would be closed to further submission. The panel of judges would review the evidence and arrive at a value for the claim. The result would be an obligation on the part of the defendant to pay the assigned value to the shareholders.

Could something like this be made to work?