Tuesday, December 13, 2011
Financiers as Monitors in Nonclass Aggregation
I recently posted a working draft of a new piece titled "Financiers as Monitors: Unbundling Agency, Risk, and Reward in Aggregate Litigation" on SSRN. The thurst of the piece is that courts will certify fewer and fewer class actions after Wal-Mart Stores, Inc. v. Dukes and AT&T Mobility v. Concepcion. When cases are economically viable en masse, they're likely to proceed as mass torts currently do, as nonclass aggregation (think Vioxx). This means that the ethically questionable practices in mass tort litigation (i.e., threatening to withdraw from representing clients who refuse to accept a proposed settlement offer) will invade protypical class action areas like employment discrimination, civil rights, and toxic torts.
The basic gist of the proposal is that third-party funders could perform a monitoring function in large-scale nonclass litigation and that by unbundling the attorney's role as a financier from that as an advisor, she could be a more faithful agent. Financiers would contract with plaintiffs for a portion of the litigation's proceeds on a nonrecourse basis. They'd then negotiate the fee arrangement with the plaintiffs' attorneys, preferably on a billable hour rate (plus, perhaps some small percentage of the proceeds as a successful litigation bonus). My hope is that this would both reduce the need for monitoring by alleviating the financial tension that a contingent-fee relationship injects and create a viable monitor in the financier.
Here's the SSRN abstract:
This Article offers a new way to monitor large-scale litigation that proceeds outside the bounds of Rule 23. Although class actions receive all the scholarly attention (and public scorn), after the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, the class action’s existence is limited, at best. The shadowy world of nonclass aggregation, where attorneys threaten to pull the rug out from under their own clients if they refuse to accept a settlement, will take its place. Despite the attorney overreaching and questionable ethics that have emerged as attorneys scramble to patch together the finality that class certification once afforded, there is no substitute for the judicial monitoring that Rule 23 provided. In short, the nebulous world of mass-tort litigation will become the new operating model for all types of would-be class actions — from employment-discrimination claims to civil-rights litigation to toxic torts.
The answer to this conundrum comes from an equally controversial source: alternative litigation financing. You see, litigating massive cases can take a small fortune, which is fronted by the contingent-fee attorney. And it is the prospect of complete financial ruin that drives plaintiffs’ attorneys to act unethically and coerce clients into settling. Thus, if a third party bore the financial risk, the attorney could be a faithful agent again. But alternative litigation financing, where hedge funds and venture capitals invest in and profit from litigation, raises plenty of ethical issues on its own and has its own cadre of critics. Although wedding the two is bound to spark fireworks, this Article seeks to carefully engineer their union such that it benefits society as a whole and plaintiffs in particular.
This draft is still in its very early stages, so I'd certainly welcome any thoughts or comments on it (eburch[at]uga.edu).