The Costly Freedom to Sue

The newly expanding practice of litigation finance is rich in pitfalls and promises. The contingent fee normally works well for the auto collision at Fourth and Main. Ordinary lawyers run a large portfolio of cases, most of which settle after some preliminary haggling. There is therefore no need for a specialist firm to supply a new deep pocket.

Those contingent fee lawyers, however, may not have sufficient wealth to back a complex class action for mass torts. Seeking compensation for 9,000 workers at ground zero is perilous business. The class action format will probably not work if the disparate features of the individual cases outnumber the common elements. A coordinated attack by joining multiple plaintiffs needs a credible legal theory which then has to be backed with intense fact preparation, with only modest economies of scale. Not easy.

In principle, teams of plaintiffs’ lawyers could coordinate their efforts without external financing, as in the tobacco litigation. But the market now has determined that the levels of risk are too high without capital investors. Among sophisticated parties, the right rule is one of freedom of contract, which lets the parties divide the spoils as they see fit.

But two other serious obstacles remain. First, how do these powerful parties contract with individual claimants? Ordinary contingent fees are commonly subject to some regulation. Probably that framework should carry over to these cases so that the contingent fee lawyer takes the same percentage of the recovery as he or she gets when acting alone.

But what about the besieged defendants? The hoary doctrines of champerty and barratry traditionally barred third-party financing of lawsuits of unliquidated damage claims (i.e. cases where no fixed sum is due). Those rules developed in recognition of the brute fact that litigation is a form of aggression mediated by the judicial system.

The key question is whether these new aggregations of wealth are sufficient to force defendants to settle cases on disadvantageous terms because they cannot afford to pay the legal fees needed for defense. That question is exceedingly difficult to answer because the legal system already affords some protection against burdensome document production and endless depositions of expert witnesses. It is hard to say in the abstract whether that is enough.

Matters are made worse because many cases rest on what I regard as dubious legal theories. Accordingly, we have to ask why the law should use sensible procedures to help promote those cases that should not have been allowed on the merits in the first place.. Some hard evidence of how litigation finance works in practice would be most welcome.