Financiers as Monitors in Aggregate Litigation

Abstract:     
This Article identifies a market-based solution for monitoring large-scale litigation that proceeds outside of Rule 23’s safeguards. Although class actions dominate the scholarly discussion of mass litigation, the ever-increasing restrictions on certifying a class mean that plaintiffs’ lawyers routinely rely on aggregate litigation (through multidistrict litigation and liberal joinder devices like Rules 20 and 42) to seek redress for group-wide harms. Despite sharing key features with its class-action counterpart, like attenuated attorney-client relationships, attorney-client conflicts of interest, and high agency costs, no monitor exists in aggregate litigation. Informal group litigation not only lacks Rule 23’s judicial protections against attorney over-reaching and self-dealing, but the plaintiffs themselves cannot adequately supervise their attorneys’ behavior. A lawyer may represent hundreds or thousands of geographically dispersed plaintiffs, which fosters collective-action problems and makes individual, case-specific information hard to obtain.

The answer to this monitoring problem lies in an unlikely and potentially controversial source: alternative litigation financing. Self-dealing and high agency costs arise principally because of the contingent-fee attorney’s dual roles as agent and investor. These roles can pull lawyers in divergent directions; because attorneys front massive litigation costs, they may be tempted to coerce clients into settling so that they can recoup and profit from their investment. Third-party litigation financing can ameliorate this critical conflict by allowing the financier to bear that financial risk. Shorn of financial self-interest, the lawyer is then free to act as a faithful agent. But alternative litigation financing, which involves hedge funds, private investors, and venture capitalists investing in and profiting from large-scale litigation, raises problems of its own and has already sparked a chorus of criticism. Although wedding profit-seeking capitalists and aggregate litigation is certain to spark fireworks, this Article seeks to engineer their union in a way that benefits society as a whole and plaintiffs in particular.

Number of Pages in PDF File: 66

Keywords: third-party financing, alternative litigation financing, multidistrict litigation, MDL, class actions, arbitration, Wal-Mart Stores, Inc. v. Dukes, AT&T Mobility v. Concepcion, nonclass aggregation, aggregate litigation, agency problems, contingent fees

JEL Classification: K10, K13, K31, K41

Accepted Paper Series