In the United States, a reformist mood is beginning to emerge but litigation funding is so entrenched - and so various - that coming up with an alternative is proving difficult.

A debate not unlike that in Australia is occurring in the US, the land known for its litigious profligacy, amid concerns at both the federal and state level about how the financing of lawsuits is impacting on the provision of justice.

But reform has been only sporadic because current US law allows myriad variations to the general concept of litigation funding, including the sale of attorney contingency fees (whereby the lawyer pays the expenses of the litigation and is compensated only if the case settles or results in a favourable judgment).

The attorney's fee is paid out of the client recovery, explains Theodore Eisenberg, a professor at Cornell University Law School who has conducted extensive research on punitive damages throughout various US jurisdictions.

Eisenberg, who will be attending the "Collective Redress and Litigation Funding" conference in Sydney and Canberra in December, says contingency fees have emerged as "the standard way in which plaintiffs are able to bring tort actions in the US".

"In class action cases, the lawyer also funds the litigation and, if the case settles, seeks to recover a fee under the common fund doctrine," he says.

"This usually results in the attorney receiving a percentage of the recovery obtained on behalf of the client.

"In some cases, including some class actions, the case is brought under a statute that allows for recovery of attorney fees by the prevailing party. In those cases, the courts may calculate a fee based on the lodestar method - that is, the hourly rates times hours worked - and a premium for good work using a multiplier."

Eisenberg points to a pending case before the US Supreme Court which will determine the extent to which a fee can be enhanced in civil rights matters.

As part of this process, companies can directly invest in lawsuits, "buying" what amounts to an equity stake in the result.

To date, many US states have not directly addressed the viability of the various arrangements that have been pursued to provide what Kent Lambert, a legal commentator who has written papers on litigation funding, describes as "non-recourse financing of and/or investment in litigation".

"Thus the enforceability of such arrangements is at least open to question in a large number of US states," says Lambert, a solicitor who practises in New Orleans.

"Other states have existing laws or cases law that at least limit some of the more creative approaches."

Lambert practises mainly in the jurisdiction of Louisiana where, "although it is permissible to 'sell' a litigious right - that is, a plaintiff's claims in a pending lawsuit - the opposing party may buy his way out of the suit by offering the purchaser of those rights the amount of money it paid to purchase them".

As various US states grapple with the consequences of litigation funding, Lambert sees "legitimate concerns" with these types of practices, including whether such arrangements discourage settlements and encourage speculative lawsuits.

"It is necessary to determine whether financing arrangements skew the inherent cost/benefit analysis that society arguably relies upon to control the volume of litigation that burdens the court system," he says.

Concerns about contingency fees are also expressed by Deborah Hensler, an associate dean at Stanford Law School, who tells of "distaste" among members of the judiciary who come from corporate law practices and from business lobbies active in seeking tort reform.

But Hensler, who will be attending the ANU/Sydney conference in December, notes that although contingency fees are a "whipping boy" for many concerned about the practice, proposals to substitute administrative schemes for litigation have failed to gain traction.

Hensler says the only areas under the microscope have been medical malpractice (for example, the California statute known as MICRA) and proposals to substitute administrative schemes for litigation (for example, the failed asbestos compensation scheme).

"The larger issue of litigation funding has yet to burst forth on the legal policy landscape in the US, although it is beginning to bubble below the surface as evidenced by recent conferences and journal articles," she says.

Allied to the controversies swirling around the financing of litigation is the practice of "Mary Carter" agreements, whereby the plaintiff agrees to settle with the defendant in a tort case for the payment of specified damages even if the case is lost by the plaintiff - that is, if the damages awarded exceed the settled amount, the defendant pays only the agreed upon amount or a specified percentage of the recovery.

"Although such arrangements are generally frowned upon, at least to the extent that they are kept secret from the non-settling defendants, this is not true in every state," Lambert notes.

"Variations on this concept persist, including arrangements where a settling defendant pays some amount to settle out of the case entirely, subject to a claw-back provision under which it gets back some or all of its payment if the plaintiff recovers against the non-settling defendants."

Lambert warns that such practices are partly responsible for the "dramatic increase in litigation costs over the past several decades".

The concerns about the prevalence of such schemes are echoed by Eisenberg, whose teachings embrace bankruptcy and debtor-creditor law, constitutional law and federal income tax, and who sees the funding consequences in a wide context which covers punitive damages, bias for and against litigants, and the chances of success on appeal.

- Michael Pollak

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