Third Party Litigation Funding (TPLF)

Since its beginnings in Australia more than a decade ago, third party litigation funding (TPLF) has spread rapidly around the globe. The practice is particularly prevalent in Australia and the UK, but has also moved into the United States, Canada, Europe, and parts of Asia. Because funding arrangements tend to operate in secret, defendants may not even be aware that a funder is involved in litigation against them. TPLF is largely unregulated, creating numerous problems and conflicts of interest for litigants, their lawyers and the overall civil justice system. read more...

For one thing, TPLF increases the volume of litigation. It is pretty simple: more litigation funding means more litigation. A study by NERA Economic Consulting found the rise of TPLF is responsible for much of the recent increase in securities class action litigation in Australia. In addition, TPLF firms’ business model allows them to spread risk across a portfolio of cases and take on cases that might be weak or dubious but still hold the possibility of a massive award. As a result, TPLF is likely to increase dubious litigation as well.

TPLF can also prolong litigation. Plaintiffs may choose to reject an otherwise reasonable settlement offer because they need to give a large part of any award to their funder. This prolonged litigation hurts defendants, who are forced to divert additional time and money from productive activity to defending litigation.

In addition, TPLF can undercut a plaintiff’s control of litigation. Obviously, funders have a major interest in the outcome of cases they invest in. So it is not unexpected that some funders seek to control a case’s legal strategy, both indirectly and directly. In one patent case, a funder sued the plaintiff for settling for an amount lower than what the funder demanded. In the infamous Chevron case in Ecuador, the funding contract with the plaintiffs stipulated that the funder would have veto power over the choice of attorneys and receive priority in the disbursement of any monetary award. Arrangements such as these make a mockery of our system of justice by placing the interests of outside investors ahead of the interests of the parties in court.

Finally, TPLF creates ethical conflicts. Funders have no ethical obligations to safeguard the interests of the claimants. Significantly, it is a fundamental rule of ethics that lawyers have a fiduciary duty to their clients. But when TPLF investors get involved in a case, they often front the fees of the claimants’ lawyer. Funders are now moving into arrangements in which they finance a law firm's litigation portfolio, or provide startup money for litigation practices, with repayment to come from the proceeds of the firm's cases. Will funded lawyers act in the best interests of their clients, as they are supposed to do, or in the interests of the third party funder paying the legal fees and financing the firm's practice? The secrecy that surrounds most TPLF arrangements also can create ethical dilemmas, when judges unaware of a significant interested party to the litigation are not able to evaluate their own conflicts of interest in hearing the case.

U.S. Reforms

Stringent safeguards are needed to counter the many problems associated with TPLF in the United States. In October 2012, the U.S. Chamber Institute for Legal Reform released Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party Investments in Litigation, a white paper which outlines a possible U.S. federal regulatory regime for TPLF. The paper’s recommendations include:

  • Prohibiting investor control of cases;
  • Forbidding direct contracts between investors and lawyers that do not also include the client; ;
  • Banning law firm ownership of TPLF firms;
  • Prohibiting the use of TPLF in class actions; and;
  • Requiring disclosure of funding contracts in litigation.

In December 2016, ILR sent a letter to the Clerk of Court in the U.S. District Court for the Northern District of California supporting a proposed local rules amendment requiring the disclosure of TPLF agreements. In January 2017, the Northern District adopted a version of that proposed amendment, requiring the disclosure of TPLF agreements in all class action cases. ILR also continues to advocate for a revision to the Federal Rules of Civil Procedure (FRCP) requiring disclosure of funding arrangements in which parties have a contingent financial interest to the court and litigants. In 2014, ILR and several other business and legal reform associations submitted an open letter to the Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts calling for an amendment to the FRCP requiring disclosure of third party investments in litigation at the outset of a lawsuit. ILR followed up on that original petition, sending an update on the state of TPLF to the Committee in October 2015, once again calling for an amendment to the FRCP mandating disclosure of the practice.

Significant legislative movement has also been made at the federal level with the Fairness in Class Action Litigation Act of 2017 (FICALA), wich passed the U.S. House of Representatives on March 19, 2017. FICALA includes an important provision that implements mandatory disclosure of TPLF in all class actions. ILR advocated for this bill, and the inclusion of a strong TPLF disclosure provision, in the House, and will continue to champion this bill as it moves through the U.S. Senate. 


Global Reforms

Australia

As the birthplace of third party litigation funding, ILR has been pressing for regulatory oversight of TPLF in Australia for many years, in hopes of slowing the rapid growth of this practice globally. In September 2013, ILR released Improving the Environment for Business in Australia: A Proposal for Reforming Oversight of Third Party Litigation Financing, which outlined an oversight regime of TPLF that would include:

  • licensing requirements;
  • ensuring that claimants, not funder, control the management of their cases;
  • a requirement that the funder act in the best interest of claimants; and
  • banning law firms from owning funders and vice versa.


In October 2013, ILR released a second paper entitled, TPLF in Australia: Class Actions, Conflicts and Controversy, building additional support for an oversight regime by illuminating the pitfalls of TPLF. More recently, in March 2014, ILR released Ripe for Reform: Improving the Australian Class Action Regime, suggesting reforms to class action procedures and rules that would restrain the use of TPLF in class actions and reduce conflicts of interest and ethical concerns.

Earlier in 2017, Martin Pakula, the Atoorney General for the Australian state of Victoria, asked the Victorian Law Reform Commission (VLRC) to review the rules covering litigation funders to prevent unfair conduct in civil proceedings, including class actions. This request was prompted by a case where the majority of the plaintiffs' $5 million award was split by their lawyers and Sydney-based LCM Litigation Funding. The attorney general has requested the VLRC answer several inquiries on TPLF. 

Europe

Throughout Europe, both at the EU institution level and in key member states like the UK and Netherlands, ILR is advocating for the introduction of meaningful legislative safeguards restricting the use of TPLF in class actions

In March 2017, ILR released The Groth of Collective Redress in the EU: A Survey of Developments in 10 Member States, which reviews how collective redress mechanisms (class action models) are being used in key EU Member States, including the UK, Spain, France, the Netherlands, Germany, Italy, Austria, Belgium, and Bulgaria. This report suggests several TPLF safeguards and highlights many of the major issues associated with TPLF in European collective redress. 

United Kingdom

In the UK, ILR has established the "Justice not Profit" campaign with the support of leading academics and business leaders. This multimedia communications campaign highlights the pitfalls of TPLF in the UK, especially in opt-out class actions - a combination that mixes two practices already prone to abuse. ILR also advoactes for transparency with respect to funding agreements. A 2015 Justice not Profit study of funders operating in the UK found that 16 funders had about $2.2 billion in global assets under management. Today, that number has grown exponentially. 

Canada

Canada has experienced an increase in third party litigation funding, especially in class action litigation. Recent court decisions, including those by the Ontario Superior Court, have approved specific TPLF agreements. These decisions have articulated important safeguards to protect class members and shine much needed light on TPLF arrangements. However, these are piecemeal standards at best; overall, the use of TPLF threatens to undermine the check on frivolous lawsuits imposed by “loser pays” cost regimes in various Canadian provinces.

Hong Kong

ILR filed comprehensive comments to the Hong Kong Law Commission in January 2016 relating to the rule proposal the Commission was considering allowing third party funding (TPF) of arbitration. The comments expressed ILR's strong agreement with the long-standing view of the Hong Kong judiciary that TPF is inappropriate in court litigation matters and should be prohibited in that context. However, if TPF is permitted in arbitration proceedings, such activity should be subjected to common-sense regulations to prevent potential negative consequences.

In October 2016, the Commission released a Report on Third Party Funding for Arbitration calling for "light touch" regulation and disclosure of TPF in arbitration. While this is an important first step and may lead to global recognition of the need for meaningful oversight in the litigation funding industry, "light touch" regulation will not suffice. ILR will continue to urge the Hong Kong Legislative Council to strongly consider adopting litigation funding rules that ensure proper enforcement.  

Research

Unstable Foundation: Our Broken Class Action System and How to Fix It

October 24, 2017 | Unstable Foundation examines the pervasive flaws afflicting the United States' class action system. Class actions rarely provide meaningful compensation for class members, and are poorly suited to deterring wrongful conduct.

Supporting Safeguards: EU Consumer Attitudes Towards Collective Actions and Litigation Funding

September 27, 2017 | As the Commission of the European Union prepares to make a significant policy decision on collective actions (known as class actions in the United States), it is important to assess how European consumers feel about the development of these mechanisms. This survey captured 6,177 consumers in six EU Member States

All Results for Third Party Litigation Funding (TPLF)

In the News Today - November 21, 2017

November 21, 2017 | News and Blog

Lawyer Spat Threatens Lumber Liquidators Class Action Settlement; Litigation Funding Changes Legal Landscape for Boutique and Small Firms Read More »

In the News Today - November 16, 2017

November 16, 2017 | News and Blog

Federal Rules Panel to Look at Third-Party Litigation Funding; California may limit liability of self-driving cars' makers Read More »

Third Party Litigation Funding's Week Under the Microscope

Author: Page Faulk, Senior Vice President, Legal Reform Initiatives, U.S. Chamber Institute for Legal Reform | November 10, 2017 | News and Blog

Third party litigation funding -- where companies "invest" in lawsuits for a cut of any proceeds -- is spreading like wildfire across the globe, with one of the largest funders boasting billions of dollars in resources just on its own. Read More »

In the News Today - November 9, 2017

November 09, 2017 | News and Blog

Senate Urged To Pass Legal Reform Bills; Federal Judicial Panel to Consider Litigation Financing. Read More »

In the News Today - November 7, 2017

November 07, 2017 | News and Blog

The Time for Litigation Funding Transparency is Now; Wrestler Admitted Atty Solicitation In Podcast, WWE Says Read More »

The Time For Litigation Funding Transparency is Now

Author: Harold Kim, Executive Vice President, U.S. Chamber Institute for Legal Reform | November 07, 2017 | News and Blog

In court, third party litigation funding arrangements remain hidden. Outside the courtroom, however, the practice is getting more attention. Read More »

In the News Today - October 31

October 31, 2017 | News and Blog

Investors in Litigation Financing Target Commercial Auto; So What If You Can't Join a Class Action? Read More »

In the News Today - October 30, 2017

October 30, 2017 | News and Blog

The Senate Just Voted to Protect Banks. But It's Actually a Win for You.; New Bill Would Allow Litigation Financing in Ireland Read More »

Unstable Foundation: Our Broken Class Action System and How to Fix It

October 24, 2017 | Research

Unstable Foundation examines the pervasive flaws afflicting the United States' class action system. Class actions rarely provide meaningful compensation for class members, and are poorly suited to deterring wrongful conduct. Read More »

In the News Today - October 19, 2017

October 19, 2017 | News and Blog

Trump Nominates Joseph Simons Of Paul Weiss As FTC Chair; UK-Based Temple Funding Urges Regulatory Oversight of Third Party Funding Industry Read More »

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