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. read more...

TPLF, which is largely unregulated, creates numerous problems and conflicts of interest for litigants, their lawyers and the overall civil justice system.

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. At the same time, prolonged litigation hurts defendants, who are forced to divert additional time and money from productive activity to 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 demanded by the funder. 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 precedence 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 third party litigation funding 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.

ILR is advocating for a revision to the Federal Rules of Civil Procedure that would require disclosure of funding arrangements to the court and litigants.


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.

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 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 has also advocated for transparency with respect to funding agreements. 

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

The Hong Kong Law Commission is considering a rule that would allow third-party funding (TPF) in international arbitration. ILR filed comprehensive comments related to this rule proposal in January 2016. The comments express ILR's strong agreement with the long-standing view of the Hong Kong judiciary that TPF is innapropriate 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.  

Research

Before the Flood: An Outline of Oversight Options for Third Party Litigation Funding in England & Wales

April 18, 2016 | This paper examines the ethical and practical concerns that are emerging from the significant expansion of third party litigation funding (TPLF) in the UK, and underscores the need for government oversight of the practice.

The ILR Research Review - Volume 2

May 18, 2015 | The ILR Research Review offers valuable insights from our preeminent experts and specialists on key topics addressed in the latest of ILR's research reports.

All Results for Third Party Litigation Funding (TPLF)

In the News Today - April 22, 2016

April 22, 2016 | Insights

Prosecutors Ask for Additional Jail Time for Sheldon Silver: Prosecutors asked a federal judge to sentence convicted former New York Assembly Speaker Sheldon Silver to more prison time than the 10 years suggested by the Probation Department. Read More »

Reuters' Frankel Looks at 'Dubious Business of Investing in Mass Torts'

April 19, 2016 | Insights

Reuters' Alison Frankel takes a critical look at the world of third party litigation finance, noting a fraud complaint filed last week by the SEC against litigation financier, Prometheus Law. Read More »

In the News Today - April 19, 2016

April 19, 2016 | Insights

AGC of Missouri Backs "Daubert Standard" Bill: As the 'Show Me State', Missouri hasn't kept pace with the rest of the nation in adopting the rule of evidence that's applied in the Federal courts and in most states courts in our nation, creating a somewhat unpredictable legal environment. Read More »

Before the Flood: An Outline of Oversight Options for Third Party Litigation Funding in England & Wales

Author: Ken Daly and Steven Pitt, Sidley Austin LLP | April 18, 2016 | Research

This paper examines the ethical and practical concerns that are emerging from the significant expansion of third party litigation funding (TPLF) in the UK, and underscores the need for government oversight of the practice. Read More »

In the News Today - March 22, 2016

March 22, 2016 | Insights

Litigation Finance Companies Fund Shareholder Class Action Against Giant Class Action Firm: JustKapital Litigation Partners and Woodsford Litigation Funding have "joined forces" to fund a shareholder class action against publicly-traded Australian class action plaintiffs' firm Slater and Gordon, after the firm posted a $958.3 loss for the last six months of 2015. Read More »

Court Tosses Champerty Claim, Allows DuPont Lawsuit to Proceed Despite Presence of Litigation Financing

March 18, 2016 | Insights

A Delaware court recently allowed a lawsuit to proceed against DuPont that was funded by outside groups, including one of the largest funders, Burford Capital. The plaintiffs in the matter sold their lawsuit to Burford and others in exchange for a percentage of the award if the litigation was successful. Read More »

In the News Today - March 3, 2016

March 03, 2016 | Insights

Litigation Finance Company Underwriting Lawsuit Against Australian Class Action Plaintiffs' Firm: UK-based Woodsford Litigation Funding is reportedly underwriting a class action against giant Australian class action firm Slater & Gordon on behalf of shareholders impacted by Slater & Gordon's $958 million half-year loss reported Monday. (Global Legal Post) Read More »

In the News Today - February 23, 2016

February 23, 2016 | Insights

ILR Responds to Hong Kong Law Commission on Risks of Third Party Litigation Funding: ILR filed public comments on a proposal by the Hong Kong Law Commission to authorize the use of what is commonly known as third-party litigation funding (TPLF) to finance the conduct of arbitration matters in this city that is one of the world's most important business centers. (ILR Blog) Read More »

ILR Responds to Hong Kong Law Commission on Risks of Third Party Litigation Funding

February 22, 2016 | Insights

Will Hong Kong go the way of the U.S. by allowing questionable third-party funding of lawsuits by outside investors? That is the question at the heart of ILR's recent public comments on a proposal by the Hong Kong Law Commission to authorize the use of what is commonly known as third-party litigation funding (TPLF) to finance the conduct of arbitration matters in this city that is one of the world's most important business centers. Read More »

In the News Today - February 10, 2016

February 10, 2016 | Insights

Lawsuit Lending Regulation Bills Moving in Indiana: "Two bills once again are moving through the Statehouse that would regulate third-party financing of lawsuits. While such measures died in previous sessions, the current bills are getting a better reception because the consumer legal funding industry is learning what can happen when it does not compromise." (The Indiana Lawyer) Read More »

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