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

The ILR Research Review - Fall 2016

September 22, 2016 | This edition of the ILR Research Review offers valuable insights from ILR's latest research on over-criminalization and the challenges of business compliance, over-enforcement, third-party litigation funding in the UK, and asbestos trust claims.

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.

All Results for Third Party Litigation Funding (TPLF)

The ILR Research Review - Fall 2016

September 22, 2016 | Research

This edition of the ILR Research Review offers valuable insights from ILR's latest research on over-criminalization and the challenges of business compliance, over-enforcement, third-party litigation funding in the UK, and asbestos trust claims. Read More »

Sue by Numbers - Algorithm Determines Which Lawsuits Will Equal Big Payouts

Author: Lisa Rickard | September 14, 2016 | News and Blog

An algorithm sounds like a long-forgotten term from your high school mathematics course. In reality, algorithms are part of our everyday existence. They are used to predict the weather, choose the fastest way for you to get to work, and determine what appears on your Facebook newsfeed. Read More »

Crain's Chicago Business Spotlights 'Rare Look' at Litigation Funding Industry

September 12, 2016 | News and Blog

Crain's Chicago Business spotlights the growing third party litigation funding industry, reporting that Chicago-based litigation funder Gerchen Keller Capital has paid $26.2 million at auction to buy a $50 million share in a court judgment" in the hopes that it can collect "a nearly 91 percent rate of return." Read More »

In the News Today - September 6, 2016

September 06, 2016 | News and Blog

License plates dub New Jersey the "Garden State," and while this densely populated state is known for growing eggplant, blueberries, and cranberries, it is also known for growing litigation. The New Jersey Civil Justice Institute (NJCJI) advocates for legal reforms to weed out the frivolous suits, stop the trend of "litigation tourism," and make the state's justice system fair for all. Read More »

In the News Today - September 2, 2016

September 02, 2016 | News and Blog

The latest story about litigation finance start-up, Legalistic, highlights ILR's concerns with the industry, quoting an op-ed by ILR President Lisa A. Richard. Read More »

Lisa Rickard Op-Ed: Litigation Finance: Stop The Hide-And-Seek Game

September 01, 2016 | News and Blog

ILR President Lisa A. Rickard published an op-ed in D&O Diary regarding the disclosure of litigation funding arrangements. Read More »

NBC News Notes U.S. Chamber Concerns about Growth of Third Party Litigation Finance

August 31, 2016 | News and Blog

NBCNews.com reports that in the wake of tech billionaire Peter Thiel's financing of pro wrestler Hulk Hogan's lawsuit against Gawker, "a host of start-ups are rushing to bring litigation finance to Main Street with a business model that could have far-reaching ramifications for both investors and the legal system." Read More »

In the News Today - August 29, 2016

August 29, 2016 | News and Blog

The Wall Street Journal editorial board gave credit to Judge Percy Anderson for tossing a lawsuit against Starbucks that alleged "baristas put too much ice in cold drinks." Read More »

In the News Today - August 18, 2016

August 18, 2016 | News and Blog

The criminal fraud case against Texas plaintiffs' attorney Mikal Watts and six others has now gone to a jury. Watts and the other defendants are facing allegations they signed up fake clients and submitted false claims after the Gulf oil spill. Read More »

In the News Today - July 29, 2016

July 29, 2016 | News and Blog

U.K.-based litigation funder Burford Capital once again announced that it has surpassed previous earnings, reporting $52.8 million in first-half profits after taxes. Read More »

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