Third Party Litigation Funding

Third-party litigation financing (TPLF) is a rapidly growing practice that threatens to undermine the administration of justice – both here in the United States and abroad. In essence, TPLF is the practice of hedge funds and other investment firms providing funds to plaintiffs and their lawyers in order to conduct litigation. If the plaintiff wins a monetary award, the investor is repaid out of the proceeds of the lawsuit, usually with an extremely high rate of return. read more...

Since its beginnings in Australia more than a decade ago, TPLF has spread rapidly around the globe. The practice is particularly prevalent in Australia and the UK, and is now moving into the United States.

Unfortunately, as a recent Forbes article entitled, “Will Litigation Finance Hold Corporations Accountable Globally?” highlighted, TPLF creates numerous problems and conflicts of interest for litigants, their attorneys 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 class action litigation in Australia. In addition, TPLF firms’ business model allows them to spread risk 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. A plaintiff may choose to reject an otherwise reasonable settlement offer because they need to give a large part of any award to their funder. So they hold out for a higher settlement or judgment in court – which is not guaranteed to happen. 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 numerous ethical conflicts for plaintiffs’ lawyers. 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 plaintiffs’ attorneys’ fees. In that case, will the attorney act in the best interests of their client, as they are supposed to do, or in the interests of the third-party funder paying their salary?

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.


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. Most 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.

Research

An Oversight Regime for Litigation Funding in Australia

September 02, 2014 | This paper discusses the issues associated with third party litigation financing (TPLF) and explains why Commonwealth oversight of the industry is required. It proposes that a licencing regime applicable to TPLF funders ("litigation funders") be introduced to ensure adequate regulation of the industry.

Ripe for Reform: Improving the Australian Class Action Regime

May 13, 2014 | Authored by Moira Saville and Peta Stevenson of King & Wood Mallesons, this paper explores the Australian federal class action regime model.

Additional Resources

All Results for Third Party Litigation Funding

In The News Today - November 18, 2014

November 18, 2014 | Insights

The South Carolina Department of Consumer Affairs has ruled that "entities that fund litigation in exchange for a piece of any recovery (i.e., third-party litigation financers, lawsuit lenders and litigation funders) are providing loans" and must comply with state law governing loans. Read More »

Tags: Third Party Litigation Funding, Class Actions, South Carolina

In The News Today - September 22, 2014

September 22, 2014 | Insights

Companies that hire third parties to send unsolicited text messages can be liable for Telephone Consumer Protection Act violations, the Ninth Circuit held Friday in a published opinion reviving a proposed class action that blamed U.S. Navy contractor Campbell-Ewald Co. for recruitment messages cellphone users received. Read More »

Tags: Foreign Corrupt Practices Act, Third Party Litigation Funding

Belated 'Clean Up' for Litigation Funders in Australia

September 17, 2014 | Insights

Chris Merritt of The Australian writes that efforts to regulate the litigation funding industry is "finally exposing the great lie that has crippled all previous attempts at reform." Read More »

Tags: Third Party Litigation Funding

An Oversight Regime for Litigation Funding in Australia

September 02, 2014 | Research

This paper discusses the issues associated with third party litigation financing (TPLF) and explains why Commonwealth oversight of the industry is required. It proposes that a licencing regime applicable to TPLF funders ("litigation funders") be introduced to ensure adequate regulation of the industry. Read More »

Tags: Third Party Litigation Funding

TPLF Transparency: A Proposed Amendment to the Federal Rules of Civil Procedure

July 06, 2014 | Insights

If Third Party Litigation Financing (TPLF) is to be part of our legal system, "its use should be transparent." That was the theme of a letter submitted to Jonathan Rose, Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts. Read More »

Tags: Third Party Litigation Funding

In the News Today - May 20, 2014

May 20, 2014 | Insights

"This is about our justice system becoming a mechanism of high finance," said ILR's Bryan Quigley, quoted in an article in The Tennessean regarding the growing controversy over Third Party Litigation Funding. Read More »

Tags: Third Party Litigation Funding, Lawsuit Abuse Impact

Ripe for Reform: Improving the Australian Class Action Regime

Author: Moira Saville and Peta Stevenson, King & Wood Mallesons | May 13, 2014 | Research

Authored by Moira Saville and Peta Stevenson of King & Wood Mallesons, this paper explores the Australian federal class action regime model. Read More »

Tags: Third Party Litigation Funding, International Judiciary Impact, Class Actions Around the Globe

The Real and Ugly Facts of Litigation Funding

March 26, 2014 | Insights

The notion that litigation financing is a mechanism for promoting justice is, at best, naive, and at worst, disingenuous. Read More »

Tags: Foreign Judgment Enforcement, Third Party Litigation Funding

In the News Today - March 24, 2014

March 24, 2014 | Insights

"We're particularly concerned about developments here in third-party litigation financing," ILR president Lisa Rickard told the Australian Financial Review. Read More »

Tags: Arbitration, International Judiciary Impact, Third Party Litigation Funding

Beware of Litigation Funders in Class Actions

March 21, 2014 | Insights

ILR president Lisa Rickard cautions the Australian government to take note of the growing influence of litigation funders in class action litigation. Read More »

Tags: Third Party Litigation Funding, International Judiciary Impact, Class Actions

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