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)

In the News Today - December 9, 2016

December 09, 2016 | News and Blog

The quarter-century-old case between Lebanese-owned AJA and Cigna Insurance (now Chubb) contained many twists and turns including "Garrett Kelleher, an Irish property developer providing some $3m in litigation funding, for which he received a 45% stake in the venture." Read More »

Judges in CA Want Plaintiffs to Disclose Third Party Funding

December 02, 2016 | News and Blog

"Federal judges in California may be about to deal the business [of litigation funding] a serious blow," writes Bloomberg. Read More »

J&J Urges Court to Consider Role of Third Party Funders When Selecting Lead Counsel in Talc MDL

December 01, 2016 | News and Blog

Johnson & Johnson (J&J) has asked a federal judge to order plaintiffs' attorneys applying for lead roles in multidistrict litigation over talcum powder products to disclose whether they are backed by third-party financiers. Read More »

Hong Kong's Call for Litigation Funding Disclosure Leads the Way for Global Reforms

November 23, 2016 | News and Blog

Last month, the Hong Kong Law Reform Commission (LRC) released a Report on Third Party Funding for Arbitration which calls for "light touch" regulation and disclosure of third party funding in arbitration. While this is an important first step and may lead the way to global recognition of the need for meaningful oversight in the litigation funding industry, "light touch" regulation will not suffice. Read More »

UK Court Issues Landmark Ruling To Increase Exposure of Litigation Funders

November 21, 2016 | News and Blog

The English Court of Appeal issued a landmark ruling Friday that increases the exposure of funders in U.K. cases that don't succeed. Read More »

ILR President Lisa Rickard Predicts More Action in Congress by Business Community to Advance Legal Reforms

November 11, 2016 | News and Blog

The National Law Journal writes on the "cautious optimism" of tort reform groups when it comes to the future legislative and regulatory efforts of president-elect Trump and Congress. Read More »

A Toxic Stew: Litigation Financier Launches New "Whistleblower" Business

November 01, 2016 | News and Blog

What do you get when you mix two of the most pro-litigation tools in America today? The tools in question are Third Party Litigation Finance (TPLF) and the False Claims Act. And one large firm has combined the two - announcing recently that it will begin a practice focused on providing financing for False Claims Act (commonly known as "whistleblower") lawsuits. Read More »

Northern District of California Rules Committee Moves to Expose Third-Party Litigation Funding

November 01, 2016 | News and Blog

Litigation funders are pushing back against a proposed amendment to Civil Local Rule 3-15 introduced by judges in the Northern District of California that would require attorneys to disclose when their case is backed by a third-party investor reports The Recorder. Read More »

In the News Today - November 1, 2016

November 01, 2016 | News and Blog

In a bit of irony, Slater and Gordon, the world's first publicly traded law firm, which specializes in class actions and also practices third party litigation funding - has been sued in a shareholder class action that is funded, in part, by Australian-based JustKapital Litigation Financing and London's Woodsford Litigation Funding. Read More »

  • bulletClick to Narrow Your Results