Third Party Litigation Funding (TPLF)

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

The ILR Research Review

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.

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.

Additional Resources

All Results for Third Party Litigation Funding (TPLF)

In the News Today - May 21, 2015

May 21, 2015 | Insights

Previously sealed evidence that led to landmark ruling and scathing judgment of asbestos plaintiffs' attorneys in the Garlock Sealing Technologies bankruptcy now can be found and accessed on Legal Newsline's website. (Legal Newsline) Read More »

Tags: Third Party Litigation Funding (TPLF), California

The ILR Research Review

May 18, 2015 | Research

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. Read More »

Tags: Third Party Litigation Funding (TPLF), Telephone Consumer Protection Act , State Legal Reforms, State Attorneys General, Securities Litigation Reform, Medical Liability, Lawsuit Abuse Impact, False Claims Act (FCA), Class Actions Around the Globe, Class Actions

Another Blow to Investor Confidence and the Rule of Law in Ecuador

May 07, 2015 | Insights

In Ecuador, unlawful expropriations and contract violations have cost U.S. investors hundreds of millions of dollars. Read More »

Tags: Third Party Litigation Funding (TPLF), Legal Ethics, International Judiciary Impact

FDA's Generic Drug Proposal Should Have Consumers Feeling Ill

April 28, 2015 | Insights

Just like a bad cold that you can't quite kick, the FDA's proposal to abandon its requirement for generic drugs to carry the same warning labels as their brand-name counterparts is back. And, it should have you feeling ill. Read More »

Tags: Third Party Litigation Funding (TPLF), Preemption/ Federalism

Consumers Beware: Lawsuit Lenders Go Digital

April 16, 2015 | Insights

The "ugly" side of the Internet is in the eye of the beholder - but we tend to think the appearance of new sites that help fuel the growth of the lawsuit lending industry fall into that category. Read More »

Tags: Third Party Litigation Funding (TPLF), Lawsuit Lending

Crain's NY Highlights ILR's Efforts to Rein in Lawsuit Lenders

February 11, 2015 | Insights

"Is this a course we want to take in the U.S. for our civil justice system? Do we want it to become a profit-making entity for private hedge funds?" Read More »

Tags: Third Party Litigation Funding (TPLF), Lawsuit Lending, New York

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 (TPLF), 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 (FCPA), Third Party Litigation Funding (TPLF)

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 (TPLF)

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)

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