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 - Spring 2015

May 18, 2015 | This edition of the ILR Research Review offers valuable insights from the latest of ILR's research on enforcement slush funds, Canadian class actions, emerging litigation trends and theories from the plaintiffs' bar, and recent state tort law rulings.

All Results for Third Party Litigation Funding (TPLF)

In the News Today - July 21, 2016

July 21, 2016 | News and Blog

Experts say the so-called Yates Memo has employees and their employers at odds as both feel they've been thrown under the bus. "In the past, if an employee committed misconduct, he's going to get fired and that might be it," said Ryan Rohlfsen, a partner at Ropes & Gray. Read More »

In the News Today - July 5, 2016

July 05, 2016 | News and Blog

Bryan Quigley is quoted in the LA Business Journal discussing the numerous issues with third party litigation funding, which include lack of disclosure and the potential to fuel an increase in litigation both within in the US and around the world. Read More »

In the News Today - June 23, 2016

June 23, 2016 | News and Blog

ILR Executive Vice President Harold Kim makes the case that Missouri's lax expert evidence standards contributed to huge jury verdicts against Johnson & Johnson and Monsanto. Read More »

In the News Today - June 16, 2016

June 16, 2016 | News and Blog

The Government Accountability Office (GAO) released a report this week that "identified deficiencies in CFPB's internal controls over accounting for property, equipment, and software that collectively constituted a significant deficiency in CFPB's internal control over financial reporting." Read More »

Rickard: Litigation Financiers 'Exploiting the Justice System for Profit'

June 07, 2016 | News and Blog

In a Bloomberg BNA op-ed, ILR President Lisa A. Rickard writes that news of billionaire Peter Thiel's financing of Hulk Hogan's Gawker lawsuit has shed light on the troubling third party litigating finance industry. Read More »

In the News Today - June 6, 2016

June 06, 2016 | News and Blog

Columnist L. Gordon Crovitz highlights problems with the growing third-party litigation finance industry. Crovitz notes that, "outside investors bankrolled the multibillion-dollar case brought by Ecuadorians against Chevron that resulted in the plaintiff lawyer being convicted of fraud and racketeering." Read More »

In the News Today - June 3, 2016

June 03, 2016 | News and Blog

Litigation funding a 'Shadow' Industry that Needs Oversight, says Law Professor: "Litigation funding is a shadow industry," said professor Maya Steinitz of the University of Iowa, College of Law. "So there's no data on how widespread any practice is, and (it) speaks of the need to have some kind of regulatory oversight over litigation finance." (Northern California Record) Read More »

In the News Today - June 2, 2016

June 02, 2016 | News and Blog

"A recent symposium hosted by ILR and the National Association of Criminal Defense Lawyers furthered the national conversation on how over-criminalization threatens economic opportunity-from children with lemonade stands to bankers with a 100-year-old family business, custodians to engineers-and harms, sometimes ruins, innocent people's lives in the process." Read More »

Rickard: Third Party Litigation Financing Turns Our 'Courts into Casinos'

June 01, 2016 | News and Blog

U.S. Chamber Institute for Legal Reform (ILR) President Lisa A. Rickard writes in the New York Times that news of billionaire Peter Theil investing in Hulk Hogan's Gawker lawsuit "sheds light on this fast-growing industry of hedge funds, lawyers and other profiteers investing in third-party litigation financing." Read More »

National Media Spotlight on Third Party Litigation Funding

May 31, 2016 | News and Blog

Last week's news that a tech mogul reportedly helped fund Hulk Hogan's lawsuit against Gawker Media has resulted in a national spotlight on the third party litigation funding industry. As such, the national media has turned to the U.S. Chamber Institute for Legal Reform (ILR) for comment on this growing industry. Read More »

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