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, 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 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?

Reforms

Stringent safeguards are needed to counter the many problems associated with third-party litigation financing. 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 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.

 

Research

Third Party Litigation Financing in Australia: Class Actions, Conflicts and Controversy

October 23, 2013 | Authored by Moira Saville of King & Wood Mallesons, this paper addresses the lack of regulation of third-party litigation financing in Australia.

Improving the Environment for Business in Australia

September 12, 2013 | In recent years, the use of third party litigation financing ("TPLF") in Australia has resulted in a notable proliferation of class actions and other funded lawsuits. The growth of the lawsuit investment industry has occurred largely without government oversight, giving rise to serious issues yet to be addressed. As a result, the increase in TPLF-financed litigation has in turn increased the cost of doing business in Australia, a trend which will continue if the current situation remains unchanged.

Additional Resources

All Results for Third Party Litigation Funding

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

Investing In Lawsuits

February 25, 2014 | Insights

"Turning litigation into a business is corrosive of almost every good value of the rule of law," Philip Howard writes. Read More »

Tags: Third Party Litigation Funding

In the News Today - February 21, 2014

February 21, 2014 | Insights

Third-party litigation financing can lead to conflicts of interests and prolong litigation, Gerald Skoning warns in the Wall Street Journal. Read More »

Tags: Lawsuit Lending, Third Party Litigation Funding, Alabama

Should England Learn From Australia?

February 18, 2014 | Insights

Australia has experienced major problems with its litigation system recently. Read More »

Tags: International Judiciary Impact, Third Party Litigation Funding

Court Ruling Calls into Question Funder Assertions About Meritless Claims

January 17, 2014 | Insights

The recent U.K High Court ruling on claims brought by Excalibur Ventures LLC for more than $1.75 billion calls into question a key assertion made by the third party litigation funding industry - that litigation funding won't increase the number of meritless claims. Read More »

Tags: Third Party Litigation Funding, International Judiciary Impact

Litigation Financing in the U.S.

January 14, 2014 | Insights

Third-party litigation financing is a practice that is more common overseas than in the United States but that could be changing, reports the Wall Street Journal. Read More »

Tags: Third Party Litigation Funding

Unregulated Growth of TPLF Threatens UK Justice System

January 08, 2014 | Insights

The Global Legal Post calls for statutory oversight of the United Kingdom's third-party litigation funding industry in order to prevent abuse, ensure transparency, and avoid conflicts of interest. Read More »

Tags: Third Party Litigation Funding

In the News Today - December 17, 2013

December 17, 2013 | Insights

Successor liability issues are becoming a bigger concern during M&A deals, due in part to more aggressive FCPA enforcement. Read More »

Tags: Environmental Litigation, Foreign Corrupt Practices Act, Third Party Litigation Funding, Louisiana

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