Third Party Litigation Funding (TPLF)

Since its beginnings in Australia more than a decade ago, third party litigation funding (TPLF), or also known as third party litigation financing, 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 these agreements tend to operate in secret, defendants may not even be aware that a funder is involved in litigation against them.

TPLF 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 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. 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, starting with the fact that 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. In that case, will the lawyer act in the best interests of their client, as they are supposed to do, or in the interests of the third party funder paying the legal fees? 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, especially in opt-out class actions – a combination that mixes two practices already prone to abuse.

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.

Research

The ILR Research Review - Volume 2

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 - August 31, 2015

August 31, 2015 | Insights

Insurance Journal highlights the call by U.S. Senators Grassley and Cornyn for greater transparency by the litigation finance industry. The story notes that, "the U.S. Chamber of Commerce, for one, has derided this activity as 'a sophisticated scheme for gambling on litigation' that allegedly fuels abusive suits and creates conflicts of interest." (Insurance Journal) Read More »

Tags: State Attorneys General, Third Party Litigation Funding (TPLF), New Mexico

U.S. Senators Call for More Transparency in Litigation Funding Industry

August 28, 2015 | Insights

Senate Judiciary Chairman Chuck Grassley (R-IA) and Senate Majority Whip John Cornyn (R-TX) have sent letters to three of the largest litigation funding companies asking "for a slew of information, including a complete list of cases each company has funded from 2009 to 2014, how much money they made, and whether the financing arrangements were disclosed to other parties in the litigation." Read More »

Tags: Third Party Litigation Funding (TPLF)

In the News Today - August 25, 2015

August 25, 2015 | Insights

Luke Barrett, head of legal and risk at UniSuper, one of Australia's largest institutional investors, criticized the country's litigation funding industry, asking why they "are able to charge 30 percent to 40 percent of the recovery amount." Those amounts, Barrett said, "can often be a multiple of what the legal fees were." (Sydney Morning Herald) Read More »

Tags: Class Actions, Class Actions Around the Globe, Third Party Litigation Funding (TPLF), California, Missouri

In the News Today - August 24, 2015

August 24, 2015 | Insights

"Investors need to be careful of the 'new kids on the block' launching class actions in Australia because the growing market for class action law firms and litigation funders carries significant risk," warns Monash University law professor Vince Morabito. (Sydney Morning Herald) Read More »

Tags: Class Actions, Class Actions Around the Globe, Third Party Litigation Funding (TPLF)

Bloomberg Highlights ILR Criticism of Litigation Funder's Move into Bankruptcy

August 21, 2015 | Insights

Bloomberg is the latest to highlight the litigation funding industry's move into the world of bankruptcy, noting Burford Capital's recent creation of Bankruptcy Litigation Funding LLC. Read More »

Tags: Third Party Litigation Funding (TPLF)

Australia's Billion-Dollar Class Action Boon Being Fueled by Litigation Funders?

August 20, 2015 | Insights

A warning bell is being sounded as litigation funding is being cited as the reason for a class action boon in Australia, reports the Australian Financial Review. Read More »

Tags: Class Actions, Class Actions Around the Globe, Third Party Litigation Funding (TPLF)

Article Notes Both 'Record Income' and 'Black Eye' for Litigation Funding Firm

July 31, 2015 | Insights

A story noting the "record income" posted by third party litigation-funder Burford Capital also notes the U.S. Chamber's warnings over the practice of litigation funding. Read More »

Tags: Third Party Litigation Funding (TPLF)

ILR's Lisa Rickard Warns About Spread of Third-Party Litigation Finance to Bankruptcy

July 28, 2015 | Insights

"Investors in the growing field of funder-backed litigation, which finances business disputes in exchange for a cut of the proceeds, are eyeing bankruptcy court as a potentially lucrative new venue," reports the Wall Street Journal's Tom Corrigan. Read More »

Tags: Third Party Litigation Funding (TPLF)

Rickard: 'The Problem with 3rd Party Litigation Financing'

July 27, 2015 | Insights

ILR President Lisa A. Rickard penned a strong Law360 op-ed as a rebuttal to a recent piece from Burford Capital, LLC, entitled, "Litigation Finance Can Help Break the Glass Ceiling." In that initial piece, Burford Capital Managing Director Aviva O. Will suggested that women in law firms ought to harness third party litigation as a means of correcting gender discrimination. Read More »

Tags: Third Party Litigation Funding (TPLF)

In the News Today - June 1, 2015

June 01, 2015 | Insights

The National Law Review notes the importance of the Spokeo v. Robins case, and the U.S. Chamber's concern over "granting standing to plaintiffs who have not suffered an injury" because it "will open the floodgates to no-injury class actions brought under statutes that authorize a private right of action." (National Law Review) Read More »

Tags: Asbestos, Class Actions, Third Party Litigation Funding (TPLF), Illinois

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