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. TPLF is largely unregulated, creating numerous problems and conflicts of interest for litigants, their lawyers and the overall civil justice system. read more...

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. This prolonged litigation hurts defendants, who are forced to divert additional time and money from productive activity to defending 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 what the funder demanded. 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 priority 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 TPLF 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.

In December 2016, ILR sent a letter to the Clerk of Court in the U.S. District Court for the Northern District of California supporting a proposed local rules amendment requiring the disclosure of TPLF agreements. In January 2017, the Northern District adopted a version of that proposed amendment, requiring the disclosure of TPLF agreements in all class action cases. ILR also continues to advocate for a revision to the Federal Rules of Civil Procedure (FRCP) requiring disclosure of funding arrangements in which parties have a contingent financial interest to the court and litigants. In 2014, ILR and several other business and legal reform associations submitted an open letter to the Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts calling for an amendment to the FRCP requiring disclosure of third party investments in litigation at the outset of a lawsuit. ILR followed up on that original petition, sending an update on the state of TPLF to the Committee in October 2015, once again calling for an amendment to the FRCP mandating disclosure of the practice.

Significant legislative movement has also been made at the federal level with the Fairness in Class Action Litigation Act of 2017 (FICALA), wich passed the U.S. House of Representatives on March 19, 2017. FICALA includes an important provision that implements mandatory disclosure of TPLF in all class actions. ILR advocated for this bill, and the inclusion of a strong TPLF disclosure provision, in the House, and will continue to champion this bill as it moves through the U.S. Senate. 


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.

Earlier in 2017, Martin Pakula, the Atoorney General for the Australian state of Victoria, asked the Victorian Law Reform Commission (VLRC) to review the rules covering litigation funders to prevent unfair conduct in civil proceedings, including class actions. This request was prompted by a case where the majority of the plaintiffs' $5 million award was split by their lawyers and Sydney-based LCM Litigation Funding. The attorney general has requested the VLRC answer several inquiries on TPLF. 

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 March 2017, ILR released The Groth of Collective Redress in the EU: A Survey of Developments in 10 Member States, which reviews how collective redress mechanisms (class action models) are being used in key EU Member States, including the UK, Spain, France, the Netherlands, Germany, Italy, Austria, Belgium, and Bulgaria. This report suggests several TPLF safeguards and highlights many of the major issues associated with TPLF in European collective redress. 

United Kingdom

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 also advoactes for transparency with respect to funding agreements. A 2015 Justice not Profit study of funders operating in the UK found that 16 funders had about $2.2 billion in global assets under management. Today, that number has grown exponentially. 

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

ILR filed comprehensive comments to the Hong Kong Law Commission in January 2016 relating to the rule proposal the Commission was considering allowing third party funding (TPF) of arbitration. The comments expressed ILR's strong agreement with the long-standing view of the Hong Kong judiciary that TPF is inappropriate 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.

In October 2016, the Commission released a Report on Third Party Funding for Arbitration calling for "light touch" regulation and disclosure of TPF in arbitration. While this is an important first step and may lead to global recognition of the need for meaningful oversight in the litigation funding industry, "light touch" regulation will not suffice. ILR will continue to urge the Hong Kong Legislative Council to strongly consider adopting litigation funding rules that ensure proper enforcement.  

Research

The ILR Research Review - Spring 2017

May 08, 2017 | This edition of the ILR Research Review offers valuable insights from ILR's recent research on the latest trends in litigation and the tactics and strategies entrepreneurial plaintiffs' firms are using to expand their business models and bring more lawsuits in local, state, federal, and international courts.

The Growth of Collective Redress in the EU: A Survey of Developments in 10 Member States

March 21, 2017 | This paper examines the 'state of play' of collective redress in 10 Member States in the EU and suggests minimum necessary safeguards to prevent litigation abuse taking hold in Europe.

All Results for Third Party Litigation Funding (TPLF)

In the News Today - June 15, 2017

June 15, 2017 | News and Blog

Bringing TPLF ‘Out of the Shadows': ILR wants to "bring third-party litigation funding arrangements out of the shadows," writes attorney Kendall W. Harrison. Read More »

In the News Today - June 8, 2017

June 08, 2017 | News and Blog

In a recent opinion piece, Lord Faulks urges the government of the United Kingdom to "consider a growing and almost unregulated phenomenon that is in danger or undermining the integrity" of the legal system. Read More »

Pressure Mounts on Third-Party Funders in the UK

June 07, 2017 | News and Blog

Recently, the Royal Bank of Scotland successfully obtained orders "forcing claimants to disclose the identity of their funders," writes the Law Society Gazette. Read More »

Litigation Finance Arrangements Need to be Disclosed

June 06, 2017 | News and Blog

With the support of more than two dozen business groups, the U.S. Chamber of Commerce Institute for Legal Reform sent a letter to the office of the U.S. courts asking the committee on rules of practice and procedure to require disclosure of third-party financing arrangements in all civil cases filed in federal court, writes the Wall Street Journal. Read More »

In the News Today - June 5, 2017

June 05, 2017 | News and Blog

More than a dozen business groups have proposed an amendment to the Federal Rules of Civil Procedure to require the disclosure of outside financing arrangements. Read More »

In the News Today - June 2, 2017

June 02, 2017 | News and Blog

Plaintiffs' attorneys asked a federal judge to sanction Sanofi, the defendant, for filing a motion filled with "unfounded accusations" in an attempt to get information on outside funding for the litigation. Read More »

Are the Days of Undisclosed Third-Party Litigation Funding Numbered?

June 02, 2017 | News and Blog

The business of bankrolling lawsuits has mushroomed from a niche practice into a worldwide, multibillion-dollar industry in less than a decade. This happened despite the fact that courts, defendants and even some plaintiffs have little or no awareness of whether the lawsuits they are involved in are underwritten by financers because there are no disclosure requirements. Read More »

Irish Court Deals Blow to Third-Party Funders

May 24, 2017 | News and Blog

Yesterday, Ireland's Supreme Court delivered a "blow" to the third party litigation funding (TPLF) industry, according to the Law Society Gazette. Read More »

Customers Sue Funder Alleging Excessive Interest Rates

May 10, 2017 | News and Blog

Six former Oasis Legal Finance customers are suing the company, asking "a federal judge to declare the interest rates charged by the company in violation of the lending laws of the state," writes Forbes/Legal Newsline. Read More »

The ILR Research Review - Spring 2017

May 08, 2017 | Research

This edition of the ILR Research Review offers valuable insights from ILR's recent research on the latest trends in litigation and the tactics and strategies entrepreneurial plaintiffs' firms are using to expand their business models and bring more lawsuits in local, state, federal, and international courts. Read More »

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