Third party litigation funding (TPLF) has turned into an estimated $100 billion industry, affecting civil justice systems in the U.S. and around the world. This questionable business practice of letting outsiders invest in lawsuits is rapidly growing in Europe, just as the EU is about to pass the first EU-wide collective redress (class action) legislation.
TPLF allows hedge funds and other outside financiers to invest in lawsuits in exchange for a percentage of any settlement or award. TPLF is mostly unregulated around the world; the industry operates in the shadows, making it difficult for judges, defendants, and consumers who sign up to join collective actions, to know whether there is TPLF involved in the cases.
ILR recently released an academic research paper that outlines the unique features of this industry and the particular risks it raises. This paper also analyzes whether, and in some cases how, policymakers around the world are confronting this new challenge. The paper urges EU legislators to take the lead in introducing protective regulation, including:
- Requiring full disclosure of funding arrangements to courts and involved parties;
- Implementing measures empowering courts to resolve conflicts of interest between funders, lawyers, and parties to litigation; and
- providing courts with tools to prevent litigation funders from exerting excessive influence throughout the lawsuit
As the use of TPLF grows globally, lawmakers and regulators should closely examine this industry and assess the risks and potential harms it could cause. Policymakers should find this paper useful for that purpose.
While legislators and policymakers in Europe are introducing new or expanded collective actions rules, they ought to review the unregulated and shadowy TPLF industry, and propose safeguards to protect both consumers and defendants against abusive litigation. Europe should not become a new litigation Eldorado!