What is Third Party Litigation Funding?
Third party litigation funding (TPLF) allows hedge funds and other financiers to invest in lawsuits in exchange for a percentage of any settlement or judgment.
TPLF is a global multibillion-dollar secretive industry operating in countries like Australia, throughout Europe, particularly in the UK and the Netherlands, and in the U.S. The industry has faced worldwide criticism from legal reform advocates, scholars, courts, policymakers, and legislators for its lack of transparency and potential ethical risks of turning control of litigation to an outsider.
Check out ILR’s Faces of Lawsuit Abuse’s video on third party litigation funding for more information.
Here’s a breakdown of how the industry operates around the world.
Third Party Litigation Funding in Australia
Third party litigation funding, which was invented in Australia more than two decades ago, drove an explosion of class action litigation in the country until the federal government introduced regulations to limit some of the fraud and abuses this industry generated.
It has been reported third party litigation funders are making a return on investment per annum of 400%. It has also been reported that Australia’s third party litigation funders have a 96-98% success rate and are making returns 10x the global average for hedge funds.
In September 2021, Attorney General Michaelia Cash and Treasurer Josh Frydenberg announced a draft law regulating third party litigation funding in class actions. The proposed legislation would restrict the fees for class action lawyers and funders to a maximum of 30% of any total payout, give courts the power to approve and adjust funding agreements, and require funders to be licensed. The proposal would also require each plaintiff to consent to participate in the class action and to the funder’s terms, creating an opt-in system for funded class actions. The bill successfully passed the Australian House of Representatives last year.
To learn more about third party litigation funding in Australia, check out this episode of ILR’s podcast, Cause for Action.
Third Party Litigation Funding in the EU
Third party litigation funding is a multibillion-euro industry but is almost entirely unregulated in Europe. Right now, the European Parliament is considering several safeguards to ensure consumers have access to justice and pull the third party litigation funding industry out of the shadows.
These measures are popular with EU consumers. For example, a 2021 survey found that 83% of EU consumers want third party litigation funding safeguards.
To learn more about the 2021 EU consumer third party litigation funding survey, check out this episode of Cause for Action.
Third Party Litigation Funding in the Netherlands
The Netherlands has become a magnet jurisdiction for third party litigation funding. In 2020, the Dutch government opened the door to opt-out class actions for damages in all fields of law. This broadening of the collective action system provided more opportunities for third party litigation funders to back large groups of claimants with potentially huge payouts. As a result, at least 27 litigation funders are active on Dutch soil. This number will likely grow once the Dutch government implements the EU directive on collective actions, allowing cross-border collective actions to be brought in Dutch courts.
Third Party Litigation Funding in the UK
The UK third party litigation funding market is worth an estimated 2 billion pounds, with the presence of at least 60 litigation funding firms in the UK. A recent study by British law firm RPC reported a 100% increase in the UK litigation funding market in three years. Ernst & Young also released a study in 2021 predicting increased litigation and reliance on litigation funding in the UK. With such an overabundance of capital, third party litigation funders are kick-starting their claims and highly publicizing to attract claimants. The UK is an attractive market for third party litigation funding due to the availability of opt-out collective action mechanisms and no government oversight of the litigation funding industry.
Third Party Litigation Funding in the U.S.
For years, ILR has called for disclosure in the third party litigation funding industry. Now policymakers and courts are paying attention to the problems with the industry.
In March of 2021, Sens. Chuck Grassley, John Cornyn, Thom Tillis, Ben Sasse, and Rep. Darrell Issa introduced the Litigation Funding Transparency Act (LFTA). The bill would require plaintiffs’ lawyers to disclose third party litigation funding agreements in federal class action lawsuits and multi-district litigation.
In 2021, the U.S. District Court for the District of New Jersey adopted an amendment to its local rules to require the disclosure of litigation funding in any case pending in the District of New Jersey and a brief description of the funder’s financial interest in the case, among other things. The rule can be found HERE.
The Federal Rules Advisory Committee for the U.S. Courts is considering amending the federal rules to require disclosure of third party litigation funding in all civil cases.
Recent ILR research Selling More Lawsuits, Buying More Trouble: Third Party Litigation Funding A Decade Later examines how exactly this explosive growth has happened, how the industry is fueling abusive litigation, how the few third party litigation funding agreements that have been made public reveal serious ethical issues with the practice, and how lawmakers and policymakers can approach third party litigation funding reform.
What can be done to reign in third party litigation funding industry in the U.S.?
- Third party litigation funding agreements must be disclosed to all parties in litigation to minimize conflicts of interest and ensure plaintiffs retain control of their case
- Fee-sharing agreements between lawyers and non-lawyers should be banned (as several bar associations have already done) to preserve the independent professional judgment of attorneys
- Third party litigation funding should not be permitted in the class action context because funding creates a potential obstacle to class counsel and named plaintiffs satisfying their fiduciary duties to the class