What Is Third Party Litigation Funding (TPLF)?
TPLF involves hedge funds or other financiers investing in lawsuits in exchange for a share of any proceeds from a settlement or a judgment award. Some estimates place the litigation finance market between €40 billion and €80 billion globally.
How Does TPLF Work?
Litigation funders identify cases where there is likely to be a large award and arrange with law firms or claimants’ representatives to pay the litigation costs in exchange for a share of the outcome. Funders also engage in “portfolio funding,” in which they purchase a contingent interest in the outcome of a whole portfolio of lawsuits. The involvement of TPLF in litigation raises a host of ethical issues.
Funders Operate in the Shadows
Once a funder decides to finance a claim, they will enter into a litigation funding agreement with the funded party, usually a law firm or claimant representative. There is no mandatory disclosure of these agreements. This means that judges, defendants, and even claimants (particularly in collective actions) may not know that a hidden third-party has a stake in—and an expectation to profit from—the case in front of them.
Funders May Take Control of Litigation
Funders design funding agreements to maximize their chances of success and profits. With this objective in sight, they will want to influence strategic decisions of the funded party in litigation, including fundamental issues such as selecting a lawyer, accepting or rejecting a settlement agreement, or even withdrawal from the case. Furthermore, when lawyers or claimant representatives are dependent on funders to get paid or are counting on their financing in future cases, they are under pressure to let the funders have their way. This creates a power dynamic which can undermine the interests of the parties in the case and the proper working of the courts.
Funders Are Often Paid Before Plaintiffs
Funding agreements also lay out how exactly the funder will be paid. In many known instances, when the claimant wins a funded case, the funder will first take its cut of the winnings before the claimant is paid – often 20-40% of the proceeds of the case, or even more. These arrangements can leave claimants (particularly in collective actions) with little or no money, especially if the lawyers also take a contingency or large winning fee.
Litigation Funding Puts Investors Ahead of Claimants
Third party funders generally don’t have to abide by any ethical or fiduciary rules. Their priority is their financial investment, not the best interests of the claimants. In fact, in some funded collective actions, the funding agreements are structured so that the fewer people who claim their award, the more money the funder gets.
TPLF Is Unregulated
TPLF is largely unregulated. Unlike other commercial activities, TPLF is not subject to any government oversight. Litigation funders should be subject to fair and proportionate regulations like other financial and legal professions to prevent litigation abuse and ensure adequate compensation to plaintiffs.
Would Self-Regulation Suffice?
In some countries, like the UK, funders claim to abide by self-regulation through voluntary codes of conduct. Still, without serious consequences for breaches of these codes, self-regulation has little to no impact on funder behaviour. Government regulation is needed to address and mitigate ethical concerns, conflicts of interest, lack of transparency, inadequate consumer protection, and potential abuses.