By: Mary H. Terzino.
Is third party litigation funding (TPLF) positioned to drown England & Wales in more litigation? That is a fair conclusion to draw from a new release by the U.S. Chamber Institute for Legal Reform, Before the Flood: An Outline of Oversight Options for Third Party Litigation Funding in England & Wales.
The publication points to trends that are taking TPLF in new, litigation-expanding directions. TPLF—the business of investing in litigation by paying the costs to litigate the case in exchange for a portion of the recovery—has traditionally focused on commercial litigation and arbitration. Recently, however, the industry has demonstrated a growing interest in consumer litigation. The evidence?
- Funders and law firms in the UK are offering participation in mass claims against UK-based companies, such as the funded mass claim on behalf of shareholders that is already underway against Tesco PLC alleging overstatement of profits;
- Funders operating in England & Wales are increasingly supporting mass claims outside the UK where aggregate litigation procedures exist, such as the class action in Germany against Volkswagen regarding emissions “defeat devices” and an Austrian action against Facebook alleging privacy violations;
- Funders have reacted to high-value market saturation by pursuing lower value claims, or by actively seeking portfolios of cases that include lower value claims, including entire law firm litigation portfolios; and
- Funders are in position to pursue consumer-oriented opt-out class actions asserting violations of competition law, newly authorized in England & Wales, as soon as they are launched.
These trends signal a palpable shift towards funding lawsuits that involve claimants who are less sophisticated and more poorly resourced than more traditional funded parties, and may therefore require more protection.
At the same time, the trend towards funding portfolios of cases increases the prospect of abusive or meritless litigation. Funders are less likely to perform extensive due diligence on individual cases in a portfolio arrangement. Portfolio funding also increases the risk of funder control over the law firm, creating pressures that may adversely affect the professional independence of solicitors and enhance the risk that the client’s interests will become subordinated to the profit motive now shared by the law firm and the funder.
Before the Flood argues that these developments create an immediate need for safeguards that will both provide more protection for funded parties and guard against increased abusive litigation. It thus proposes a hard look at oversight options that will: assure that funders have adequate capital to meet their obligations; address ethical dilemmas such as fiduciary duties, conflicts of interest and control of litigation decisions; reduce incentives to pursue low quality claims, including bolstering liability for adverse costs; and promote disclosure in the court system of these secret funding arrangements.
In short, TPLF is now ripe for oversight. As the publication points out, TPLF in England & Wales currently lacks a governing framework, which creates uncertainty, disparity, and a lack of coherence in policy. In 2010 the Law Society’s Access to Justice report noted that voluntary association rules cannot adequately address problems such as “the appropriate level of percentage that [funders] can take from damages, their liability for costs or what happens if they become insolvent or wish to withdraw from the action”. Even the voluntary code of the Association of Litigation Funders acknowledges the need for some controls, such as capital adequacy assurances. However, its rules lack meaningful sanctions for violations, and its code in any event applies only to the seven funders that are members.
Two proposals in Before the Flood merit specific mention. First, the so-called “Arkin Cap”, named after a 2005 court decision, limits funder liability for adverse costs to the amount the funder has contributed to the litigation. The result is that the “loser pays” principle, an important deterrent to frivolous litigation, applies in full to the funded claimant, but not to the funder that may have inspired, supported, and steered the litigation in pursuit of a significant profit. There is no compelling public policy reason to maintain this limitation, and the report urges that it be abolished.
Second, there is the chronic problem of secrecy regarding funding arrangements. The report presents compelling support for policy changes that would make litigation funding agreements disclosed, as between funders and funded parties and within the litigation system. A disclosure requirement would ensure that the existence and terms of a funding arrangement are known to the court, with a presumption favouring disclosure to the opposing parties. Sunlight, as the saying goes, is the best disinfectant.