Third party litigation funding (TPLF) is a fast-growing industry that should raise red flags for consumers, businesses, and courts. TPLF involves private financiers signing secret deals with claimants’ lawyers to fund lawsuits in exchange for a share of the proceeds – often leaving courts, defendants, and even claimants in the dark. The industry is largely unregulated, and there are serious concerns that it increases the volume of litigation and encourages frivolous cases, all while cutting into claimants’ recoveries. In short, TPLF is already highly problematic – but a recent development threatens to add a new twist to an already unbalanced dynamic.
In recent years, funders and affiliated companies have upped the stakes to build secondary markets around lawsuits, so not only can the funders buy shares in litigation, but they can also sell and swap them like regular securities. An early September article in finance industry journal Altfi shows that some companies are taking this trend a step further by opening up cases for crowdfunding.
Enter AxiaFunder. According to their website, AxiaFunder (a trading name of Champerty Limited) is “the UK’s first litigation crowdfunding platform.” This is how AxiaFunder works: “sophisticated” and “high net-worth” investors browse through a list of ongoing civil cases on the AxiaFunder website and invest as little as 500 GBP in one or multiple cases in exchange for a piece of the settlement or award. According to Altfi, the platform allows investors to buy and sell case shares to each other “while proceedings are live.”
AxiaFunder claims to have generated a 55% average rate of return to date, with the potential for returns up to 200%. That’s great news for investors – but if crowdfunded litigation funding works like more common TPLF arrangements, it doesn’t bode well for actual claimants. For example, a December 2020 report released by the Australian Parliament showed that litigation funders often rake in outsized profits – sometimes as much as 500% – while their fees cut significantly into claimants’ compensation. The Australian report described claimants in funded class actions as “the biggest losers” in that system.
Even putting aside the issue of investors benefiting over claimants, there’s the issue of privacy. AxiaFunder offers investors access tosensitive case information, including documents related to the case, financials, and information about the lawyers involved. This could raise serious privacy concerns for claimants who won’t know who or how many people have a stake in their case. And there is no way for them to find out – because there is no disclosure requirement for TPLF in the UK.
Crowdfunding litigation comes with other serious concerns. AxiaFunder’s “Claimant” page reassures prospective claimants that an unnamed “Partner company” will review their case before it goes to the crowd and may commit to a minimum level of funding if the crowd decides not to support it. But it doesn’t list who the partner is and if or how claimants can find out.
This development comes in the context of increasing calls to regulate TPLF from the media, policymakers, and U.S. courts. The Financial Times editorial board recently ran a piece titled “Litigation funding needs better oversight,” in response to a 150 million GBP tie-up between a law firm and a litigation funder. Members of the European Parliament have also launched an initiative to formally regulate the practice in the European Union. And across the Atlantic, the U.S. District Court for the District of New Jersey recently became the latest jurisdiction to mandate a degree of disclosure for TPLF arrangements in funded cases.
Platforms like AxiaFunder have the potential to take the already serious ethical and practical problems with litigation funding and multiply them by injecting dozens – perhaps hundreds – of mystery investors in civil lawsuits. In the interest of consumers, decision makers must not allow this trend to continue unchecked.