Third-party litigation funding is becoming more prevalent as firms seek creative ways to allow litigation proceedings to move forward. The funding system first arose during the mid-1990s; as yet, there are no existing regulations at international levels. As such, the growth of third-party litigation financing will necessitate legal adaptations at the global and national levels.
The Proliferation of Third-Party Litigation Funding
The growth of third-party litigation funding is likely to continue in jurisdictions where it is already accepted. It is also expected that the industry will expand in jurisdictions where such arrangements are currently prohibited, or where the rules on litigation funding need clarifying.
Third-party litigation funding has outgrown its beginnings as an initial solution for financially distressed and illiquid claimants. Funders are now promoting a wide range of finance solutions, including monetization options for clients who want to sell an award, portfolio financing solutions for legal firms and in-house counsel, and other options. Experts also suggest that the term “third-party funding” could be phased out, with terms like “litigation finance” or “legal finance” suggesting a wider range of solutions.
Discussion Points Surrounding TPLF
The discussion surrounding third-party litigation funding has generated both support of the concept as well as concerns regarding its usage. Some arguments in support of this type of litigation include:
- It can provide funds needed to prosecute when the plaintiff does not have the ability to pay the capital out of pocket (the “access to justice” argument)
- It may allow parties and counsel to offload some of the litigation risks onto the funder
- Frivolous lawsuits may not be of concern, as such cases would not be sound investments
In other instances, third-party funding can help a case move forward despite restrictive jurisdictional rules. An example of this is in the Fortis case, wherein Kessler Topaz Meltzer & Check and Grant & Eisenhofer structured a unique approach where they obtained financing from a hedge fund that specializes in such funding arrangements. This allowed the case to proceed while conforming to European rules, which bar lawyers (but not third-parties) from collecting contingent fees.
Litigation finance may also have the potential to alter existing law firm business models, as it may lower costs and risks associated with launching a new firm. In particular, costs may be lowered for firms and clients if a funder invests in a portfolio of cases instead of a single one.
Some arguments against third-party funding include:
- Funders may only be interested in maximizing the value of their investment, rather than funding meritorious litigation
- Funded litigation may attract negative media attention and create premature settlements
- Nonlawyer investors are not always subject to ethical obligations that apply to a party’s counsel
Lastly, one of the main concerns with third-party litigation funding is a lack of clear guidelines for firms and investors to follow. In particular, the issue of disclosure is a major concern.
Transparency and Disclosure of Third-Party Litigation Funding
In the U.S., the issue of disclosure of third-party litigation financing in a lawsuit has not been squarely resolved, and a general consensus appears to be far off. On the other hand, overall developments may indicate a general trend towards mandatory disclosure, though progress is slow and incremental.
For instance, in a securities fraud class action case, Kaplan v. S.A.C. Capital Advisors LP, the defendants argued that they were entitled to disclosure of the arrangement and identity of the plaintiff’s funder. Their argument was that neither they nor the court could adequately analyze whether the plaintiff’s legal counsel could sufficiently represent the class.
However, the court disagreed on the basis that the plaintiff’s admission of a litigation funding agreement did not in itself constitute a sufficient reason to question counsel’s ability to fund the litigation.
Meanwhile, the House of Representatives recently passed H.R. 986, the Fairness in Class Action Litigation Act of 2017, which contains third-party litigation funding disclosure provisions. Specifically, the Act requires prompt disclosure to the court and all parties in class actions of any entity with a “contingent right to receive compensation from any settlement judgment, or other relief” obtained in the action.
Thus, rulings may appear disjointed, and disclosure requirements will likely continue to be assessed on a jurisdiction-by-jurisdiction basis. As such, parties need to keep pace of new developments and updates in each jurisdiction.
Third-Party Litigation Funding News Around the World
The Paris Bar Association recently issued a resolution which provides a legal framework for third-party litigation funding. In particular, the resolution addresses various third-party funding issues in an international arbitration context. The resolution seeks to establish clearer ethical rules for attorneys, especially with regards to the attorney-client privilege, where the third-party funder may have access to privileged information.
In addition, the resolution emphasizes the importance of disclosure of third-party funding arrangements. It requires the funded party’s attorney to “encourage his/her client to disclose the existence of such funding to the arbitrators.” They should also warn their clients about the possible negative consequences of non-disclosure. Thus, the Paris Bar Association’s resolution provides firm reminders that attorneys are under a number of obligations to their clients, and not necessarily the third-party funder.
The Supreme Court of Ireland stated in a recent decision that the country is still bound by maintenance and champerty laws, and thus third-party litigation funding is not allowed.
Chief Justice Susan Denham did, however, recognize a possible need to review champerty laws. She stated that modern issues, such as Ireland’s status as an international trading nation and issues concerning international arbitration, may be reasons why it might be appropriate to revise the law on champerty in light of third-party litigation funding. She also stated that this may be a question that is more suited to full legislative analysis.
All four concurring judges in the case observed that there may be valid arguments for viewing third-party litigation funding in a more modern context, especially with regards to the constitutional right to access to justice.
Justice Dunne also drew attention to the fact that there have not been any champerty and maintenance prosecutions since the foundation of the State. She also questioned exactly what the constituent elements of the offenses are.
Lastly, Justice Clarke stated that circumstances could arise where the Courts may need to reconsider their position on third-party funding in situations where neither the government nor the legislature have taken action to create a definitive ruling on the constitutionality of champerty and maintenance laws.
Thus, it appears that third-party litigation funding is expanding and may challenge traditional concepts of litigation in some jurisdictions. The subject is such a complex and influential topic that it may require legislative action to fully resolve some of the surrounding matters. If you have questions regarding global litigation developments, contact us at Kessler Topaz. We are committed to protecting consumers, employees, and others from fraud, abuse, and misconduct by businesses and fiduciaries.