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As a weekend bonus to our readers, the following is a courtesy reprint of an excerpt from the United States Chamber of Commerce Institute for Legal Reform’s advisory on third party litigation funding.
Since its beginnings in Australia more than a decade ago, third party litigation funding (TPLF) has spread rapidly around the globe. The practice is particularly prevalent in Australia and the UK, but has also moved into the United States, Canada, Europe, and parts of Asia. Because funding arrangements tend to operate in secret, defendants may not even be aware that a funder is involved in litigation against them. TPLF is largely unregulated, creating numerous problems and conflicts of interest for litigants, their lawyers and the overall civil justice system.
For one thing, TPLF increases the volume of litigation. It is pretty simple: more litigation funding means more litigation. A study by NERA Economic Consulting found the rise of TPLF is responsible for much of the recent increase in securities class action litigation in Australia. In addition, TPLF firms’ business model allows them to spread risk across a portfolio of cases and take on cases that might be weak or dubious but still hold the possibility of a massive award. As a result, TPLF is likely to increase dubious litigation as well.
TPLF can also prolong litigation. Plaintiffs may choose to reject an otherwise reasonable settlement offer because they need to give a large part of any award to their funder. This prolonged litigation hurts defendants, who are forced to divert additional time and money from productive activity to defending litigation.
In addition, TPLF can undercut a plaintiff’s control of litigation. Obviously, funders have a major interest in the outcome of cases they invest in. So it is not unexpected that some funders seek to control a case’s legal strategy, both indirectly and directly. In one patent case, a funder sued the plaintiff for settling for an amount lower than what the funder demanded. In the infamous Chevron case in Ecuador, the funding contract with the plaintiffs stipulated that the funder would have veto power over the choice of attorneys and receive priority in the disbursement of any monetary award. Arrangements such as these make a mockery of our system of justice by placing the interests of outside investors ahead of the interests of the parties in court.
Finally, TPLF creates ethical conflicts. Funders have no ethical obligations to safeguard the interests of the claimants. Significantly, it is a fundamental rule of ethics that lawyers have a fiduciary duty to their clients. But when TPLF investors get involved in a case, they often front the fees of the claimants’ lawyer. Funders are now moving into arrangements in which they finance a law firm’s litigation portfolio, or provide startup money for litigation practices, with repayment to come from the proceeds of the firm’s cases. Will funded lawyers act in the best interests of their clients, as they are supposed to do, or in the interests of the third party funder paying the legal fees and financing the firm’s practice? The secrecy that surrounds most TPLF arrangements also can create ethical dilemmas, when judges unaware of a significant interested party to the litigation are not able to evaluate their own conflicts of interest in hearing the case.
Stringent safeguards are needed to counter the many problems associated with TPLF in the United States. In October 2012, the U.S. Chamber Institute for Legal Reform released Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party Investments in Litigation, a white paper which outlines a possible U.S. federal regulatory regime for TPLF. The paper’s recommendations include:
- Prohibiting investor control of cases;
- Forbidding direct contracts between investors and lawyers that do not also include the client;
- Banning law firm ownership of TPLF firms;
- Prohibiting the use of TPLF in class actions; and
- Requiring disclosure of funding contracts in litigation.
In December 2016, ILR sent a letter to the Clerk of Court in the U.S. District Court for the Northern District of California supporting a proposed local rules amendment requiring the disclosure of TPLF agreements. In January 2017, the Northern District adopted a version of that proposed amendment, requiring the disclosure of TPLF agreements in all class action cases. ILR also continues to advocate for a revision to the Federal Rules of Civil Procedure (FRCP) requiring disclosure of funding arrangements in which parties have a contingent financial interest to the court and litigants. In 2014, ILR and several other business and legal reform associations submitted an open letter to the Secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts calling for an amendment to the FRCP requiring disclosure of third party investments in litigation at the outset of a lawsuit. ILR followed up on that original petition, sending an update on the state of TPLF to the Committee in October 2015, once again calling for an amendment to the FRCP mandating disclosure of the practice.
Significant legislative movement has also been made at the federal level with the Fairness in Class Action Litigation Act of 2017 (FICALA), wich passed the U.S. House of Representatives on March 19, 2017. FICALA includes an important provision that implements mandatory disclosure of TPLF in all class actions. ILR advocated for this bill, and the inclusion of a strong TPLF disclosure provision, in the House, and will continue to champion this bill as it moves through the U.S. Senate.”