Third-Party Litigation Funding: A Review of Recent Industry Developments

IADC Defense Counsel Journal

Authored Article

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PROPONENTS of third-party litigation funding (“TPLF”) believe the industry provides capital that plaintiffs and their counsel need to compete against seemingly deep-pocketed defendants, enables law firms to prosecute additional cases by sharing litigation risks with the funder, and empowers parties to hire counsel that may not typically accept contingency fee cases. Opponents of TPLF believe the practice is opaque and promotes the filing of frivolous lawsuits, increases litigation costs, and empowers funders to exert influence over litigation strategy and settlement discussions.

Regardless of one’s view of TPLF, it is a growing, multi-billion-dollar industry that is reshaping litigation on a global scale. The litigation finance industry is a five-billion dollar market in the United States alone. In addition, third-party funding of international arbitrations is on the rise. “In the international arbitration sphere it is becoming ‘the norm’ for parties to at least consider seeking funding for part or all of their case.”

This article presents an overview of recent developments in the TPLF industry. In particular, this article: (1) provides an update on the status of TPLF in a number of countries of interest to International Association of Defense Counsel members, (2) addresses recent enactment of legislation in Hong Kong and Singapore allowing third party funding of arbitration, and (3) discusses the recent treatment of a number of the legal issues that can arise as a result of TPLF, including the disclosure or discoverability of TPLF arrangements and the applicability of the attorney-client privilege and/or work product doctrine to TPLF activity.

I. Analysis of Third-Party Litigation Funding Developments in Selected Countries

TPLF is well-established in a number of countries, including Australia, England, the United States, and Canada. In the following section we first focus on TPLF activity in those countries. We then address TPLF in certain countries where the market is less mature. Lastly, we discuss recent enactment of legislation in Hong Kong and Singapore providing for third-party funding of arbitration.

A. Representative Countries with Established TPLF Industries

1. Australia

TPLF has been in existence in Australia for more than two decades. In the last decade, TPLF has played an increasingly significant role in large class actions, particularly securities cases. A recent study found that almost 50% of federal class actions in the last six years were funded by third parties.

An important factor driving TPLF in Australian civil litigation is the country’s fee-shifting approach, whereby the losing party is typically responsible for paying some or all of the winning party’s legal costs and other expenses. Another factor driving TPLF in Australia is the country’s prohibition on contingency fee arrangements. This prohibition prevents Australian plaintiffs’ attorneys from amassing the kind of “war chest” often used to fund significant litigation in countries such as the United States, where contingency fee arrangements are permitted.

In recognition of the difficulties that cost-shifting creates in class action litigation, Australian commissions on law reform have recommended that contingency fees be permitted and a class action fund be created; however, the Australian government has yet to act upon those recommendations. Financing arrangements in the class action context typically involve the funder’s payment of counsel’s legal fees and costs incurred in the litigation, and if the litigation is unsuccessful, indemnification of the funded party from any order to pay the opposing party’s costs. In return, the funder typically contracts to receive a percentage of the amount recovered if the litigation is successful, commonly in the range of 25-40%. With approval from the courts, funders have exercised significant control over the conduct of Australian class actions.

One of the indirect, and some argue undesirable, consequences of TPLF involvement in Australia has been the rise of limited “opt-in” classes. Because there is no class certification procedure or other mechanism that might result in a judicial order binding all class members to the funding agreement, litigation funders require class members to sign the agreement that entitles the funder to share in the proceeds in the event the litigation is successful. This has resulted in the de facto creation of “opt in” classes, which limits the number of potential beneficiaries to those who have signed the agreement. A recent decision by the Federal Court, however, has paved the way for eliminating the need for closed classes. In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd, the court approved an application for the class action to be conducted on a common fund basis, enabling the funder’s contingency fee to be borne by all class members who stand to benefit from the action, whether or not they have signed the agreement (with the potential for objecting members to opt out). The court reserved the right to review and approve the rate of commission charged by the funder.

There is no mandatory licensing or supervision of litigation funding in Australia. In a recent decision, the Full Federal Court held that funded class actions are managed investment schemes as defined in the Corporations Act of 2001. As such, funders and their funding arrangements with clients would be subject to several regulatory requirements, including registration, licensing, conduct, and disclosure. But the Australian Federal Government reversed the decision, exempting funding arrangements from the Corporations Act. However, funders and funding arrangements are monitored by the Australian Securities and Investments Commission (“ASIC”), which requires funders to have adequate procedures to manage conflicts of interest.

2. United Kingdom

TPLF is well-established in the United Kingdom. TPLF is available for a wide range of disputes, including arbitrations. The industry is not specifically regulated, although the Association of Litigation Funders provides a form of self-regulation. Funders that are registered and based in the UK are also regulated by the Financial Conduct Authority, but the actual funding arrangements are not. Courts have held that a litigation funder, even though it is not a party to the litigation, may be held liable for adverse costs.

In a recent landmark decision, the High Court of Justice in London held that a prevailing party in arbitration could recover not only its legal costs, but also the £1.94 million that it was required to pay to its third party funder. The court held that the arbitrator’s power to include the funder’s fee in the cost award stemmed from the language in section 59(1)(c) of the Arbitration Act of 1996 (permitting recovery of “other costs”) and Article 3(1) of the ICC Arbitration Rules. The specific facts of the case were relatively egregious, and the arbitrator had found that the losing party had deliberately put the other party in a position where it could not self-fund the arbitration. Therefore, it remains unclear how frequently arbitrators will award funding costs. The decision of the arbitrator as to whether to award costs owed to the funder is subject to an overall reasonableness requirement. The court noted that the Civil Procedure Rules for litigation speak only of “costs” and therefore would not permit recovery of costs paid by the party to its funder.

With respect to the mandatory disclosure of TPLF arrangements, UK law imposes no express obligation to disclose either the fact of litigation funding or the agreement itself to the opposing party or the court. However, courts have discretion to compel disclosure of the funder’s identity in the context of an application for security for costs. As to privilege, it is uncertain whether a party waives privilege by disclosing otherwise privileged documents to the third party funder; however, the documents will generally retain their privileged status as against the world, and the funder is prohibited from disclosing the documents to third-parties.

One recent commercial development of note in the TPLF industry involves criticism of the accounting practices of Burford Capital, the world’s largest publicly traded provider of litigation finance. Traded on the London Stock Exchange, and with over $3 billion committed to the legal market, Burford is comprised of over 100 team members on three continents, including a staff of over fifty lawyers comprised of alumni from some of the world’s top law firms. In summary, in August 2019 an investment firm contended that Burford had manipulated its financial results by misstating the value of the legal cases it had invested in and accounting for recoveries before having received recovery proceeds. The criticism resulted in a 50% drop in the value of Burford’s shares. Burford maintains that its accounting practices are appropriate.

3. United States

TPLF is flourishing in the United States. The market for TPLF has developed in private litigation, class actions, and international arbitration. Of course contingency fees are permitted in the U.S., but unlike in Australia, for example, parties in U.S. litigation typically pay their own legal costs. The high cost and often protracted duration of litigation in the U.S., coupled with the risk of netting a zero return, particularly if working on a contingency fee basis, have fueled the TPLF market. 

This market includes both “consumer-litigation financing” and “commercial-litigation financing,” as well as financing offered directly to law firms. “Consumer-litigation finance deals primarily with personal-injury, divorce, and small claims in which the plaintiff is typically not well funded.” "Commercial-TPLF financiers normally provide funding directly to corporate plaintiffs in exchange for a share of the recovery, though funding may be extended to defendants as well.” Commercial-litigation financing has focused on disputes involving antitrust, intellectual property, and business-contract issues.

Historically, many U.S. states recognized the common law torts or crimes of maintenance and champerty, which prohibited unconnected parties from funding litigation. “Maintenance is the act of a third party encouraging or maintaining litigation, usually by providing financial assistance. Champerty is a type of maintenance where a third- party funds litigation in return for a share of any judgment proceeds.” However, the consistent trend across the country is toward limiting the doctrines of maintenance and champerty in favor of permitting TPLF.

There are a few notable outliers. Also, a number of states have passed legislation regulating TPLF. “These regulations seem principally aimed at consumer litigation finance, not commercial litigation finance.” For example, a number of states have imposed caps on the interest rates consumer litigation funders can charge consumers. However, commercial litigation funders believe that states’ efforts to regulate the consumer litigation finance industry are also directed at the commercial litigation finance industry. To date, there has been no regulation at the federal level.

With respect to any requirement that a third-party litigation and/or arbitration funding arrangement be disclosed, an increasing number of courts across the country require disclosure of at least some funding arrangement details. The trend toward mandatory disclosure of at least some aspects of third-party arrangements is discussed in further detail below. Also discussed in further detail below are issues regarding privilege and confidentiality, as well as various ethical concerns, arising from TPLF.

4. Canada

TPLF in Canada has been in existence for more than a decade. Like Australia, and unlike the United States, TPLF in Canadian class actions “is publicly known and judicially approved.” Although contingency fees are permitted in Canada, Canada’s cost-shifting regime has spurred the rise of TPLF to indemnify the funded party from adverse cost orders.

Unlike Australian litigation funders, who often have a substantial strategic and advisory role in the cases they fund, Canadian funders do not appear to exercise any significant strategic control over their cases. Under McIntyre Estate v Ontarioand Schenk v Valeant Pharmaceuticals, a “funding agreement must not impair the lawyer and the client relationship or the lawyer’s professional duties, and must not diminish the representative plaintiff’s right to instruct and control the litigation.”

Canadian courts have a certification requirement for class actions and the “de facto regulator of TPLF” has become the class action judge. Court approval of the funding agreement is required in class actions, and the court must be satisfied that the agreement is fair and reasonable to the class. The attorney-client privilege may be waived by seeking court approval, even where this is done on an ex parte basis. Canadian courts diverge on this issue, and the matter is decided on a case-by-case basis with no per se waiver rule. There has yet to be significant movement toward legislative or regulatory reform of the TPLF industry in Canada.

The complete article originally appeared in Volume 87, No. 1 of the IADC Defense Counsel Journal on January 30, 2020.