Litigation Finance: The Cost of Class Actions
Litigation funding expenses are fundamentally related to the cost of doing business—so says a federal district court judge in their rejection of a request to recover expenses. In Perez v Rash Curtis & Assoc, the judge held that if funding expenses were recovered from a class settlement fund, that it would undermine necessary transparency—particularly in cases in which funding agreements were not pre-approved by the court. Lexology details how this ruling affirms that litigation funding expenses should be treated the same as other financing agreements used in class actions. As such, expenses resulting from a funding agreement should not be recoverable from any settlement. Take this case involving the Telephone Consumer Protection Act. Class counsel and a third-party funder agreed to enforce the recovery of a judgment of more than $250 million. Additionally, the funder paid $10 million to class counsel, and more to a separate legal firm to assist. When it came time to divide the award, counsel attempted to recover $300,000 for payment to the broker who arranged the funding agreement, plus $15 million to the funders—amounting to a return of $5 million on a $10 million investment. It could be argued that the funder and broker made the $75 million (the final settlement amount) possible. The district court, however, insisted that funding expenses must not be charged to claimants. No regulation affirms that expenses relating to litigation funding are recoverable. As the court concluded, such fees are directly related to the cost of doing business—and not a recoverable expense relating to litigation. Of course, this might all go differently if counsel sought court approval of their litigation funding agreement. This could open a Pandora’s Box of questions regarding disclosure and the standards of scrutiny the courts apply to funding agreements.