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Mythbusting the Call for New Regulation of TPLF

By John Freund |
December 2, 2024

Mythbusting the Call for New Regulation of TPLF

The following is a contributed piece from Rupert Cunningham, Director for Growth and Membership Engagement at the International Legal Finance Association (ILFA).

In their call for more EU regulation last week, AmCham EU, Business Europe and their co-signatories make misleading and inaccurate allegations about third-party litigation funding. These calls have been repeated by the same groups over and over again, pushed by big corporations that simply do not want those harmed by their wrongful behaviour to have recourse in the judicial system. ILFA will continue to counter these claims in the strongest terms. Below we unravel some of the most common misleading statements:

Myth: “Third-party litigation funders currently operate in a regulatory vacuum and without any transparency requirements.”

There is no regulatory vacuum. Litigation funders are regulated under company law in the same way as any other business, for example, the Directive on unfair business-to-consumer commercial practices and the Directive on unfair terms in consumer contracts. Specific to litigation funding, activities are regulated by the Representative Actions Directive and the Collective Redress Directive.

Publicly traded funders are further regulated through legislation on securities and financial instruments and by the relevant stock exchanges and financial authorities. This includes publishing annual reports on financial performance. Examples of other EU rules that apply to listed funders include the Shareholder Rights Directive, Prospectus Regulation, MIFID II.

Lawyers engaged in litigation are bound by professional, regulatory, and fiduciary responsibilities to represent the best interests of their clients where they practise.

Myth: “A civil justice climate that is abundant in abusive claims and mass private third-party funded litigation, creates a chilling effect that deters businesses from innovating, investing, competing, and prospering.”

Supporting meritorious litigation does not deter businesses from innovating and prospering – it deters corporate wrongdoing. As long as companies behave responsibly and comply with the obligations set out in the law, they have nothing to fear from litigation funding.

Myth: “If civil litigation remains funded by unregulated private third parties, we expect a surge in speculative litigation in the EU, which would undermine public confidence in the European justice systems at a time when maintaining faith in our democratic institutions is so critical.”

Far from undermining public confidence in the legal system, a recent independent report from the European Law Institute (ELI) concluded litigation funding plays a ‘functionally vital role in facilitating access to justice in many jurisdictions’.[1]

With public funding (legal aid) increasingly concentrated in the criminal justice sphere, litigation funding offers vital assistance to claimants bringing meritorious civil claims to courts. Greater access to justice, supported by litigation funding, leads to the development of better legal jurisprudence – a benefit to our legal system and to the rule of the law.

Myth: “TPLF is a for-profit business model that allows private financiers, investment firms, and hedge funds, to sign confidential deals with lawyers or qualified entities to invest in lawsuits or arbitration in exchange for a significant portion of any compensation that may be awarded, sometimes as much as 40% of the total compensation but can go even substantially higher.”

Litigation funder’s fees reflect the level of risk undertaken (which will vary) and are assessed case-by-case.

Many funded cases are “David vs. Goliath” in nature with well-resourced defendants. This requires substantial upfront financial investment to level the playing field and for cases to proceed. In the UK sub-postmasters’ recent successful claim against the Post Office, the Post Office spent nearly 250m GBP on its defence.

Myth: “The financial incentives of such practices encourage frivolous and predatory litigation, but they also shortchange genuine claimants and consumers.”

Litigation funding is provided on a non-recourse basis, i.e. if the case is unsuccessful, the funder loses their entire investment. There is no logical financial incentive for litigation funders to fund frivolous legal claims. Funders’ due-diligence checks assist the justice system by weeding out unmeritorious claims that have a poor chance of success when put before a court. The approval rate for funding opportunities is as low as 3-5%.

Myth: “The introduction of a purely profit-motivated third party, often non-EU based, into the traditional lawyer-client relationship, raises serious ethical concerns and presents an economic security threat for Europe.”

The letter presents no substantive evidence that litigation funding is being used by ‘non-EU’ entities to destabilise the European economy or legal systems. ILFA suggests that experienced judges and lawyers operating in EU legal systems are more than capable of identifying threats to the integrity of our legal systems and safeguarding against the misuse or abuse of the court system for geopolitical or other aims.

Myth: “Funders are frequently the initiators of claims and may exercise control over decisions taken on behalf of claimants, and in this context, they prioritise their own financial aims over the interests of claimants. Faced with years of litigation brought by claimants with support from well-resourced funders, expensive legal costs, and reputational risk, defendants are often forced to settle even unmeritorious claims.”

Litigation funders make passive outside investments, meaning that funders do not initiate claims or control the matters in which they invest. A recipient of legal funding, and their legal counsel, maintain full control over the conduct of the case, including strategy and ultimate decision-making.

Myth: “If Europe continues to neglect proper oversight of private TPLF we risk our courts becoming profit facilitators for litigation funders, at the expense of European companies, consumers, and the integrity of our court systems.”

The reference to European companies is a curious one. Litigation funders make no distinction between EU or ‘non-EU’ claimants, basing funding awards on factual criteria such as the legal merits of a case, budget, funding required, and any other award and risks associated with the case.

This latest call from big businesses makes clear they continue to side with corporate wrongdoers, diminishing the legitimate rights of businesses and consumers to access justice and exercise their rights before the courts.

“Misleading and inaccurate claims like these appear around the world as part of a global lobbying effort to encourage unnecessary and burdensome regulation of the legal finance sector,” said Rupert Cunningham, ILFA’s newly appointed Global Director for Growth and Membership Engagement.  “Robustly challenging these persistent myths is critical to improving understanding of the sector amongst policy makers and wider industry stakeholders. That is why it is so important that international organisations like ILFA are able to respond to these claims on behalf of the sector, wherever and whenever they appear.”

By enabling the pursuit of meritorious claims, litigation funding levels the playing field and creates an equality of means between otherwise unequal parties.

[1] https://www.europeanlawinstitute.eu/fileadmin/user_upload/p_eli/Publications/ELI_Principles_Governing_the_Third_Party_Funding_of_Litigation.pdf

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John Freund

John Freund

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Environmental suits, increasingly seen as tools to hold governments and corporations accountable for ecosystem destruction and climate risk, often stall or never get filed because of steep costs and limited budgets.

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