Our second legislative own-initiative report (INL) in the JURI committee this term addresses a new business model, whereby commercial actors such as hedge funds heavily invest in legal proceedings and often make enormous profits on the back of the claimant. Originally coming from Australia, this practice was gradually exported to other countries. Lately, litigation funders are also edging more and more in the European market.
On 28 June 2021, we presented our draft report on 'Third-party litigation funding' (TPLF). It is a topic that is not located in our usual digital field but which is closely connected to our work on representative action back in 2018. TPLF is a growing practice, whereby commercial investors that are not a party to a dispute (i.e. hedge funds) heavily invest in legal proceedings. In exchange for paying the litigation costs (= financing the process for one side), they are often asking for a disproportionate share of the award of the settlement secured. As litigation funders act solely in their own economic interest, the funded claimant who suffered a harm is regularly left with little or no redress.
Many litigation funders operate in the shadows and obscure the amount of their rewards with non-transparent contractual relationships. Courts and defendants do not even know about the funding behind a claim, so they cannot take into account where the redress actually goes. Likewise, claimants know little about the funding terms, and do not realize until too late that the cost of funding means that they receive little or no compensation. Empirical studies (see here or here) have indicated that TPLF does not really improve access to justice for the ordinary citizen as litigation funders pick and choose between cases in order to find the best returns. They mainly invest in large value lawsuits, while considering ordinary cases that involve smaller claims often as too risky or not profitable enough.
Although the provisions in the 2018 Directive on representative actions address TPLF to some extent, they only regulate in the narrow context of representative actions. The problems related to TPLF are however much wider, affecting many more areas than just consumer cases. Self-regulatory codes (e.g. UK Association of Litigation Funders or ALF) proved to be insufficient as most funders did not sign up and as they have no real ability to enforce any requirements (12 of 89 funders operating in Europe are ALF members). This is why we find that an additional regulatory regime is necessary.
The proposed safeguards
With our proposal we do NOT want to prohibit TPLF. In some cases, it makes a lot of sense and enables claimants to get redress that they otherwise would not be able to receive. What we however want to achieve is to better protect claimants by guaranteeing that this legal practice is not abused. To put it simple: we want to remove the rotten apples among litigation funders by installing strong legal safeguards and by establishing a licensing system that allows TPLF as long as certain rules are being met. We are convinced that in order to prevent different levels of protection resulting in forum shopping in the Internal Market, a harmonized set of rules in form of a Directive is required. This proposed Directive should contain the following key safeguards:
Authorization: Require that litigation funders are licensed by a Supervisory Authority, have a registered office in a Member State, and comply with the provisions in the Directive.
Governance: Litigation funders must have proper procedures in place and only conclude contracts that avoid conflicts between their economic interests and the litigants’ own interests.
Fiduciary duty: Litigation funders must always act in the best interest of litigants, like lawyers to their clients.
Capital adequacy: Litigation funders must have adequate financial resources throughout the proceedings they have agreed to fund.
Accountability: Litigation funders must not interrupt their funding while the proceedings are ongoing or refuse to pay adverse costs (i.e. litigation cost if the party they fund loses the case).
Standards: Litigation funding agreements must be written in clear and easily understood terms. Excessive or disproportionate fees must be avoided. Litigation funders must not control the proceedings.
Disclosure: Fully disclose third party funding agreements to ensure understanding of the terms and allow courts and administrative authorities to assess compliance with the provisions of the Directive on the Responsible Private Funding of Litigation.
Approximately two weeks after the presentation of the draft report in June 2021, overall 327 amendments were tabled by the other political groups. The low number of amendments as well as their similar content underlined that most MEPs in the JURI committee agree with the general approach of the draft report. Due to staff shortage as well as a lack of meeting rooms, the compromise negotiations only started on 11 November, when the first technical took place. Since then, there is roughly one technical meeting every week. Also the European Commission (where Unit A.1 (A. Stein) of the DG JUST will be responsible) faces a heavy workload. It is therefore rather likely that the Commission only becomes active at the end of the mandate. Having President von der Leyen's quote in mind, the European Parliament will however insist that the legislative response is not forever postponed but presented in the next few years.