What is TPLF?
Third-party litigation funding is a practice where a third party (such as a hedge fund, foreign wealth fund, etc.), not directly involved in a legal dispute, provides financial support to one of the parties involved in the litigation. In exchange for funding, the third party typically receives a portion of any settlement or judgment awarded in the case. This type of funding is often used by individuals or businesses who may not have the financial resources to pursue a legal claim on their own.
TPFL started around the mid-1990s in Australia and quickly spread across the globe, arriving in the United States about a decade later. In recent years, TPLF has experienced explosive growth and is now a multi-billion-dollar industry worldwide, with an estimated $15.2 billion in commercial litigation investments in the United States alone.
What's the Problem with TPLF?
TPLF is problematic for a variety of reasons.
Allowing outsiders to secretly use courtrooms as a trading floor incentivizes the filing of non-meritorious litigation. Litigation is extremely expensive, and businesses seek to avoid it. Businesses often settle cases rather than engage in protracted and costly litigation, regardless of whether the claims are legitimate. Since TPLF lets plaintiffs off the hook for legal costs, there is little risk for them to advance non-meritorious claims.
When companies face higher litigation costs, they are often forced to raise prices for consumers. Furthermore, TPLF can corrupt the legal system by prioritizing profit over justice, putting the investment interests of funders ahead of the interests of others, including the plaintiffs themselves. In essence, TPLF can weaken the fairness and integrity of the legal system and negatively impact the economy.
TPLF allows funders to exercise undue control or influence over the litigation to the detriment of courts, defendants and plaintiffs. For example, in some TPLF agreements, there are provisions that allow funders to make strategic decisions like whether and when to settle, even if the plaintiff would rather proceed to trial. Unlike attorneys, funders do not owe a fiduciary duty to the plaintiffs and may not be acting in their best interest.
Private Funders in the U.S. have a whopping $15.2 billion under management for commercial case investments.
Funders Are Often Paid Before Plaintiffs
Funding agreements also lay out how exactly the funder will be paid. In many instances when the plaintiff wins a funded case, the funder will take its cut of the winnings before the plaintiff is paid—often 20-40% of the proceeds of the case, or even more. The arrangements leave plaintiffs (particularly in class actions) with little or no money, especially if the lawyers also take a contingency or large winning fee.
Litigation Funding Puts Investors Ahead of Plaintiffs
Third party funders generally don't have to abide by any ethical or fiduciary rules. Their priority is their financial investment, not the best interest of the plaintiffs. In fact, in some funded class actions, the funding agreements are structured so that the fewer people who claim their award, the more money the funder gets.
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