Australian judge raises questions about litigation financing

05th May 2017

An Australian judge raised questions earlier this year about the unregulated nature of what has become known as the third party litigation finance industry, or TPLF—a business built on financing civil lawsuits in exchange for a share of a settlement or judgment.

Despite approving a $40 million settlement in a securities class action case – of which third party funders got a 30% cut – Judge Jonathan Beach of the Federal Court of Australia said that, moving forward, judges may take a more active role in regulating the amount a third-party funder can take from a settlement. Judge Beach also questioned why judges have not cracked down on excessive payouts to third parties from the beginning.

What makes Judge Beach’s comments all the more interesting is that Australia is widely considered the birthplace of third-party litigation financing.

Ruth Overington, a partner at the international law firm of Herbert Smith Freehills, told the Financial Review that litigation funders should tread carefully following this ruling, as funders “will be under ever more scrutiny to justify to the court why the return they seek is both proportionate and reasonable.”

This is welcome news from the country where the spread of third-party litigation funding across the globe started, and it could not have come at a better time.

The industry is growing rapidly and globally. While those who bankroll lawsuits all over the world say their analyses are thorough and rigorous, it is important to remember that these funders are investors, not lawyers. The infamous Chevron v. Donziger case reminds of how nefarious TPLF can be. Third party funders invested $4 million dollars in the case riddled with fraud, and led plaintiff’s counsel down an unseemly litigation strategy. The case shows that funders have high-risk appetites and are willing to back claims of questionable merit.

NERA Economic Consulting recently found that TPLF is responsible for much of the recent increase in securities class action litigation in Australia.

Additionally, the United Kingdom is having issues with TPLF. The UK’s fundamentally flawed voluntary code of conduct  provides little framework for regulation. As a result, UK funders have realized a staggering 700 percent increase in global assets under management since 2009.

As the U.S. Chamber Institute for Legal Reform has highlighted numerous times in the past, TPLF has also become rampant in the U.S. and has begun to catch the eye of judges, lawmakers, and defendants alike.

In 2015, U.S. Senate Judiciary Committee Chairman Charles Grassley (R-IA) and U.S. Senate Assistant Majority Leader John Cornyn (R-TX) sent a letter to the top litigation funders expressing concerns about the lack of transparency in the industry. In fact, 93% of federal judges in 2014 told George Mason University that they were not even aware of third party litigation financing being used in their courtrooms and two thirds of state and federal judges thought TPLF was an unacceptable practice. In an industry in which an investor can charge a 60% yearly interest rate, transparency is not only expected, but needed.

Thankfully, these comments, and recent developments out of the U.S. District Court for the Northern District of California, are a step in the right direction. Judges, defendants, and consumers have the right to know who has a stake in a lawsuit in which they’re involved.

Investing and profiting off litigation has become a booming industry. In a virtually unregulated industry, any step toward a responsible solution is welcome.