Private Litigation and Third-Party Litigation Funding: Developments in Europe

Introduction

Third party litigation funding (TPLF) has been generally available in continental Europe for decades and has particularly grown to be seriously considered with the rise of private cartel damages litigation since the mid-2000s. Cartel damages litigation following the European truck cartel, which the European Commission fined with roughly 4 billion euros in 2016 and 2017, may be considered as the peak for TPLF activities in continental Europe, with the majority of larger plaintiffs being litigation-funded in various ways. TPLF has also come more into focus in connection with the European Collective Redress Directive, which provides that EU member states may allow, or prohibit, TPLF in collective actions regarding consumer claims. The importance of the topic is also evidenced by the recent establishment of the European Litigation Funders Association (ELFA). While any serious issues are not known to have arisen from TPLF arrangements in Europe, the perception appears to be that TPLF needs regulation.

Legislative Developments

The “Added Value Assessment” by the European Parliament Research Service

In March 2021, the European Parliamentary Research Service published its report, Responsible Private Funding of Litigation – European Added Value Assessment.

The study concludes that responsible TPLF legislation could lower costs, simplify unnecessary procedures, and increase the predictability of the costs involved in litigation funding.

It argues that a lack of legislative intervention could lead to excessive economic costs and the funding of opportunistic and frivolous claims. The authors in particular associate this danger with an increase in “portfolio litigation practices,” where funders spread the risks of funding disputes over several cases, which could, in the authors’ view, encourage the investment into cases with little merit. It is noteworthy that these fears are only being stated in a hypothetical manner, without any evidence that such issues have occurred significantly so far. The authors explain that, currently, there is a lack of legal certainty for courts, litigation funders, lawyers, claimants, and defendants. This would lead to resistance against TPLF from courts unsure of the right procedure in TPLF cases as well as from claimants who may be wary of giving up control of their cases. These resistances may be limiting opportunities in the TPLF sector. The authors thus estimate that approved, legitimate funders could experience substantial growth once a sensible framework is established.

The Voss Report

On July 17, 2021, Axel Voss, a member of the European Parliament with the conservative European People’s Party (EEP) and a legal policy spokesperson of the EPP group, published the Draft Report with Recommendations to the Commission on Responsible Private Funding of Litigation (the Voss Report). Voss has spoken out against collective redress for European consumers in the past.

The Voss Report argues for the establishment of a uniform European legal framework for TPLF, based on several arguments. Inter alia, the Voss Report fears that, while TPLF is a rapidly growing market in the EU, litigation funders are prioritizing their own profits to the detriment of plaintiffs. The profit share of funders would therefore often be disproportionately high. The Voss Report further references studies in other jurisdictions, namely Australia, in which litigation funders would not have contributed to fairer outcomes. It alleges that, under current rules, litigation funders operate in a largely opaque manner. The absence of a Union-wide legal framework would allegedly allow for forum shopping of funders and would thus undermine the internal European market.

The Voss Report however does not seriously address the relevant arguments for the policy raison d'être of TPLF (such as overcoming the rational disinterest of claimants in enforcing low value claims and helping to achieve a level playing field for plaintiffs and defendants). Furthermore, it does not take into account that, while there may be a need for a certain degree of consumer protection (which is already covered by the Collective Redress Directive), any regulation of TPLF arrangements between funders and companies may not be necessary. In light of the freedom of contract, companies should be able to unregulatedly decide whether to use TPLF and under which conditions. Because of this unbalanced approach, the Voss Report overall fails to adequately weigh the alleged need for a sensible regulatory framework and TPLF as a tool for access to justice.

Adoption by the European Parliament

Nevertheless, many of the measures proposed in the Voss Report were adopted by the European Parliament in the Resolution with Recommendations to the Commission on Responsible Private Funding of Litigation on September 13, 2022 (the Resolution). The proposal was adopted with 80% of the votes.

Compared to the Voss Report, the introductory memorandum to the Resolution shows a slightly more balanced approach. For example, while the Voss report states only perceived dangers of TPLF, the text of the Resolution explicitly stresses the advantages of TPLF. If properly regulated, TPLF could “be used more often as a tool to support access to justice,” especially in jurisdictions with high legal costs, and not least for marginalized groups with funding barriers. The Resolution also points out the prevalence of TPLF in Australia, the United States, Canada, the United Kingdom, and the Netherlands and highlights the importance of TPLF in a collective redress context, calling it a “key aspect of collective redress, which has an important cross-border dimension.” Nonetheless, the Resolution acknowledges a risk of potentially abusive TPLF practices and thus aims at creating a framework allowing for supervision and regulation of authorized litigation funders while not hindering the access to justice for claimants.

According to the Resolution, member states shall be free to allow or exclude TPLF. If they decide to admit TPLF, they shall set up a system for the registration and authorization of litigation funders. The supervisory body shall have the authority to grant or deny accreditation to litigation funders and shall review at least annually whether the conditions for the authorization are still being met.

According to the Resolution, several requirements shall be met by funders:

• The funder has to have its registered office in the member state in which it applies for authorization. It will also need to demonstrate sufficient capital for the activity sought and show that it has established adequate compliance structures. Finally, litigation funders should be required to enforce the interests of claimants in a fiduciary capacity. Once a funder is authorized in one member state, the other member states shall mutually recognize this authorization.
• The proposed legislation provides for several requirements for litigation financing contracts. Inter alia, the contract needs to include a declaration of absence of any conflicts of interest. Also, clauses shall be invalid that leave to the litigation funder the decision on the choice of claims pursued, the conclusion of a settlement or the management of costs. The same applies to clauses that grant the litigation funder a minimum share before the claimant receives its share. In principle, a litigation financing agreement according to which the claimant’s share would fall below 60% of the gross proceeds shall not be allowed.
• Furthermore, according to the proposed legislation, the existence of a litigation financing contract should have to be disclosed to the court and defendants shall be made aware of the existence of the TPLF agreement and the identity of the litigation funder.

All in all, the proposed legislation is a mixed bag for businesses, funders, and plaintiffs. It is not the robust framework that the European Parliament’s report had promised, which would remove all existing doubts in the legal system, expand opportunities, and allow the TPLF sector to flourish. The bureaucratic effort of the proposed supervisory procedures seems huge. Also, the legislation will enable forum shopping by giving member states the choice between allowing and prohibiting TPLF. In addition, the proposed legislation appears inconsistent insofar as member states will be able to prohibit TPLF in their jurisdiction but presumably nonetheless may have to recognize funders authorized in different, more liberal member states. On the other hand, the Resolution does not seem to be the prohibitive framework that the Voss Report seems to have envisaged. While the Voss Report only sees dangers in TPLF practices, the adopted Resolution regards TPLF as an important tool to enable collective redress and access to justice.

Next Legislative Steps

Since the European Parliament lacks the formal right of legislative initiatives, it requested the European Commission to introduce its own proposal. As of yet, there is no news on whether the European Commission plans to follow the European Parliament’s proposals or intends to come up with something different or with anything at all.

The European Commission’s course of action might be influenced by the transposition of the Collective Redress Directive by the EU member states, which will necessarily touch on aspects of TPLF in consumer collective redress cases. The European Commission may thus want to monitor how the Collective Redress Directive affects the TPLF market before acting on a potential holistic TPLF regulation beyond the consumer claims world.

Outlook

At this point, it is hard to foresee whether litigation funders will be able to access a growing market under a sensible EU-wide framework or whether overly strict regulation will hinder further growth. An unbalanced regulation of TPLF will not only affect consumer cases, but also TPLF for companies. It may in particular affect the opportunities of private cartel damages litigation and may thereby affect the effectiveness of the European Cartel Damages Directive, which is built on the principle of both public and private enforcement being necessary to bring European competition law to its full effectiveness.

The alternative to TPLF is the assignment of damages claims (e.g., consumer or cartel) to a claims collection vehicle or the sale of such claims to investors and the “self-funding” of litigation by such investors. This is because funding is only considered TPLF if the funder is not itself a party to the litigation. This option has become more relevant in particular in cartel damages litigation in recent years but requires a much larger upfront investment and willingness to take risk than traditional TPLF. A full purchase of claims from victims may therefore not be suitable from an investor’s perspective in all types of cases that would require funding from a victim’s perspective.

With a view to the traditional European the loser pays principle, an overly rigorous regulation of TPLF may increase victims’ rational disinterest in bringing unfunded cases, reduce the full effectiveness of European consumer protection and competition law, and significantly limit access to justice.