Third Party Funding in Class Actions

Third party litigation funding (TPLF) has emerged as a significant force in the legal landscape, particularly in the context of class actions. This practice involves external financiers, such as hedge funds or banks, providing capital to plaintiffs in exchange for a portion of any settlement or judgment. This article explores the implications, benefits, and challenges associated with TPLF in class actions.

What is Third Party Litigation Funding?

Third party litigation funding is a financial arrangement where a third-party entity agrees to pay for some or all of the costs associated with a lawsuit. In return, the funder receives a percentage of the proceeds if the case is successful. This model has gained traction since its inception in Australia in 2001 and has since expanded globally.

How TPLF Works in Class Actions

In class action lawsuits, where a group of individuals collectively bring a claim against a defendant, TPLF can play a crucial role. Here’s how it typically works:

1. Initial Assessment: The funder evaluates the merits of the case, including the likelihood of success and potential damages.
2. Funding Agreement: If the case is deemed viable, the funder and the plaintiffs enter into a funding agreement outlining the terms, including the percentage of any recovery that will go to the funder.
3. Case Management: The funder may also provide resources or expertise to help manage the litigation process.
4. Settlement or Judgment: Upon a successful outcome, the funder receives their agreed-upon share of the settlement or judgment.

Benefits of Third Party Funding

There are several advantages to utilizing TPLF in class actions:

• Access to Justice: TPLF allows individuals who may not have the financial means to pursue a lawsuit to do so, leveling the playing field against larger corporations.
• Risk Mitigation: Plaintiffs can pursue their claims without the risk of incurring significant legal costs, as the funder assumes this financial burden.
• Increased Resources: Funders often bring additional resources and expertise to the case, potentially improving the chances of a favorable outcome.

Challenges and Concerns

Despite its benefits, TPLF is not without challenges and concerns:

• Potential for Abuse: Critics argue that TPLF can lead to frivolous lawsuits, as the financial incentive may encourage litigation that lacks merit.
• Impact on Settlements: The involvement of third-party funders may complicate settlement negotiations, as they seek to maximize their return on investment.
• Regulatory Scrutiny: As TPLF continues to grow, it faces increasing scrutiny from regulators and legal professionals who are concerned about its implications for the justice system.

The Future of TPLF in Class Actions

The landscape of third party litigation funding is evolving. As more jurisdictions recognize and regulate TPLF, its role in class actions is likely to expand. Legal professionals and businesses must stay informed about these developments to navigate the complexities of this funding model effectively.

Conclusion

Third party litigation funding represents a significant shift in how class actions are financed and pursued. While it offers valuable opportunities for plaintiffs, it also raises important questions about the integrity of the legal system. As this industry continues to grow, its impact on the legal landscape will be an area to watch closely.