Third party litigation funding has become intriguing development in the expansion of global class and collective action litigation over the past several years, particularly in Australia. (For various previous CAB articles addressing third party litigation funding, click here). The concept of third party litigation funding generally refers to financing of litigation by a private party or corporation that is not a party to the dispute, in exchange for a right to a portion of the recovery if the litigation is successful.
In the U.S., the ethical rules prohibiting fee-splitting with nonlawyers made most types of third party litigation funding improper (see Model Rules of Prof’l Conduct, R. 5.4(a)), while the existence of law firm funding through contingent fee arrangements (Model Rules of Prof’l Conduct, R. 1.5(c)) made nonlawyer sources of funding unnecessary for the development of class action litigation.
However, in other parts of the world, where contingent fees are prohibited, third party litigation funding has developed as an alternative to provide a means for plaintiffs to pay for class action litigation and to avoid the risks associated with the English rule, or “loser-pays” rule, which requires the loser of a case to pay the other side’s costs and attorneys’ fees.
Sue Lannin, financial reporter for ABC (Australia Broadcasting Corporation) News, published this article on Wednesday discussing the impact that private litigation funding may be having on class action litigation in Australia. The article quotes one Australian attorney who believes that private litigation funding is responsible for a recent increase in shareholder class actions and will likely continue to generate an explosion of class action litigation in that country. However, the article also quotes an attorney with a contrary view, that the recent increase in shareholder class actions is simply the result of the financial crisis in the latter part of the last decade.
The combination of deep pockets and the legal ability to pursue class action litigation for profit would appear to be a good recipe for expanding class action litigation anywhere, but whether litigation funding in Australia actually creates a “US-style litigation culture with unregulated legal financiers shopping around for cases” remains to be seen.