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Illusory Truths and Frivolous Claims: Critical Reflections on a Report on Litigation Funding by the European Parliamentary Research Service

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YSEC Yearbook of Socio-Economic Constitutions 2022

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Abstract

This paper presents a close reading of the European Parliamentary Research Service’s (EPRS), report ‘Responsible private funding of litigation’, which was prepared to assist the Members of the European Parliament with an objective and authoritative analysis of litigation funding and its effects in order to consider implementing policies on a yet unregulated market. The report raises significant concerns with respect to, inter alia, the alleged lack of a clear and comprehensive taxonomy for the litigation funding practice, as well as the perceived risk for frivolous claims and conflicts of interest whereby funders allegedly corrupt justice by influencing funded parties in settlement situations. However, through careful analysis of the report, it is shown in this paper that several critical conclusions on the purported drawbacks of litigation funding set forth in the report are not founded in the research presented in the report itself but rather contradict its actual findings.

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Notes

  1. 1.

    Committee on Legal Affairs’ Report with recommendations to the Commission on Responsible private funding of litigation, 2020/2130(INL), 25 July 2022, p. 33.

  2. 2.

    European Parliamentary Research Service (2021). The EPRS is “the European Parliament’s in-house research department and think tank. Its mission is to assist Members in their parliamentary work by providing them with independent, objective and authoritative analysis of, and research on, policy issues relating to the European Union.” https://knowledge4policy.ec.europa.eu/organisation/eprs-european-parliament-research-service_en.

  3. 3.

    The EPRS report, preface.

  4. 4.

    The EPRS report, p. I. The annex is entitled State of play of the EU private litigation funding landscape and the current EU rules applicable to private litigation funding.

  5. 5.

    The EPRS report, p. I.

  6. 6.

    The EPRS report, p. I.

  7. 7.

    The EPRS report, p. 82.

  8. 8.

    The EPRS report, pp. 2 and 91.

  9. 9.

    The EPRS report, p. 33.

  10. 10.

    The EPRS report, p. 18.

  11. 11.

    The EPRS report, p. 19.

  12. 12.

    The EPRS report, p. 43.

  13. 13.

    Cf. “either individually or as part of a specific range of cases”. Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, 2018, p. 50.

  14. 14.

    Thus, the EPRS report sets out in a separate definition that “‘Portfolio Litigation Funding (PLF)’ refers to the professional practice of funding a portfolio of disputes for business purposes.” (The EPRS report, p. 43.) The reason to define portfolio funding separately is unclear, particularly as the acronym PLF is used only twice in the EPRS report (pp. 60 and 73); whereas the full term “Portfolio Litigation Funding”, stated to be one of “the fundamental concepts discussed in the study” (p. 43), is actually never used in the report.

  15. 15.

    Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, 2018, p. 50.

  16. 16.

    The direct funding of a specific representative action by a trader operating in the same market as the defendant should be considered to imply a conflict of interest, since the competitor could have an economic interest in the outcome of the representative action which would not be the same as the consumers’ interest.” Directive 2020/1828, item (52). See also Article 10, Section 2 (b).

  17. 17.

    The EPRS report, p. I.

  18. 18.

    The EPRS report, p. 43.

  19. 19.

    Cf. “…such support or financing is either provided in exchange for remuneration […] or provided through a grant […]”. Report of the ICCA-Queen Mary Task Force on Third-Party Funding in International Arbitration, 2018, p. 50.

  20. 20.

    The EPRS report, p. 76.

  21. 21.

    Solas (2019), p. 4.

  22. 22.

    If the intention of the EPRS report instead is that the definition should not be read such as to exclude insurers per se, it should be noted that there are some grammatical issues which provide further uncertainty, as the definition does not refer to any “insurer”, but “insurer of such a party”. Only insurers of a certain party (“such a party”) may thus fall within the definition of TPLF. One would of course presume such party to be the insured or funded party. However, that is not what the definition says. Rather, there is only one party mentioned which could be referred to when using the language “such party”, and that is an “entity that is not a party to a dispute”. Thus, if narrowly construed in accordance with its letter, the definition states that an insurer of a non-party which bears the cost of the dispute in exchange for a percentage of the financial recovery would be considered a funder. Of course, that could not be the intention of the EPRS and it must be the case that the modifier in the definition is simply misplaced.

  23. 23.

    European Parliamentary Research Service (2017), p. 18.

  24. 24.

    The EPRS report, p. I. As was discussed in Sect. 3.2, due to the definition of TPLF as used in the EPRS report, it is unclear whether portfolio funding (or PLF, as the EPRS report defines it) should be understood to fall within the term TPLF as used throughout the EPRS report. In the above quoted passage, reference must be understood to be made only to frivolous single claims in the first paragraph, as the concept of portfolio funding is not introduced until the second paragraph.

  25. 25.

    The EPRS report, p. 27.

  26. 26.

    The EPRS report, p. 29.

  27. 27.

    The EPRS report, p. 30.

  28. 28.

    The EPRS report, p. 30.

  29. 29.

    The EPRS report, p. 18. See also p. 20. With respect to the term “portfolio TPLF”, it is of some interest since it shows—as argued in Sect. 3.2 above—that the term TPLF as defined in the EPRS report does in fact not cover portfolio funding, but only single claim funding (otherwise, the addition of “portfolio” would have been circular). This also shows that the repeated assertions throughout the report that TPLF has a high risk for frivolous claims should be understood as—or intended to be understood as—a reference to single claim funding. It is not clear why the EPRS report does not in this context use the acronym PLF which it—in its attempt to “clarify some terminology used” (p. 43) has defined as “the professional practice of funding a portfolio of disputes for business purposes” (p. 43).

  30. 30.

    The EPRS report, pp. I, III, 1, 2, 18, 20, 25, 27, 29, 30, 31, 32, and 33.

  31. 31.

    The EPRS report, pp. 18 and 20.

  32. 32.

    The EPRS report, p. 74.

  33. 33.

    https://www.judiciary.uk/wp-content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf, p. 117.

  34. 34.

    The EPRS report, p. 18, emphasis added.

  35. 35.

    The EPRS report, pp. 77–78, emphasis added.

  36. 36.

    The EPRS report, p. 78, footnote 137, emphasis added.

  37. 37.

    The EPRS report, p. 65, emphasis added.

  38. 38.

    The EPRS report, p. 20, footnote 46.

  39. 39.

    See, e.g. Code of Conduct for European Lawyers, item 3.3, p. 17.

  40. 40.

    The European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs, The Effectiveness of Conflict of Interest Policies in the EU Member States, 2020, p. 8. According to Blacks’ Law Dictionary, a conflict of interest means the following: “1. A real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties. 2. A real or seeming incompatibility between the interests of two of a lawyer’s clients, such that the lawyer is disqualified from representing both clients if the dual representation adversely affects either client or if the clients do not consent.

  41. 41.

    The European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs, The Effectiveness of Conflict of Interest Policies in the EU Member States, 2020, p. 38.

  42. 42.

    The European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs, The Effectiveness of Conflict of Interest Policies in the EU Member States, 2020, p. 36.

  43. 43.

    See, e.g., Griffiths-Baker (2002).

  44. 44.

    The EPRS report, p. I. It is further stated that “[t]he lawyer might also be in a potential conflict of interests with clients, given that the former usually obtains their fees directly from the litigation funder.” (Ibid.) Any issue relating to conflicts of interest for a lawyer when representing a client (whether or not such client has entered into a litigation funding deal) is mainly a problem of general character for any legal services provider which is and should be thoroughly dealt with in relevant Bar rules, legislation or soft law applicable to attorneys and will not be further discussed in this paper (as it is not a particular problem relating to TPLF).

  45. 45.

    The EPRS report, p. 75.

  46. 46.

    With respect to any conflict of interest for an attorney, please see footnote 44.

  47. 47.

    The EPRS report, p. 87.

  48. 48.

    The EPRS report, pp. 21 and 87.

  49. 49.

    The EPRS report, p. 72.

  50. 50.

    The EPRS report, p. 5, footnote 13. There may exist specific arrangements among some funders that could involve the rendering of services under certain contracts; that would however not be considered the ordinary type of TPLF deal, cf. the definition of TPLF and Third Party Litigation Funder in the EPRS report as discussed above in this paper.

  51. 51.

    The funder may of course use other tactics in a settlement situation than as formally agreed under the contract, such as negotiating with the funded party that the funder will lower its profit share if the funded party accepts the settlement. That means that the funded party is presented with a new and better alternative which it may or may not accept.

  52. 52.

    The EPRS report only refers to the fact that a proposed Directive on common minimum standards of civil procedure in the EU has been suggested to include a provision under which a funder should not be allowed to influence procedural decisions of the funded party: “Member States shall ensure that in cases where a legal action is funded by a private third party, the private third party shall not: (a) seek to influence procedural decisions of the claimant party, including on settlements”. Article 16, European Parliament resolution of 4 July 2017 with recommendations to the Commission on common minimum standards of civil procedure in the European Union (2015/2084(INL)). Even if no such influence were to be allowed, that does not mean that exercising such influence would constitute a “conflict of interest”.

  53. 53.

    The EPRS report, pp. 72 f.

  54. 54.

    Directive 2020/1828, Article 10.

  55. 55.

    The EPRS report, p. 72.

  56. 56.

    The EPRS report, p. 72, footnote 117, emphasis added, square brackets in original.

  57. 57.

    The statements made are thus in contradiction with the title of the annexed study—State of play of the EU private litigation funding landscape and the current EU rules applicable to private litigation funding.

  58. 58.

    The EPRS report, p. 72.

  59. 59.

    The EPRS report, p. 65.

  60. 60.

    The EPRS report, p. 65, footnote 87.

  61. 61.

    Cf. that the lowest success chance rate referenced and reported by any funder is “higher than 50 %”.

  62. 62.

    It may be presumed that the LFA in the example contains an adverse costs protection clause, as there is no downside risk mentioned for the claimant in respect of a loss (it is only stated than in case of loss, claimant will receive 0 EUR; i.e. there is no mentioning that claimant should also pay the adverse costs and thus have a negative result, which is of course a major factor when considering whether to accept a settlement offer or risk not only the full disputed amount but also having to pay adverse costs). As the loser pays rule with respect to cost of proceedings applies throughout the EU, it is clear that someone has to foot the bill—if there is not a risk for claimant in this respect (which seems to be the case as this significant piece of information is not mentioned in the hypo), that means that claimant has contracted with the funder to do so. Full adverse costs are thus part of the funder’s exposure if the case goes to trial, which of course affects the pricing of the deal.

  63. 63.

    Under the same logic, the funder cannot expect a EUR 40 payoff in the judgment scenario, since it will receive a success fee of EUR 80 (if the case is won) or lose its entire investment and have to pay the defendant’s adverse costs, which means that under a loss scenario, the funder not only receives EUR 0 (zero), but has a much worse result because it even has to make further payments for adverse costs, resulting in a significant negative result. It is thus not even true that the financial value of the claim for the funder in the judgment scenario is EUR 40, but significantly less, taking into account the adverse costs in the loss scenario. Why the EPRS report does not mention the adverse cost issue—one of the most important issues for any serious considerations in a TPLF deal and in a settlement scenario—is not clear. It may have suited the EPRS not to do so.

  64. 64.

    The EPRS report, p. 55.

  65. 65.

    There may exist individual cases where the funder’s remuneration reaches such extraordinary level—that would however only be the case if the claim is not nearly as successful as expected (and provided that the funder has priority for its success fee under the waterfall agreement).

  66. 66.

    The EPRS report, p. 46.

  67. 67.

    Remuneration under LFAs are generally based on either a percentage of the recovery (which may be unaffected as to the fee split as such at time of settlement or trial but where the amounts would be substantially different for both the funded party and the funder, i.e. higher for both if the case succeeds after trial instead of settling), or through a multiple approach, where the funder would be paid a higher amount as time evolves (i.e. later pay-out means higher multiple), but where the level of recovery for the claimant does not affect the remuneration payable to the funder (provided that such remuneration does not exceed the funded party’s recovery).

  68. 68.

    The EPRS report, p. 55, footnote 38.

  69. 69.

    The EPRS report, p. 46.

  70. 70.

    The paragraph in Rowles-Davies to which the EPRS report refers reads as follows: “In most cases, a litigation funder would look to ensure that the ratio of likely quantum of damages to the budget is a minimum of one to four, with most looking at a more likely ratio of one to ten. If the budget to trial for a proposed case is £1m then the likely quantum needs to be a minimum of £10m for a funder to be satisfied that it is a case to fund. Again, this is not a strict rule, but it is, in the author’s experience, an industry norm.” Rowles-Davies (2014), p. 10, para. 1.48.

  71. 71.

    The EPRS report, p. 87.

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Skog, J. (2023). Illusory Truths and Frivolous Claims: Critical Reflections on a Report on Litigation Funding by the European Parliamentary Research Service. In: Storskrubb, E. (eds) YSEC Yearbook of Socio-Economic Constitutions 2022. YSEC Yearbook of Socio-Economic Constitutions, vol 2022. Springer, Cham. https://doi.org/10.1007/16495_2023_44

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