EJF calls on policymakers to strengthen safeguards for litigation funding in the Directive on Representative actions

Funding of collective litigation can come from Member States, e.g. by legal aid as in the UK during the 1990ies, or as in Germany today by providing budget to the German Federal Consumer Protection Organization “vzbv”, or it can come from private initiatives and private investors.

The practice of providing money to a party to pursue a lawsuit in return for a share of any damages obtained, the so-called Third Party Litigation Funding (TPLF), turns the pursuit of legal entitlements into a business model of its own. Given the high returns expected in this field for “investments”, there is an inherent risk that such private litigation funding creates impulses for the abuse of any means of collective redress due to the leverage coming with the large number of potential beneficiaries. This business can become so attractive for funders that they invest into portfolios of claims – to spread the risk of single actions – or even subsidize law firms to set up offices.

Stricter admission conditions are of the essence to contain danger of abuse

Policymakers may perceive TPLF of representative action lawsuits in the Union as the only quickly available means to facilitate access to justice for consumers, to the extent that the litigation risk is borne by third parties and not by the beneficiaries. But litigation funders’ profit interest will lead them towards using such collective redress platforms as suit best their interest in maximising their profits. This may or may not be a Representative Action based on the EU Directive, but the push and attention being given by its introduction to the funders’ business in general will lead to a multiplication of collective actions in the Union. In order to prevent abuse of any form of collective action by litigation funders, TPLFs’ monetary incentives like excessive fees or interest payments or participation in the awards achieved (“quota litis”), should be controlled through broader and stricter safeguards. Therefore, Art.7 as adopted in the European Parliament’s position needs to be reintroduced and would be the ideal place to aggregate harmonised conditions for the admission of an EU Representative Action for Redress with a firm look to avoiding its dangers resulting mostly from monetary incentives for third parties. In this respect the use of Ad-hoc-entities, originally admitted by the Commission and in the Council text, is to be banned. Moreover, contingency fees for lawyers and other participants in the procedure, such as TPLFs and claims collection vehicles, need to be prohibited because they usually eat into the compensation awarded to the beneficiaries and even worse, are the fuel which ignites the fire of abuse making risk-free and even inconsiderate participation possible for anybody.

Recommendation to ensure transparency of funding of each individual action

The disclosure of all information about the financial background of each action, i.e. disclosing the funding and all related contracts, minimizes the danger of conflicts of interests and helps to ensure that it is really the plaintiff representing the beneficiaries who has control over the litigation and not its funder. Moreover, the full disclosure of information will facilitate efficient proportionality and cost shifting decisions, while it will also facilitate more realistic settlement negotiations. Such disclosure is becoming more and more the practice in jurisdictions with long-standing experience with representative actions (e.g. in the US state of Wisconsin).

Transparency of funding for each single action brought under the Directive is essential. As foreseen in the initial Commission proposal, courts and administrative authorities need to be empowered to assess at the earliest stage of the action the circumstances of the funding and accordingly may require the QE to refuse the relevant funding in case of influence on decisions or conflict of interest. It is of the essence that these criteria be the same across the Union and that they be applied consistently; this cannot be left to Member State choices. As it seems to be a current topic for decision-makers, funding support for QEs by Member States may be an important tool not to push them into the hands of profit seeking private actors.

Please contact us for concrete proposals on Transparency of Litigation Funding for the Trilogue negotiations regarding the Directive on Representative Actions.

For further general information, please see also our position paper.