The litigation funding stampede: coming soon to a courtroom near you?
03rd Oct 2016
By: Lisa A. Rickard, President, U.S. Chamber Institute for Legal Reform
Buffalo stampedes were a staple of the old Hollywood Westerns. The cowboys would often ignore the first few running animals only to panic moments later as the thundering herd trampled everything in its path. And the stampede, once started, usually ended badly.
Sadly for the UK and Europe, the stampede of third party litigation funding (TPLF) has begun in ways that some have warned against for several years.
Heading to a London court is a novel class action lawsuit against MasterCard brought on behalf of 46 million British cardholders by the American-based law firm Quinn Emmanuel and US lawsuit funder Gerchen Keller Capital LLC. The suit is claiming damages of £14 billion (US$18.2 billion) for alleged overcharges of interchange fees. This is the largest amount in damages ever claimed in the UK.
Though the credit card fees are paid by merchants, the suit claims that the cost of the fees was passed to the consumers in the form of higher prices. The proposed lawsuit will be filed under the UK’s year-old Consumer Rights Act, which permits private parties to seek collective redress for alleged competition law violations. The MasterCard suit is just the latest in a string of cases in the UK and across Europe using litigation financing.
TPLF is a relatively new construct created a little more than a decade ago in Australia that has now spread around the world as a way for mostly high finance hedge funds to invest in lawsuits. Financiers with no connection to a dispute invest funds to pay the costs of litigation in return for a large portion (as much as 40 percent or more) of a successful settlement or judgement.
As witnesses to the US lawsuit nightmare, we at the U.S. Chamber Institute for Legal Reform have been voicing our concerns for several years now about Europe’s move toward this sort of abuse of the civil court system. We are concerned that TPLF is the spark that will start a stampede of US-style litigation, particularly if this dangerous new financial tool continues to be ignored by legal and regulatory authorities.
Unfortunately we are being proved right.
Reportedly, Gerchen Keller Capital has committed to invest up to £40 million in the MasterCard case, its biggest overseas investment, mostly to underwrite the law firm’s fees. If the case is successful in garnering even one-half of the requested damages, and if Gerchen Keller Capital were to receive a third of the recovery, the funder would stand to walk away with over £3 billion. And that money would surely be put to work funding more European/UK lawsuits.
TPLF seeks to turn the courts into profit centers. Because funders’ profits are generated only when cases are litigated or arbitrated, TPLF will increase the number of lawsuits in a British society that is already seeing increased civil litigation. It also shifts control of lawsuit decisions toward funders rather than litigants, pressuring litigants to reject otherwise-reasonable resolutions to their lawsuits so that the TPLF provider will reach its profit goal.
TPLF has grown into a big finance tool. A 2015 study estimated that the top 16 TPLF providers in the UK now have at least £1.5 billion in global assets under management. In a letter last year to US Senators investigating TPLF, Burford Capital, a large international funder, disclosed that its rate of return is a whopping 60 percent. Burford also recently reported that in 2016 it has more than doubled its first-half year earnings with $52.8 million in profits as compared to $23.7 million earned during the first six months of 2015. This is a highly profitable industry, but unlike the rest of the financial sector, there is no independent authority that oversees this industry and much of their business presently occurs out of view of the public, the courts, and the regulators.
While many in the UK have dismissed concerns about the TPLF industry over recent years, some have raised questions. In a recent Conservative Home blog post, Lord Hodgson cautioned against TPLF when he said: “Common-sense safeguards are needed to protect consumers and to ensure that the civil justice system remains balanced, objective and transparent”. He went on to say: “Rules also need to be introduced ensuring full disclosure of any funding arrangements to the court”.
The MasterCard lawsuit is a stampede warning. UK and European policy makers should implement proposals for common-sense governance of lawsuit financiers now, before the lawyers and financiers turn the lawsuit environment here into one that mirrors the US.