Third-party funding of collective actions: is it all that bad?

Third-party litigation funding refers to an arrangement whereby a third party, who has no other connection to the litigation, finances some or all of a party's legal costs in return for a share of any proceeds of the litigation. While third-party funding solves the problem of funding the litigation and enables wider access to justice for consumers, it could lead to excessive economic costs, opportunistic and 'frivolous claims'. For these reasons, since the introduction of collective redress opportunities, there has been strong resistance in Europe towards third-party funding that was often said to lead to 'US-style' class actions. Instead, in Europe, we developed 'collective actions' that enabled the protection of consumers without the 'questionable' third-party funding.  

 

While there is no doubt the introduction of collective redress for consumers in Europe had been an important milestone in the protection of consumers, the absence of sufficient funding of these expensive litigations often undermined the effectiveness of national collective redress mechanisms. Practice showed that funding is a problem, that prompted some Member States to allow for third-party funding. 

 

This trend has been now accknowledged by the new Directive 2020/1828 on Representative Actions for the protection of collective interests of consumers that devoted Article 10 to this question. The provision leaves it up to the national legislator to introduce third-party funding laying down certain standards that such legislative measure has to comply with. Importantly, conflicts of interests should be avoided and the representative action should in no way be diverted away from the aim of protecting consumers.

A recent study published by the European Parliament (J. Saulnier et al): Responsible private funding of litigation argues for the need for effective safeguards to develop responsible third-party litigation funding in the EU. The study outlines a number of regulatory gaps and challenges that the EU must overcome to improve responsible private litigation. To this effect, it discusses various approaches to the contractual, ethical, and procedural aspects of third-party funding.  Specifically, the study highlights the main policy options at EU level – including both legislative initiatives and self-regulation – that may represent effective safeguards against the risks associated with thid-party litigation funding. The Report may be an important read for our readers interested in consumer dispute resolution and collective redress.