EU Parliament directive proposal on litigation funding

On 13 September 2022, the EU Parliament proposed a directive on "responsible private funding of litigation". This was to be expected and comes as no surprise in terms of both substance and content. Some already fear the end of commercial litigation financing (cf. Kolba, press release 16.09.22). But this does not have to be the case.

What exactly is the Parliament asking for? Essentially three things:

1. Regulation and supervision of litigation financiers.

After the industry has failed for years to organise itself in the EU and to regulate itself, it is logical that with the increasing volume of financing, the legislator feels compelled to take measures. A uniform EU regulation is demanded, which makes perfect sense because many proceedings today are cross-border and/or have several jurisdictions. Further a minimum capital, a registered office in the Union and an ombudsman's office for consumer complaints.

2. Upper limit for profit-sharing

A central aspect of regulation naturally had to be the desire for an upper limit for the financier's participation. It is demanded that at least 60% should remain with the claimant. At first sight, this is unproblematic, since in Europe rarely more than 40% profit participation is demanded anyway. However, it is problematic that for this purpose “all damages, costs, fees and other expenses” are to be included in the financier's share. This is unfair and unnecessary. The financier, as the cost bearer, will pay close attention to keeping these under control. If they exceed the originally calculated amount, this is due to the course of the proceedings and not infrequently to the fact that the defendant – which is his right – appeals. It must therefore remain the case that procedural costs are always initially serviced from procedural proceeds, even if this means that not much is left over in the end. This fate is then shared by the financier and the plaintiff. A different situation could apply if the mandated lawyers have a stake in the litigation financier, but abuse through excessive fees is likely to be the exception, at least in Europe (excluding the UK!). A fair compromise would be to set the upper limit at 50%, after compensation of all legal costs. Incidentally, this would be in line with current practice. However, it is problematic that the funder should not be allowed to “abandon funded parties (…) at any time”. This sounds like a “community of risk”, but it is only conditionally such. The financier is an investor who wants to make money and not sink it, and that is a good thing. This guarantees that procedures that are no longer promising will be terminated.

3. Disclosure and transparency

Disclosure of litigation funding? Why not? After more than 23 years, commercial litigation funding is a recognised and widely used instrument and no longer needs to hide. In a large part of the proceedings, disclosure is already made today and in consumer cases, idR class actions, this is done anyway in the context of bookbuilding. What is required is the naming of the financing company and the disclosure of the financing contract. This is unproblematic as long as the financing conditions and agreements on the conduct of the lawsuit and the enforcement of the claim remain secret. Anything else would be a violation of the fair trial, as the defendant could use the knowledge of the financial framework and approach for its strategy.

Conclusion:

Litigation finance regulation is coming, and it may – in a sensible form – even help the industry to grow further if the following key points are observed:

a uniform Union framework in coordination with the Directive EU 2020/1828
no over-regulation, agreement on appropriate minimum standards
a cap on profit-sharing at a maximum of 50% of the remaining revenue after costs and not more than that
preservation of the financier's entrepreneurial freedom to withdraw from proceedings at any time, provided that he indemnifies the claimant against all costs up to that point or until immediate termination.

The aim of the industry should now be to use regulation to be allowed to finance consumer associations in the sense of the Directive without restrictions in the future. This would help everyone:

A better consumer protection, an effective law enforcement and an industry that has always been committed to providing access to justice for everyone.