01/03/2022

Proposed regulation of third party litigation funding by the EU

Kennedys is a member of the European Justice Forum (EJF), a not for profit organisation that promotes access to justice. The EJF develops position papers on topical EU subject matters in conjunction with its members and is in regular dialogue with EU institutions. We regularly engage with the EJF on matters of collective redress, with reference to the EU representative actions directive, and third party litigation funding (TPLF).

Unsafe products can lead to claims for reimbursement, compensation and/or other remedies. A rise in consumer led litigation and mass harm events, particularly in relation to consumer products, highlighted the need for EU consumers to have an effective mechanism by which they could bring group actions and enable access to justice. 

The EU’s Directive on representative actions (the Representative Actions Directive), which came into force on 24 December 2020, requires Member States to have in place regimes to facilitate group litigation in respect of infringements of EU law on the basis that magnitude of scale enables groups to pursue claims that would be uneconomic to pursue individually.  

Annex I to the Representative Actions Directive lists 66 EU laws in respect of which a representative action can be brought, including the Product Liability Directive (85/364/EEC) and the General Product Safety Directive (2001/95/EC) which form part of the EU’s wider product safety and product liability framework and is currently subject to various proposed reform initiatives.  

The Representative Actions Directive, in combination with increased availability of third party litigation funding (TPLF) and experienced US plaintiff law firms opening offices across Europe, provides fertile ground for future large scale product related group litigation.

Third party litigation funding concerns and proposed regulation

Group litigation, particularly in the form of class actions, attracts private investors as ‘third party litigation funders’ whose interest lies in obtaining a return on their investment out of the damages awards to plaintiffs. In recent years, there has been a proliferation of third party litigation funders (including US funders) in EU Members States, particularly in the Netherlands where group actions mechanisms are well established.   

As TPLF is largely unregulated across Europe, it is highly vulnerable to abuse. Although the Representative Actions Directive includes restrictions around the provision of TPLF, there are concerns that it does not go far enough to safeguard it from abuse.

In its Position Paper published in January 2022, the European Justice Forum (the EJF) directs policy-makers to the importance of TPLF regulation in order to prevent abuse, supporting the statement of Axel Voss, MEP who has made similar calls to the EU for TPLF regulation, including a proposal for a Directive, warning that EU consumers could become “pawns in profit seeking”.   

The European Parliament’s Legal Affairs Committee’s report to the European Commission dated 17 June 2021, led by Mr Voss, highlights in particular that product liability claims are “regularly assessed as too risky, impossible to settle or not profitable enough”, resulting in TPLF funders demanding excessive returns, often up to 300% or even 3,000%.

The EJF cautions that “for society as a whole, TPLF – if not properly regulated – could also lead to excessive costs (social inflation), in particular for consumers, be it in the guise of increased prices for future customers of companies successfully targets, be it in higher premia for e.g. general liability and commercial auto insurance, up to and including opportunistic or “frivolous” claims affecting innovation as well as the competitiveness of business”.

The Legal Affairs Committee’s report continues to be considered by the European Parliament. 

Kennedys continues to monitor the progress of the report and will report on future developments.