Journal of Law, Economics & Policy VOLUME 8 SPRING 2012 NUMBER 3 EDITORIAL BOARD 2011-2012 Larry Pounders Editor-in-Chief Shannon Minarik Daniel J. Wisniewski Executive Editor Managing Editor John Buckley Katie Barnes Mike DeRita Senior Articles Editor Senior Notes Editor Senior Research Editor Melissa Alfano Graham Dufault Daniel Glynn Elyse Dorsey Rachel Fertig Brendan Mullarkey Andrew Galle Articles Editors Notes Editors Research Editors Dallin Glenn Laura A. Lieberman Melissa Alfano Articles Submissions Editor Publications & Outreach Editor Symposium Editor MEMBERS Jarred Bomberg Malaikah Choudhry Kay Teng Corey Carpenter Benjamin Nelson William Wiegand Christina Newton CANDIDATE MEMBERS Peter Anderson Anthony Peter Kanakis Adam Park Emily Barber Hollie Kapos Alex Payne David Brodian Juan Kassar Tom Randall Michael Brody Jason Malashevich Adam Schneider Kylie Caporuscio Louise Martin Morgan De Ann Shields Benjamin Charlton Jacob Merrill Mark Stevens Nathaniel Harris Genevieve Miller Robert Strange Carolyn Head Elizabeth Newell Mark Weiss Jennifer Johnston Lauren Wynns i 1 Journal of Law, Economics & Policy VOLUME 8 SPRING 2012 NUMBER 3 BOARD OF ADVISORS Lisa E. Bernstein Francesco Parisi James M. Buchanan Eric Posner Judge Guido Calabresi Judge Richard A. Posner Lloyd R. Cohen Roberta Romano Robert D. Cooter Hans-Bernd Schäfer Robert C. Ellickson Steven M. Shavell Richard A. Epstein Henry E. Smith Judge Douglas H. Ginsburg Vernon L. Smith Mark F. Grady Gordon Tullock Bruce H. Kobayashi Thomas S. Ulen Henry G. Manne W. Kip Viscusi A. Douglas Melamed Todd J. Zywicki ii Journal of Law, Economics & Policy VOLUME 8 SPRING 2012 NUMBER 3 Contents 405 THIRD-PARTY LITIGATION FUNDING IN EUROPE Cento Veljanovski 451 THIRD-PARTY LITIGATION FUNDING IN AUSTRALIA AND EUROPE Dr. George R. Barker 525 THIRD-PARTY FINANCING IN THE PERSPECTIVE OF GERMAN LAW—USEFUL INSTRUMENT FOR IMPROVEMENT OF THE CIVIL JUSTICE SYSTEM OR SPECULATIVE IMMORAL INVESTMENT? Professor Dr. Alexander Bruns 549 FUNDING OF MASS DISPUTES: LESSONS FROM THE NETHERLANDS Professor Dr. Ianika N. Tzankova 593 IDEAL VERSUS REALITY IN THIRD-PARTY LITIGATION FINANCING Joanna M. Shepherd 613 TO FUND OR NOT TO FUND: THE NEED FOR SECOND-BEST SOLUTIONS TO THE LITIGATION FINANCE DILEMMA Jeremy Kidd, Ph.D. 645 ECONOMIC IMPLICATIONS OF THIRD-PARTY LITIGATION FINANCING ON THE U.S. CIVIL JUSTICE SYSTEM Geoffrey J. Lysaught and D. Scott Hazelgrove 673 INSURERS DEFEND AND THIRD PARTIES FUND:ACOMPARISON OF LITIGATION PARTICIPATION Michelle Boardman 701 THE ECONOMICS OF THIRD-PARTY FINANCED LITIGATION Keith N. Hylton 743 COMPARING THIRD-PARTY FINANCING OF LITIGATION AND LEGAL EXPENSES INSURANCE Michael Faure and Jef De Mot iii 2 iv 2012] 405 THIRD-PARTY LITIGATION FUNDING IN EUROPE Cento Veljanovski* INTRODUCTION Third-party litigation funding (TPLF) is where an investor otherwise unconnected with a legal action finances all or part of a claimant’s legal costs. If the case fails, the funder loses its investment and is not entitled to receive any payment. If the case succeeds, the investor takes an agreed-upon success fee. While not entirely new, the emergence of TPLF has recently been put in the spotlight with the entry of dedicated firms in- vesting in commercial litigation in the U.K., Europe, and further afield. This study aims to shed light on the reality of TPLF. It is based on in- terviews with the leading dedicated TPLF investors based in the U.K.,1 and dedicated TPLF group action investors in Europe.2 It explores the devel- opment and rationale of TPLF in Europe, with a focus on the position in England and Wales,3 and the emerging funding of group actions in Europe.4 * Managing Partner, Case Associates; IEA Fellow in Law and Economics, Institute for Economic Affairs; Adjunct Senior Research Fellow, Centre for Regulation and Market Analysis (CRMA), Univer- sity of South Australia. My thanks to Susan Dunn (Harbour), David Burstyner (Omni Bridgeway), Neil Purslow (Therium), Vicky Waye (University of South Australia), Vince Morabito (Monash University), and an anonymous referee for comments on an earlier draft. I would also like to thank Kate Majkut for her valuable research assistance. Contact: [email protected]. Other papers by the author can be viewed at http://ssrn.com/author=599490. 1 The following were interviewed mainly during July 2011 with subsequent follow-up discus- sions and emails: Neil Brennan (Chief Executive Officer, ILF Advisors), Neil Purslow (Managing Director, Therium), Nick Rowles-Davies (Consultant, Vannin Capital), Mark Wells (Managing Partner, Calunius Capital), Brian Raincock (Chairman, Commercial Litigation Funding), Ben Hawkins (Manag- ing Director, Commercial Litigation Funding), Susan Dunn (Head of Litigation Funding, Harbour Liti- gation Funding), Dr. Arndt Eversberg (Managing Director, Allianz ProzessFinanz GmbH), Christopher Bogart (Managing Director, Burford Capital), Jonathan Barnes (Director, Woodsford Litigation Fund- ing), Michael Zuckerman (Managing Partner, Redress Solutions), John Walker and Clive Bowman (Executive Directors, IMF (Australia) Ltd), Richard Fields (Juridica), Bob Gordon (1st Class Legal) and David Rae (Synergy Solutions/Axiom Legal Financing). 2 Interview with David Burstyner, Senior Legal Counsel, Omni Bridgeway (July 2011). CDC declined to be interviewed on the grounds that “it was not in its interests,” and CFI did not respond to several requests for an interview. 3 Although England and Wales, Scotland, and Northern Ireland all are part of the U.K., their legal systems differ. It is therefore necessary to distinguish these jurisdictions—though, in reality, the differ- ences are not great, and TPLF investors effectively operate across the U.K. 4 This is the first quantitative study of TPLF investors and their activities in the U.K. The only other industry-wide study, albeit largely qualitative, is by lawyers. FOX WILLIAMS, THE NEW, NEW THING: A STUDY OF THE EMERGING MARKET IN THIRD PARTY LITIGATION FUNDING (2010), available 3 406 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 8:3 Part I of the discussion below provides some background to the devel- opment of TPLF in Europe. Part II is an overview of the TPLF funders in England and Wales based on interviews conducted in the second half of 2011. Part III examines group litigation funding in Europe. Part IV dis- cusses the justification for and likely impact of TPLF, together with some of the policy issues. Part V looks at the anecdotal criticisms of TPLF that have been made by U.S. commentators and compares them to hard evi- dence. I. BACKGROUND A. Overview Economists like markets and are therefore naturally suspicious when laws impede their development. Historically, this was the legal position in common and continental European civil legal systems. Funding or support- ing the litigation of another was banned, prohibited, and outlawed. These prohibitions were abandoned in European continental civil law countries some time ago. Third parties can now finance litigation in nearly all civil law jurisdictions in Europe, apart from Greece and Portugal.5 In most common law countries, the ban on third-party funding of legal actions con- tinued until recently, and still exists in some jurisdictions. The common law torts of maintenance—where a stranger supports lit- igation in which he has no legitimate concern—and champerty—when the person maintaining another receives a share of the gains from the legal ac- tion—prevented the funding of and trading in legal claims.6 Historically, such actions were criminalized in order to prevent a frequent abuse of the legal system.7 During the Middle Ages, wealthy landowners often funded litigation in order to seize land from weaker parties. Restrictions on TPLF have progressively been removed and decrimi- nalized across common law countries. In England and Wales, the laws of maintenance and champerty were decriminalized in 1967. Since the mid-1930s, the Australian states of South Australia (1935), Victoria (1950), at http://www.lawfirmalliance.org/assets/attachments/738.pdf; LORD JUSTICE JACKSON, REVIEW OF CIVIL LITIGATION COSTS ch. 11 (2010). The Law Society of England and Wales publishes Litigation Funding each quarter. It lists TPLF funders, brokers and ATE insurance providers. 5 LOVELLS LLP, AT WHAT COST? A LOVELLS MULTI JURISDICTIONAL GUIDE TO LITIGATION (2010), available at http://www.hoganlovells.com/files/Publication/c940bb4b-a67f-4e63-a5b8- ced6198b2125/Presentation/PublicationAttachment/fff33267-29d5-4230-a140- cf2eeb7d4a05/LitigationCostsReport.pdf. 6 Max Radin, Maintenance and Champerty, 24 CALIF. L. REV. 48, 58-64 (1935). 7 Percy H. Winfield, History of Maintenance and Champerty, 35 Law Q. REV. 50, 57-68 (1919). 2012] THIRD-PARTY LITIGATION FUNDING IN EUROPE 407 New South Wales (1993), and the Australian Capital Territory (2002)8 have decriminalized them as well. They have also been removed in many states in the U.S. Today, there is growing support for TPLF as a means of providing in- creased access to justice. The costs and complexity of litigation can dis- courage many meritorious claimants from seeking redress through the courts. Only those who feel particularly aggrieved or determined—or with deep pockets and a sufficient stake—will be inclined to embark on litiga- tion. Thus, many see easing the path to litigation as attractive, believing it will achieve a number of goals, including greater access to justice. This is particularly true in common law jurisdictions where there is a growing concern over the high costs of litigation. The Oxford Study9 pro- vided estimates of the legal and court costs for a “large commercial case”10 involving a complex breach of contract with a €7 million (USD 6 million) lost profits claim in twenty-seven countries. The joint costs of pursuing this claim to full trial in the English and Welsh courts were estimated at USD 3 million, or 50% of the value of the claim.11 According to the study, the legal costs of suing in England and Wales were by far the largest, by many orders of magnitude, of all twenty-seven countries (e.g., thirty times greater than in Germany).12 The Jackson Committee in the U.K.