The National Association of Mutual Insurance Companies (NAMIC) recently published a paper on the topic of third-party litigation funding (pdf), advocating for legislation restricting its use.  Third-party litigation funding, as the term suggests, involves a third party investor providing funding to help finance the cost of litigation, typically in exchange for a share of the proceeds if the case is successful, and often with no recourse against the borrower if the case is unsuccessful.  This has been prevalent in the UK for some time and is becoming more prevalent in the US. 

The paper is relatively short and an interesting read; I recommend it.  A response from a litigation funding company that has a blog is also worth reading.  What I’ll focus on here is the part dealing with class actions.  NAMIC writes: 

Class action litigation is particularly vulnerable to the pursuit of profit through third-party funding schemes.  There is no practical way to obtain permission from all the potential plaintiffs as to whether the attorneys representing the class may obtain litigation funding, or from whom they may obtain it.  Nor are members of the class in a position to negotiate or approve the terms of the funding arrangement.  Thus, the entire process of obtaining funding will occur without the consent, or even the knowledge, of the plaintiffs.

Moreover, once the funding arrangement is in place, decisions regarding the strategy and tactics to be employed in a class action will be entirely at the discretion of the funding company and the attorney, again without the involvement of the plaintiffs.

I see a few things the paper overlooked here that are also in play.  For a class to be certified, either on the merits or for settlement purposes only, court approval is required.  I would expect most judges would require disclosure of the existence and terms of any third-party funding arrangement in a notice to class members.  Judges should closely scrutinize any such arrangement in deciding adequacy of representation.  These arrangements are ripe for creating ethical issues and conflicts that might impact the adequacy of the class representative and class counsel, and might be grounds for denying certification.  Unlike individual cases, in putative and certified class actions, judges have substantial power to take appropriate steps where a third-party litigation funding arrangement is inappropriate or where the funding company may be playing an improper role in the litigation.

Defense counsel in class actions should be sure to explore whether these arrangements exist in their cases.  With these arrangements becoming more prevalent, “standard” interrogatories and document requests will now need to include requests pertaining to third-party litigation funding.