Earlier this month, the European Parliament announced that it adopted a resolution with recommendations to the European Commission on responsible private litigation funding. In short, the European Parliament observes that there is an increase in the use of third-party litigation funding (TPLF) within the European Union. This development in particular impacts the funding of class action litigation. The rise of TPLF brings both advantages and disadvantages, and the European Parliament recommends the European Commission to limit certain risks related to TPLF by introducing a licensing system and limiting the maximum proportion of final compensation allocated to the litigation funder. How will this development and its possible implications for TPLF impact class actions in the Netherlands?
Increase of third-party litigation funding in the Netherlands
Dutch law provides a well-established statutory regime for class actions. With the introduction of the Act on Collective Damages in Class Actions (Dutch acronym WAMCA) in January 2020, claim organizations have the possibility to seek monetary compensation (which was not possible under the pre-WAMCA regime, as still applies to part of the Dutch class actions). Claiming monetary damages has made Dutch class actions an attractive investment for litigation funders. This is also why we have seen increasing numbers of globally operating plaintiff firms and litigation funders opening offices or becoming more active in the Netherlands (see our earlier blog).
The popularity of class actions among third-party litigation funders brings certain advantages, but also introduces risks. When TPLF is deployed, third-party litigation funders will typically fund a class action in exchange for a share of the total (damages) award. The Dutch legislator already recognized the risks related to TPLF with the WAMCA, introducing a statutory admissibility requirement imposing on claim organizations the duty to show that they have sufficient funds to bear the costs of an action (and to support this with evidence), and sufficient control over the action. The rationale behind this is to allow the court insight into the relationship between the claim organization and the litigation funders so as to prevent conflicts of interest between the claim organization and litigation funders on the one hand and the injured parties on the other: litigation funders may view class actions (or: collective settlements) as investment opportunities rather than (primarily) seeking to serve the interests of injured parties. The European Parliament recognises those sentiments too and is now pushing the European Commission towards (further) regulation of litigation funders.
The European Parliament's recommendations
In its recommendations to the European Commission dated 13 September 2022, which were published on 5 April 2023, the European Parliament notes that there is an increase in TPLF within the European Union. The European Parliament recognises that TPLF may facilitate class actions. However, the European Parliament also notes that there is the risk that litigation funders primarily act in their own (economic) interests, and may have undue influence over the claim organization participating in the proceedings.
In addition, EPRS research data shows that in certain Member States litigation funders may demand a disproportionate share (20%-50%) of the proceeds, at the expense of the injured parties. Therefore, the European Parliament considers it crucial to ensure that the fees awarded to the litigation funders are proportionate and that any awarded compensation is primarily allocated to the injured parties and to limit the litigation funders' relative share of the total award.
The European Parliament recommends that the European Commission, among other things, establishes a licensing system for litigation funders to protect claimants. According to the draft minimum criteria for granting such TPLF license as suggested by the European Parliament, litigation funders should for example establish internal good governance processes that meet the proposed transparency requirements and its fiduciary duties towards injured parties to avoid conflicts of interests. Furthermore, the European Parliament believes that a only under exceptional circumstances should arrangements between litigation funders and claimants depart from the general rule that a minimum of 60% of the gross settlement or damages is paid to the claimants. Finally, the European Parliament recommends that claim organizations should make financing agreements public.
Representative Actions Directive (RAD) and Dutch implementation
The European Parliament's wish for further regulations for TPLF also fits within the safeguards as set out in the Dutch implementation of the Representative Actions Directive (RAD) for class actions on consumer protection, which will enter into force on 25 June 2023 (see our earlier blog). However, the safeguards of the RAD with respect to TPLF only apply to class actions initiated on behalf of consumers on matters identified in the RAD. The European Parliament's latest recommendation urges the European Commission to introduce similar safeguards on TPLF in all class actions.
After the entry into force of the RAD on 25 June 2023, it is up to the European Commission to decide whether or not it will submit a proposal for a directive establishing common minimum standards at the European level for TPLF.
Possible consequences for class actions in the Netherlands
The desired regulation of TPLF may significantly impact the Dutch class actions landscape. The current proposals by the European Parliament would contribute to making litigation funding in the Netherlands more transparent. In particular, requiring the funding arrangements to be publicly accessible will force the reward structures of litigation funders out into the open.
At the time of writing, a debate is ongoing in various class actions before Dutch courts on transparency of funding agreements. Dutch courts have in certain cases ordered claim organizations to submit their funding agreements to the court (and sometimes, also to the defendants), with several sections on financial details redacted (see the commentary of members of our Dutch class actions team). It will be interesting to see whether these agreements will stand up to the court's scrutiny.
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