Why Mandatory Disclosure of Third-Party Litigation Funding Is a Bad Idea
One widespread response to the rise of litigation funding is a call for the mandatory disclosure of any litigation funding arrangements. Advocates of mandatory disclosure contend that it is necessary to bring litigation funding “out of the shadows” and to prevent any potential conflicts of interest. But mandatory disclosure seems less about clarity and more about providing an opportunity for distraction.
As with many developments concerning litigation finance, the movement for mandatory disclosure started abroad. In China, the Hong Kong Law Reform Commission recently recommended mandatory disclosure for cases there. In December 2016, the Singapore International Arbitration Centre released new investment arbitration rules that allow tribunals to order disclosure of third-party litigation funding contracts and their principal terms. Courts in several Canadian provinces routinely require the disclosure and judicial approval of litigation funding arrangements in many class action cases and in certain other cases as well. There have also been movements towards mandatory disclosure in Australia and New Zealand.
This movement has support in the United States, too. In December 2014 and again in April 2016, the United States Chamber of Commerce, perhaps the leading foe of third-party litigation funding, submitted proposals to the Advisory Committee on Rules of Civil Procedure for an amendment of Fed. R. Civ. P. 26 that would require automatic disclosure of funders at the outset of all civil cases. In 2016, the Northern District of California considered amending its local rules along similar lines.
For now, United States authorities have rejected these “reform” proposals. The Advisory Committee noted that judges have the authority to order disclosure of any litigation funding arrangement when it is relevant to the case. Similarly, the Northern District of California decided to not require disclosure in every case. Instead, it modified one of its standing orders to require disclosure only in class or representative actions.
Why is this the right result? Because discovery is about relevance and litigation funding arrangements are not relevant in every case. When disclosure is mandated in every case, regardless of relevance, disclosure can be used as a distraction. Once the arrangement is disclosed, it may be possible for the opposing party to seek confidential communications between the funder and the party receiving funding. Even if such communications are ultimately protected from discovery, the mandatory disclosure has turned into an opportunity for distraction and harassment.
Topics: litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, discovery, mandatory disclosure
Works Cited:
Tripp Haston, The Missing Key to 3rd-Party Litigation Funding, Law360 (Feb. 7, 2017) available at https://www.law360.com/articles/888716/the-missing-key-to-3rd-party-litigation-funding
