The Problems with Mandatory Disclosure of Litigation Finance

Opponents of litigation finance have recently stepped up their calls for amendments to procedural rules that would mandate the disclosure of litigation financing agreements.  The U.S. Chamber of Commerce, perhaps the most outspoken critic of litigation finance, has collaborated with more than two dozen other business groups to call for amendments to the Federal Rules of Civil Procedure to require the disclosure of outside financing arrangements.  But these demands for disclosure reform lack a coherent rationale.

This is not the first time that opponents of litigation financing have sought rules changes to require disclosure.  In 2014, business lobbyists asked for similar amendments, but the committee in charge of the Federal Rules rejected that request.  In their renewed petition, these business groups argue that the expansion of litigation financing demonstrate that disclosure is definitely needed now.

The U.S. Chamber and their business lobbyist allies contend that disclosure will make it easier to assure that third-party financing is not used for improper purposes. In this connection, the business groups reiterate the familiar arguments against litigation financing – that it may violate the common law doctrines that prohibit the “stirring up” of litigation and that they may promote the litigation of unmeritorious claims.  The question is whether these old arguments will gain any new ground.

A former United States District Judge explains whey these arguments should not and why the disclosure of litigation finance agreements is unwarranted.  Judge Vaughn Walker, who served as the Chief Judge of the United States District Court for the Northern District of California, and who retired in 2010, points out that “if you put in all the [disclosure] requirements that had been talked about, where do you stop? Plaintiff contingency fee arrangements are a form of funding, and law firms have financed their receivables for years. Do you then require a firm to disclose it has receivable financing from Bank of America or Chase?”

Judge Walker noted that his former court had recently amended its local rules to require limited disclosure in class action cases, but he characterized the change as modest in terms of actual impact on cases.  Moreover, the disclosure of funding arrangements for the class representatives in class action cases is different because it pertains to questions about class certification, specifically to the representatives’ ability to represent the class’ interests.  This is a consideration that is beside the point in any non-class action.

As Judge Walker points out, in the ordinary case, there is no principled difference between a litigation funding agreement and a contingency fee agreement.  Just as there is no reason to disclose a contingency fee agreement, there is no reason to require the disclosure of a litigation funding agreement.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, disclosure, civil procedure

 Works Cited:

Andrew Strickler, Calif. Legal Funding Rule Won’t Shed More Light on Deals, Law360 (January 28, 2017) available at https://www.law360.com/articles/884901/calif-legal-funding-rule-won-t-shed-more-light-on-deals