Tag Archives: disclosure

More on Mandatory Disclosure

As a follow-up to the previous post on the current state of disclosure requirements for litigation finance in the United States, this post considers two major questions in disclosure regulation.  First, is mandatory disclosure of litigation finance inevitable and with that, are the trends in the court and legislatures in favor of full disclosure in every instance? Secondly, is disclosure of litigation finance advisable in every civil matter and should litigants be forced to not only disclose if their legal cost but also the financiers’ identities and the specific arrangements that were made?

Starting with the first question, is mandatory disclosure inevitable? No. The primary reason for disclosure is to ensure that judges deciding the matter do not have a conflict of interest.  Mandatory disclosure in regards to litigation finance would be to provide an advantage to a litigation adversary, which is not the intended purpose of disclosure rules.  This is supported by the fact that Rule 7.1(a) requiring disclosures is intentionally very limited.

To address the second part of question one, do trends favor mandatory disclosure; the lack of current regulation  (as demonstrated in more detail in the previous blog post) suggests that the trends of the court at least do not favor disclosure.  There have been discussions of new legislation and most recently in May, a draft bill introduced by Senator Chuck Grassley but so far there has not been anything definite to show a trend towards mandatory disclosure.

As for the second question, disclosure is not advisable in every civil matter.  But the one area where disclosure may be more helpful than burdensome is in collective litigation.  In collective litigation there is generally no single plaintiff and the cases are often very sophisticated so the court plays a more active role than it does in single-claimant commercial litigation.  However, this does not mean that mandatory disclosure should be automatic in every collective litigation case.

In response to the second part of the second question, if disclosure is mandatory in a collective action case then it should be done in what Christopher Bogart deems a “common sense approach.”  Which is to say that the disclosure should not be overly excessive to disclose every detail of the arrangement and maybe not even the identities of the financiers but rather in a way that affirms to the judge that there is no conflict and that the funder exercises no control over the matter. This can be done by calling for disclosure to be made ex parte and in camera to the judge only, not the defendant, and by stipulation that no discovery will be permitted into litigation finance arrangements as they are protected attorney work product.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited:  Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

Regulation and Litigation Finance

The topic of regulation in litigation finance has been raised more and more frequently in recent news.  Part of this is likely attributable to the rapid growth and success of the relatively new industry in the United States.  Much of the talk of regulation is based on the topic of disclosure, when (if ever) should disclosure that a party to litigation is being funded by a third-party be mandatory? With the many ideas of regulation circulating but nothing finalized, this post seeks to identify a few key federal and state rules currently in place relating to disclosure in litigation finance to give a background understanding to the issue.

At the federal level, there is no rule that requires automatic disclosure of litigation finance agreements in any case. This is sometimes confused with Rule 29.6 of the Federal Rules of Civil Procedure that requires disclosure of any parent corporation or public shareholder that owns ore than 10% of the party’s stock.  This rule does not encompass litigation funders as they are not parent corporations or public shareholders, and financing litigation is not the same as buying stock in the company.

While there is no general federal rule requiring disclosure, half of the circuit courts of appeal (6 out of 12 courts) have local variations on FRCP 26.1 that requires all outside parties with a financial interest in the outcome to be disclosed.  At the federal district court level only 24 out of 94 district courts have a similar local variation to rule 26.1 to require disclosure of outside parties with a financial interest in the outcome.  However, it is critical to note that these local variations do not specifically call-out litigation financers and could apply equally to any type of funders (ex: banks).  Additionally, as a practical matter, the language in these disclosure provisions is extremely broad to potentially include a large number of commercial relationships and it is often not followed or enforced.

At the state level, almost all states do not require the disclosure of litigation finance in commercial litigation.  The one exception to this is Wisconsin.  In March of 2018, Wisconsin passed a law requiring parties in all civil litigation to disclose funding arrangements.  This seems to be in an effort to regulate consumer litigation funding.  However, Wisconsin is such a small part of commercial litigation, making up only 0.11% of civil matters in all US state courts it is unlikely that this one state’s regulation will have much of an effect.

It should be noted that these regulations are in regards to commercial litigation finance in the United States.

Topics:  litigation finance, alternative litigation finance, third-party funding, regulation, disclosure, commercial litigation

 Works Cited: Christopher P. Bogart, Litigation Finance Disclosure in the US: Common Sense v. False Narratives, Bloomberg Big Law Business (July 11, 2018).

Wisconsin Requires Disclosure of All Litigation Funding Arrangements

Wisconsin Governor Scott Walker signed legislation in April that requires all third-party litigation funding deals to be disclosed, regardless of whether there has been any discovery request for that information. The law is consistent with lobbying efforts by the U.S. Chamber of Commerce, which has long been an aggressive critic of litigation financing.

Wisconsin Act 235 requires litigants “provide to the other parties any agreement” under which third-party funders are entitled to a share in any earnings from a civil action, settlement or judgment. The rule excludes lawyer contingent fee arrangements. According to Law360, the new law is first of its kind on the state level.

In a press release, Lisa Rickard, president of the U.S. Chamber’s Institute for Legal Reform, said: “Wisconsin’s law brings litigation funding out of the shadows, so that funders in the state can’t anonymously ‘pull the strings’ of a lawsuit without other parties’ knowledge.” Paige Faulk, vice president of the Institute expressed confidence that other states would follow suit: “This law is another step in what’s become a growing movement.”

But the legislation may alienate many of the commercial entities that the Chamber purports to serve. In recent years, more and more businesses have sought to use litigation funding as a way to manage their risk and maximize the value of their litigation portfolios. Now they face some strategic harm from the legislation that the Chamber promoted.

As one observer noted, “[m]ost states have been diligent to draft new laws that clearly separate consumer and commercial litigation finance. In its haste to pass a consumer law, however, Wisconsin did not do so, despite there being no expressed desire to regulate commercial litigation finance. We view this as an accidental outlier that is likely to change in due course once Wisconsin businesses realize that their legislators just overreached.”

Keywords: litigation finance, third-party litigation funding, regulation, discovery, disclosure

Work Cited: Jamie Hwang, Wisconsin Law Requires All Litigation Funding Arrangements to Be Disclosed, ABA Journal (April 10, 2018) available at http://www.abajournal.com/news/article/wisconsin_law_requires_all_litigation_funding_arrangements_to_be_disclosed

Changes in Discovery Resulting From Litigation Finance

Novel issues in discovery have emerged and more and more lawsuits involve third-party litigation funding. Such issues revolve around the question whether and to what extent funding agreements are discoverable. Because there are few formal rules that directly address this question, courts have reached sometimes conflicting conclusions about how to resolve these issues.

For example, in 2015, a New York federal district court considered a motion to compel the production of litigation funding documents. Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 VM KNF, 2015 BL 324773, at *4 (S.D.N.Y. Sept. 10, 2015). The court denied the motion, ruling that the defendants did not demonstrate the documents were relevant to any party’s claims or defenses. Nevertheless, other courts ruling on similar requests have found litigation finance documents to be relevant and therefore discoverable. See e.g., Acceleration Bay LLC v. Activision Blizzard, Inc., No. CV 16-453-RGA, 2018 BL 45102, at *4 (D. Del. Feb. 9, 2018).

Even in those courts that find them relevant, the documents relating to litigation funding agreements have sometimes been found to be protected by the work product doctrine, which protects documents prepared in aid of litigation. See Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 738 (N.D. Ill. 2014); see also Morley v. Square, Inc., No. 4:10CV2243 SNLJ, 2015 BL 379408, at *4 (E.D. Mo. Nov. 18, 2015). In Acceleration Bay, the court concluded that funding documents were not work product because their “primary purpose” was to obtain funding and because the documents were not prepared for a party to the litigation. Acceleration Bay, 2018 BL 45102, at *3.

The discovery of litigation funding is also an increasingly prevalent issue in non-judicial forums. Some arbitration organizations require the disclosure of parties who have a direct financial interest in the outcome of the arbitration. See IBA Guidelines on Conflicts of Interest in International Arbitration, § 6 (b), Oct. 23, 2014; see also ICCA-Queen Mary Task Force, Third-Party Funding in International Arbitration 40 (Sept. 1, 2017) (draft) (examining third-party funding in the international arbitration context).

In light of these trends in discovery, funders and the lawyers for parties seeking funding would be well-advised to consider drafting appropriate common-interest agreements to extent the protection of the privilege to at least some parts of the funding transaction. In addition, funders and counsel should consider minimizing the extent to which documents are created disclosing potentially sensitive views as to the likelihood of success in the litigation.

Keywords: litigation finance, litigation funding, discovery, disclosure

Work Cited:

Alan R. Glickman, William H. Gussman, Jr. and Hannah Thibideau, Discovery Trends in Litigation Finance Arrangements, Big Law Business (April 20, 2018) available at https://biglawbusiness.com/discovery-trends-in-litigation-finance-arrangements/

New Developments in the Regulation of Litigation Finance

The expansion of litigation finance is drawing more attention from state and federal regulators. Up to now, there has been a patchwork of statutory and other regulations, but more and more legislatures and regulatory agencies are considering ways to regulate litigation finance transactions.

For many years, litigation funding was entirely banned. With the last few decades, that ban has eroded. Today, about half of United States jurisdictions permit third parties to fund litigation more or less freely.

Even where it is permitted, the sources of regulation for litigation funding can be diverse. In most jurisdictions, litigation funding is not characterized as lending. But, in some states, regulations come from the usury laws that apply to consumer lending. Of course, these regulations might not apply with the party receiving funding is a business entity.

Other regulations pertain to disclosure. For example, Wisconsin just enacted legislation requiring the disclosure of litigation funding arrangements. Some courts, such as the federal district court for the Northern District of California, require disclosure of the participation of litigation funders in certain kinds of cases. But even with these disclosure rules, there’s still some uncertainty over the extent to which the attorney-client and work-product privileges protect funding arrangements from disclosure.

Given this variety of regulatory sources, some litigation finance firms have considered uniting to develop and propose a set of disclosure and other rules that they can live with. As litigation funding continues to grow, the effort to regulate it will increase, and funders are probably well-advised to participate in its formulation.

Keywords: litigation finance, third-party litigation funding, regulation, disclosure

Work Cited:  David Lat, The Evolving Regulatory Landscape For Litigation Finance, Above the Law (June 8, 2018) available at https://abovethelaw.com/2018/06/the-evolving-regulatory-landscape-for-litigation-finance/

The Importance of Disclosure in Drafting a Litigation Funding Agreement

Full disclosure is an important part of making any transaction work.  This applies to litigation funding transactions to the same extent as any other transaction.  When an attorney advises a client in connection with a litigation funding transaction, she must make sure that there is full disclosure on both sides in the transaction.  This is a crucial step in avoiding any problems or disputes once the case is over and time to repay the investment comes.

In a few jurisdictions, there are express statutory rules about what must be disclosed in litigation financing transactions.  These rules are found in the states that regulate litigation financing directly, such as Maine, Vermont, Indiana, Ohio, and Tennessee.  Some of these jurisdictions prescribe that funders disclose certain information about the fee structure in the transaction and that these disclosures be made in a certain format.  In some states, there are even rules about the font size for these disclosures in the funding agreement.  As a general rule, the disclosure requirements under these statutory schemes mimic the disclosure requirements for consumer lending transactions.

In the vast majority of jurisdictions that do not directly regulate litigation financing, the question arises about what kind of disclosure should be made in connection with the agreement.  It certainly makes sense to disclose the precise nature of the fee structure, and following the model of consumer lending disclosures makes sense, regardless of whether the client is a financially sophisticated business entity or an individual.  Accurate disclosure is never a bad idea, even if it takes a little extra effort.

In addition, if there is a relationship between the funder and the attorney, the nature and extent of this relationship should be disclosed to the litigant.  In many situations, attorneys refer business to funders; and if there has been such a referral relationship in the past, the litigant should be informed about it.  This disclosure need not come in the financing agreement itself, but it should be made in writing to avoid any suggestion later on that the litigant was unaware of the fact that the attorney and the funder had some shared interests outside of the litigant’s own case.

Disclosure is not a one-way street, so it is important that the litigant make disclosures as well.  In this connection, the most important information concerns any security interests in the recovery that the litigant may have previously given out, including, of course, the attorney’s contingent fee, if there is one.  In addition, litigants should disclose any other information relating to their willingness or ability to take the case to its conclusion.  Virtually every funder will seek this information as a matter of course, but if there is any doubt about whether there has been full disclosure by the client, any attorney involved in the financing transaction should make sure that such disclosure has been made.

Topics:  litigation finance, legal reform, third-party funding, ethics, litigation finance best practices, disclosure

 Works Cited:  Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861 (2015)

Federal Judge Protects Litigation Funding Information From Disclosure

A federal district court judge in Chicago federal judge has refused to compel an antitrust plaintiff to disclose its litigation funding arrangements.  This decision is further support for the argument that litigation funding arrangements should be routinely disclosed.  In addition, the decision supports the proposition that disclosure of confidential materials to a litigation funder does not waive the attorney-client and/or work-product privileges.

The decision came in a case concerning “interconnects” – cooperative platforms set up by cable service providers, which allowed local advertisers to buy ad time across “particular Designated Media Markets.” Viamedia alleged that Comcast acted to eliminate competition for “spot advertising” on the interconnects in the Chicago and Detroit areas, ordering other cable TV service providers, to only sell spot cable ads through Comcast’s wholly owned subsidiary, Comcast Spotlight.  According to the complaint, this action cut Viamedia out of the markets in which it had long competed.

Comcast filed a motion to compel seeking certain documents that Viamedia had claimed as privileged.  In the motion, Comcast asserted that Viamedia may have sought funding help from third-party litigation financing firms and may have disclosed confidential documents to those financiers.  In addition, Comcast noted that Viamedia had disclosed some documents to the Justice Department in an effort to prompt government enforcement proceedings.  Comcast argued that this disclosure waived any privilege in these documents.  Viamedia, however, argued all of the documents should remain protected by legal privilege, as the responded by arguing that the documents were all prepared and shared only in anticipation of legal action, and any prior disclosure was “inadvertent.”

On June 30, U.S. District Judge Amy J. St. Eve denied Comcast’s motion. Although her decision declined to address whether the documents should be protected by attorney-client privilege, she held the documents should remain protected under the work-product doctrine, which protects from disclosure certain materials prepared in anticipation of filing a lawsuit.  In this connection, she rejected Comcast’s arguments that privileges could not apply because they were disclosed in a lobbying effort to instigate a regulatory action, not a lawsuit.

The decision is consistent with the idea that seeking litigation funding is part of the litigation process and that funding companies are not really in the position of third parties to the litigation.  Therefore, disclosing information to a funder for the purpose of obtaining funding is akin to sharing information with an expert or a consulting law firm that might be assisting in the representation.  In short, the decision is another step in developing the recognition that litigation finance is normal part of the litigation process.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, disclosure, discovery, Comcast

 Works Cited: Jonathan Bilyk, Judge Won’t Force Viamedia to Share Documents on Litigation Funding, DOJ Action vs Comcast, Cook County Record (July 7, 2017) available at http://cookcountyrecord.com/stories/511145298-judge-won-t-force-viamedia-to-share-documents-on-litigation-funding-doj-action-vs-comcast

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

Bill to Reform Class Action Procedure Would Require Disclosure of Litigation Funding Agreements

The United States House of Representatives has just passed legislation that would have a sweeping effect on class action procedure and would mandate disclosure of litigation financing arrangements in class actions cases.  This disclosure would occur at the discovery stage and at the end of proceedings, when the settlement or judgment payment to the class is authorized.  These new procedural rules would be in accordance with procedural reforms proposed for or adopted by certain federal district courts in their local rules.

The current legislation is H.R. 985 – The Fairness in Class Action Litigation and Furthering Asbestos Claim Transparency Act of 2017 (FICALA), which is purportedly meant to benefit both defendant companies and deserving class action plaintiffs.  FICALA is styled as follow-on legislation to the Class Action Fairness Act of 2005 (CAFA), which made it easier for defendants to remove class actions from state to federal court. FICALA includes a variety of procedural reforms, including:

  • a prohibition of class actions in which the named plaintiffs/class representatives are relatives or employees of class counsel;
  • a requirement that, before certification, the putative class representatives show that there is a mechanism for identifying members of the proposed class and a feasible way to directly administer any monetary awards;
  • limits on attorneys’ fees for class counsel; and
  • a stay of discovery while any dispositive motions are pending.

In addition to these reforms, FICALA would include a couple of other reforms that would directly implicate litigation financing arrangements for the named plaintiffs or the class as a whole.  First, FICALA requires the disclosure of any contract with a third-party funding litigation. This required disclosure is designed to make it harder for the funder to exert any influence on the litigation that might conflict with the interests of class members and the attorney-client relationship.  This requirement parallels a reform to the local rules for the Northern District of California, with respect to class action cases.

The second reform concerns transparency in the disbursement of any award to the class.  FICALA requires class counsel to file an accounting detailing the following information: (a) the total amount paid directly to all class members, (b) the actual or estimated total number of class members, (c) the number of class members who received payments, (d) the average amount (both mean and median) paid directly to all class members, (e) the largest and smallest amounts paid to any class member, (f) each amount paid to any other person (including class counsel) and the purpose of the payment.  Under (f), payments to litigation funders would have to be disclosed, at least as long as they were made directly from the award to the class.

The House has sent FICALA to the Senate for consideration and it remains pending before the Senate Judiciary Committee. If it is enacted in something like its current form, FICALA will increase scrutiny from defendants and the judiciary into how litigation funders are supporting plaintiffs in class action cases.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, class action procedure, CAFA, FICALA, civil procedure, disclosure

Works Cited:

H.R. 985: Fairness in Class Action Litigation and Furthering Asbestos Claim Transparency Act of 201, available at https://www.govtrack.us/congress/bills/115/hr985/text