Litigation Funding is an increasingly important part of the current litigation scene, but it remains controversial. One of the important issues under debate is the question of whether or not litigation funding arrangements must be disclosed. In a recent discovery-related ruling (here), Northern District of California Judge Susan Illston confronted this question of whether or not a class action plaintiff must disclose third-party litigation funding contracts. As discussed below in the following guest post from Lisa Rickard, the President of U.S. Chamber Institute for Legal Reform, takes a look at Judge Illston’s decisions and examines its relevance in the ongoing debate regarding litigation funding. I would like to thank Lisa for her willingness to publish her article as a guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit and article. Here is Lisa’s guest post.
The most perplexing characteristic of third-party litigation finance is that it typically occurs in secret. Historically, when defendants were sued, they knew who was bringing the action. The plaintiff’s (and counsel’s) name was printed right there on the complaint. But with increasing frequency, a plaintiff is little more than a façade for meticulously hidden investors who have purchased an interest in the asserted claims, all in pursuit of handsome profits.
So far, the financers’ clandestine strategy has succeeded. They have prevented defendants from knowing the identity of their real litigation adversaries. And by hiding, they have shielded themselves from proper judicial supervision, even though they are often the puppeteers exercising substantial control over the lawsuits they sponsor.
Fortunately, the tide may now be turning.
In a San Francisco federal court, Chevron presently faces a class action brought on behalf of over 12,500 coastal Nigerian fishermen alleging that an explosion and ensuing fire on a Chevron-managed offshore drilling rig disrupted their businesses and caused personal injury. Suspicious that the lawsuit was actually being sponsored by investors unaffected by those alleged events, Chevron demanded production of any litigation funding agreements.
Reluctantly, plaintiffs’ counsel acknowledged that outside financers were in fact backing the lawsuit. Thereafter, recognizing the legitimacy of Chevron’s request, Judge Susan Illston recently ordered that all funding contracts be produced.
That ruling is a landmark event for several reasons.
First, Chevron’s motion revealed that notwithstanding repeated denials by the litigation finance industry, its members are investing in class actions. For years, there have been concerns that the class action device is evolving into nothing more than a profit vehicle for plaintiffs’ counsel, providing little or no benefit for the allegedly injured persons on whose behalf the class litigation is ostensibly brought.
As the U.S. Court of Appeals for the Seventh Circuit observed only a few weeks ago in rejecting a shareholder class action settlement: “The type of class action illustrated by this case—the class action that yields fees for class counsel and nothing for the class—is no better than a racket. It must end.” Now, investments in class actions by hedge funds focused primarily on maximizing returns for their stakeholders (not for allegedly injured class members) threaten to exacerbate this problem.
Second, Judge Illston’s ruling recognized that the involvement of litigation financers can be very relevant to key litigation issues, particularly in class actions. Indeed, in another class action against Chevron (the infamous Ecuador environmental case), the litigation funding-related agreements required that set amounts of any proceeds be paid first to the third-party investors and others, such that allegedly injured class members were at risk of getting nothing.
Judge Illston rejected protests that the funding agreements should not be revealed because they contained a “confidentiality provision,” observing that plaintiffs cited no precedent that such a clause “would override discovery obligations or a court order.” Further, her ruling brushed aside plaintiffs’ argument that the contracts should not be shared with the defendant, holding that concealment “would deprive Chevron of the ability to make its own assessment and arguments regarding the funding agreement and its impact.”
Finally, a footnote in Judge Illston’s ruling indicates that the U.S. District Court for the Northern District of California is presently considering an amendment to its local rules that would require immediate disclosure of the involvement of litigation funders in any civil action. Adoption of that change would be a major step in the right direction. Defendants are required to reveal up front any insurance coverage that might be available to finance the defense or settlement of a case. Why shouldn’t plaintiffs likewise be required to divulge litigation funder support?
The U.S. Chamber’s Institute for Legal Reform, Lawyers for Civil Justice, the National Association of Manufacturers, and the American Tort Reform Association have jointly petitioned the federal judiciary’s Advisory Committee on Civil Rules to implement such a disclosure requirement applicable in all federal courts nationwide. That parallel reform should also be adopted without delay.
Our Framers nobly sought to establish a fair, efficient legal system in which citizens could obtain resolution of disputes with other citizens and pursue redress from alleged wrongdoers. Though not without some serious misadventures, that system has operated in a manner aspiring to those fundamental goals since our Nation’s founding. The escalating injection of third-party investment in lawsuits, however, threatens to transform our courts into what are essentially commodities exchanges that do little more than declare winners and losers on litigation investment schemes.
We need a probing public debate about when and where litigation financing should be allowed and how it should be regulated. Fortunately, Congressional leadership is signaling an interest in taking up that challenge. But in the meantime, we should at least know when and where litigation finance is occurring. If, as its supporters urge, such funding is so obviously a positive contributor to our legal system, why must it occur in the shadows? It’s time for third-party litigation finance to come fully into the sunshine.
Lisa A. Rickard
President, U.S. Chamber Institute for Legal Reform