The recent rise of litigation funding, frequently noted on this site, has been accompanied with rising uneasiness, at least in certain quarters, as well as calls for some form of regulation. Litigation funding is in fact subject to regulation in some countries, including those where there is a longer history of third-party litigation financing; in Canada, for instance, it has become an accepted practice that litigation funding must be disclosed and judicially approved. There have been various calls in this country for litigation funding to be regulated, but up until now, now there have been no affirmative steps toward regulation. However, on January 23, 2017, the Northern District of California adopted new rule — the first of its type — requiring the automatic disclosure of third-party funding agreements in proposed class action lawsuits.
As discussed in Ben Hancock’s January 23, 2017 article in The Recorder entitled “Northern District, First in Nation, Mandates Disclosure of Third-Party Funding in Class Actions” (here), the Northern District of California Civil Rules committee has adopted a revision to the district’s standing order for all cases regarding the contents of the joint case management statement. The revision provides that “In any proposed class, collective, or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.”
The court’s announcement of the new requirement can be found here. The announcement includes a link to the revised standing order.
The Rules Committee, which is chaired by Judge Richard Seeborg, had proposed a revision to the Civil Local Rule that would have required the disclosure of funding agreements in any matter before the Court. Following a comment period, the Court elected not to adopt the draft proposed Rule revision but instead amended the Standing Order, and to require disclosure only in class action lawsuits.
According to the Recorder article, the new requirement, while limited in scope, is “still groundbreaking,” adding that according to funding industry observers “no U.S. district court has yet adopted a rule requiring the automatic disclosure of funding agreements of any kind.”
A January 25, 2017 article in The Recorder about the new requirement (here) quotes one commentator as saying that the new rule is a “harbinger” and a “signal that courts are really starting to see the need to consider the presence of third-party financiers.”
The second of the two Recorder articles includes several additional comments suggesting that the new requirement is likely to generate more litigation around “the limits of what is discoverable to defense counsel once they learn that a funder is behind a class-action lawsuit.” Among other issues that likely will have to be sorted out is whether or not the defendants can force the plaintiff to turn over their agreement with the funder or other communications showing case strategy or valuation. The article quote one defense counsel as saying that defendant would “surely” want to see the funding agreement “to know whether a financier has any control over the litigation or the settlement discussions.”
Because the new requirement is focused solely on class actions, it may not represent that much of a threat to many funders, particularly the larger funders. The Recorder article states that the Australian firm Bentham IMF doesn’t fund class actions. The article also quotes a representative of Burford Capital, the largest litigation funder in the U.S., as saying that class actions make up only a small portion of its investments. Obviously the new requirement could have a bigger impact on other funding firms that do provide litigation financing for class action plaintiffs’ attorneys.
There have been periodic calls for some type of regulation or at least greater transparency with regard to litigation funding. These calls became more frequent after it came to light that Silicon Valley business man Peter Thiel had funded Hulk Hogan’s “sex tape” case against Gawker (as discussed here).
Litigation funding critics have tried to argue that defendants are required by the Federal Rules of Civil Procedure to disclose the existence of insurance relevant to the plaintiff’s case, and the litigants should be compelled to make the same kinds of disclosures about litigation funding arrangements.
Opponents of these kinds of revisions have argued that disclosure of litigation funding has a tendency to create “a sideshow” over the presence of funding. They argue that full transparency would have a “chilling effect” on the funding industry by deterring investors because of the added cost of “collateral litigation” that come with such disclosures. (For a recent example of a case in which a litigant sought – unsuccessfully — to challenge its opponent’s litigation funding in a Delaware civil action, refer here.)
From my perspective, and as I have previously suggested, the time may have come for a debate on these issues. Among other things, the Northern District of California will not be the only court called upon to consider whether or not to adopt requirements regarding litigation funding. A healthy and open debate now will ensure that any measures adopted have been fully considered and will be likeliest to serve the interests of litigants and of the courts.
Among other issues that may also be considered, beyond the kind of disclosure requirements that the California court adopted, is whether there should be registration and minimum capital requirements, and whether or not there should be mandated disclosures to funding firm investors, as well as to those receiving litigation funding. Another issue to be considered is whether these kinds of issues are best addressed through court rules or through legislative action.
In any event, the California court’s requirements are now in place and the court will in effect be conducting what amounts to something of a laboratory experiment with one type of litigation funding regulation. It will be interesting to monitor developments as they arise, particularly to see what type of problems and questions arise – for example, will litigants be able to obtain access to funding agreements or to conduct other discovery? And as the California court’s experiment unfolds, it will also be interesting to see if any other courts follow the California court’s initiative.