filefoldersMost observers of the current litigation scene are well aware of the recent rise in litigation funding, both in the U.S. and around the world. Indeed, according to a recent memo from the Skadden law firm (here), in 2016, “the worldwide market for third-party litigation financing was estimated to exceed $1 billion.” The industry is likely to continue to grow. The rise of litigation funding has not been without its concerns, however; with the increasing role of litigation funding have come calls for regulation of various kinds. One recurring issue has been with respect to the requirement of mandatory disclosure of litigation funding.


The courts have struggled with whether or not one party to a lawsuit can compel its adversary to disclose third-party litigation financing in the course of discovery. On the one hand, in August 2016, Northern District of California Judge Susan Illston held that the defendant, Chevron Corp., was entitled to discovery of claimant’s litigation funding agreement. The class action lawsuit sought the recovery of damages for a Nigerian oil rig.  The plaintiff had moved for class certification. Chevron opposed the motion and, among other things, sought discovery relating to the claimant’s funding arrangements in connection with the question of the adequacy of the claimant to represent the putative class.


Judge Illston held that Chevron was entitled to discovery of the funding agreement. She rejected the claimant’s proposal to make the agreement available for in camera review as “inadequate because it would deprive Cheveron of the ability to make its own assessment and arguments regarding the funding agreement and its impact, if any, on plaintiff’s ability to adequately represent the class.”


On the other hand, in September 2015, Southern District of New York Magistrate Judge Kevin Fox held in Kaplan v S.A.C. Capital Advisors (here) held that the defendants were not entitled to discovery of the claimant’s third-party funding arrangements. The defendants, like Chevron in the Nigerian oil barge explosion case, had sought to compel production of the claimant’s third-party funding agreement, in connection with the question of the claimant’s adequacy to represent the putative class. In connection with this adequacy argument, the defendants sought to argue that the plaintiff lacked sufficient resources to represent the class or that there were potential conflicts with the interests of the class. Magistrate Judge Fox rejected these arguments as “purely speculative,” adding that the plaintiff’s entry into a litigation funding agreement does not by itself raise questions about the plaintiff’s ability to fund the litigation adequately. The Magistrate Judge rejected the defendant’s effort to compel production of the litigation funding agreement, because the defendants had not shown that the funding agreement was relevant to any claim or defense.


While the various courts have wrestled with these questions about the obligation to make details of litigation available in the ordinary course of discovery, at least one court has amended a requirement — the first of its type — specifying the automatic disclosure of third-party funding agreements in proposed class action lawsuits. As discussed here, on January 23, 2017, the Northern District of California amended its Standing Order to require disclosure of third party funding arrangements in class action lawsuits, a development that one observer called “groundbreaking.”


While at this point no other federal district court has followed the Northern District of California’s lead on this issue, Congress itself now has taken up the issue. As discussed here, in February 2017, Rep. Bob Goodlatte (R-Va.) introduced the Fairness in Class Action Litigation Act, H.R. 985, which, as discussed here, includes a provision that requires the prompt written disclosure to the court and all other parties of “the identity of any person or entity, other than a class member or class counsel of record, who has a contingent right or receive compensation from any settlement, judgment or other relief obtained in the action.”


In March 2017, the U.S. House of Representatives passed the bill (including the provision requiring disclosure of third party litigation funding) and the bill was received in the Senate and referred to the Senate Judiciary Committee. Whether or not this bill will become law remains to be seen; an earlier class action reform bill that Rep. Goodlatte advanced in 2015 also made it through the House, but the bill died in the Senate.


As the Skadden memo to which I linked above put it, even though “the tide of legislative and judicial opinion seems to be turning toward disclosure,” the issue “had not been squarely addressed in most jurisdictions.” Unless Congress passes a nationwide disclosure requirement, “rules will continue to be crafted on a jurisdiction-by-jurisdiction basis.”


The requirements in this area are, as the Skadden memo puts it, “rapidly changing.” I agree with the Skadden memo that there is an overall move toward more regulation of third-party litigation funding, including in particular with respect to required disclosure of litigation funding arrangements. These developments are an almost inevitable consequence of the rise of litigation funding, a topic that I discussed at length here and here.


As litigation funding becomes increasingly prevalent, and in particular, as questions about litigation funding continue to arise, calls for regulation and disclosure are likely to continue. Courts in a number of jurisdictions increasingly are raising questions about third-party litigation funding; indeed, one judge in Australia recently raised concerns in connection with a shareholder class action lawsuit settlement with regard to the plaintiff’s third-party litigation funding arrangements.


These kinds of questions will continue to be asked. Questions surrounding mandatory disclosure requirements, among other issues, will continue, as will more general questions involving the regulation of third-party litigation funding. A discussion of possible regulation might include, for example, 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.


As I have emphasized in the past, I am not necessarily advocating any of these steps, but I do think the time has come for a debate on these issues, particularly with respect to mandatory disclosure. Indeed, I think it arguably would be in the interest of the firms currently in the litigation funding vanguard to get out in front on these issues, to try to bring about a level and type of regulation and disclosure that is acceptable to them.