As the use of third-party litigation funding has become more widespread, one issue that has been debated is whether or not the existence and details of a funding arrangement must be disclosed to the adversarial parties. As I have noted in prior posts, courts have struggled with the question of whether or not funding arrangements must be disclosed under existing discovery rules. A number of proposals providing for mandatory disclosure of litigation funding arrangements have been proposed. Now, Wisconsin has become the first state to adopt a provision requiring the disclosure of litigation funding arrangements. The state’s action is just the latest step in what seems to be a general move toward requiring disclosure.
Litigation funding is a mechanism to provide litigants with the financial means to pursue litigation, or even the financial means to defend litigation. In exchange for the financing, the borrower agrees to give the funders a portion of any settlement, judgment or fee awards. The practice is well-established in Australia and Canada, as well as in the U.K. Litigation funding is still relatively new in the U.S, but the industry is growing rapidly.
As discussed in a March 21, 2018 Wall Street Journal article entitled “Lawsuit Funding, Long Hidden in the Shadows, Faces Calls for More Sunlight” (here), both the financiers and the borrowers have generally tried to keep their arrangements confidential. However, as the article notes, “as litigation funding in the U.S. has spread to more courthouses and transformed into a billion-dollar business, plaintiffs and their faceless financiers are confronting calls for more transparency.”
As the Journal article details, courts have wrestled with the question whether litigants must disclose details of litigation financing in the ordinary course of discovery. However, at least one federal district court has instituted 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.
There is also a current proposal pending that would revise the Federal Rules of Civil Procedure to require disclosure of third-party funding arrangements. As James Beck notes in a post on his Drug and Device Law Blog (here), the Advisory Committee on Rules of Civil Procedure has introduced a change to the Federal Rules of Civil Procedure that would provide for mandatory initial disclosure of “any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.” The Committee is expected to take up the proposal later this year. As I noted in a prior post, there have been a variety of Congressional initiatives on this subject in recent years as well.
As a recent memo from the Skadden law firm (here) put it, even though “the tide of legislative and judicial opinion seems to be turning toward disclosure,” for now it seems as if the issue will be addressed on a jurisdiction by jurisdiction basis.
Now, at least one state has instituted a statutory provision requiring the disclosure of litigation funding arrangements. On Tuesday, April 3, 2018, Wisconsin Governor Scott Walker signed into law Wisconsin Act 235 specifying that in civil actions in Wisconsin’s state courts litigation funding agreements must be disclosed. According to Ben Hancock’s April 4, 2018 article in The National Law Journal (here), the Wisconsin statute “appears to be the first law of its kind in the United States, and comes amid a continued push by litigation finance opponents to increase transparency in the industry.”
The relevant statutory provision specifies that even without first requiring a discovery request, a litigant must provide to other parties “ any agreement under which any person … has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment or otherwise.” The provision does not apply to lawyer contingency fee arrangements.
The U.S. Chamber of Commerce Institute for Legal Reform issued an April 3, 2018 press release hailing the “groundbreaking” enactment of the legislation, which the Institute had supported. The National Law Journal article to which I linked above quotes Institute President Lisa Rickard as saying “It’s our hope that other states will follow suit,” although she also noted that she is not aware of any other states where similar legislation is pending.
The National Law Journal article also contains comments from a representative of Burford Capital, the largest litigation funding firm, “downplaying the likelihood that Wisconsin law could spur the adopting of similar transparency laws elsewhere,” and as saying that “we view this as an accidental outlier that is likely to change in due course once Wisconsin businesses realize that their legislators just overreached.”
The advocates for requiring mandatory disclosure of funding arrangements say that litigants have a right to know if another party stands to benefit financially from the successful prosecution or settlement of a case. This particular point of view receiving a great deal of attention in connection with Hulk Hogan’s privacy litigation against Internet scandal site Gawker, that was funded by Silicon Valley mogul Peter Thiel. As discussed here, the news about Thiel’s financial involvement produced a cascade of commentary about litigation funding, which in turn has arguably put the litigation industry on the defensive.
Litigation funders, by contrast, argue that mandatory disclosure requirements will invite expensive and lengthy discovery battles, and that the disclosure of funding documents could reveal information relating to assessments of the case’s strengths and weaknesses. They also argue that the funding arrangements are irrelevant to the merits of the case.
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. Questions surrounding mandatory disclosure requirements, among other issues, will continue, as will more general questions involving the regulation of third-party litigation funding.
As I have emphasized in the past, I am not necessarily advocating steps to regulate litigation finance, 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.