One of the hot topics in the litigation arena these day is the question of whether or not litigants should be obliged to disclose their litigation funding arrangements to opposing parties. Indeed, as discussed here, last month three U.S. senators introduced a bill to require litigation funding arrangements to be disclosed in class action litigation and multidistrict litigation. One of the arguments raised in favor of this type of disclosure is that under the Federal Rules of Civil Procedure defendants are already required to disclose to opposing parties at the outset of the case their insurance coverage information. In an interesting June 11, 2018 Law 360 article entitled “Claimants Shouldn’t Be Forced to Disclose Litigation Funding” (here), Matthew Harrison and John Harabadian of Bentham IMF litigation funding firm challenge the parallels that are usually drawn in this context between discovery of insurance and discovery of litigation funding arrangements, arguing that while this comparison is “superficially appealing,” the two types of disclosures “are far different by nature.”
Under Fed. R. Civ. Proc. 26(a)(1)(iv), a party to a civil action must produce to other parties at the outset of the litigation “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” The rules advisory committee noted with respect to this requirement that the details about insurance coverage represent “basic information that is needed in most cases to prepare for trial or make an informed decision about settlement.”
Thus, the authors of the Law 360 article note, “the rationale for disclosure of insurance policies is tied to an early assessment of a defendant’s ability or possible inability to pay a judgment or settlement based on the merits of the case.” The authors further note that other than the insurance coverage information, defendants are not obliged to disclosed any other specific financial information, such as sources of financing for the defense of the case or their litigation budgets
Requiring litigants to disclose their litigation funding arrangements, the authors argue, “would divulge far different information from liability insurance policies.” The forced disclosure of litigation funding arrangements “would harm the disclosing party – typically the claimant – by revealing its ability to pay legal fees and costs, which would give the defendant enormous leverage to force unjust settlements on plaintiffs, with no connection to the merits of the claims or defenses.” The disclosure of liability insurance policies may help facilitate settlement but the disclosure, the authors argue, does not reveal the defendants’ ultimate risk tolerance in the form of the amount the defendant is able and willing to spend defending or resolving the case.
Another important difference between requiring the disclosure of insurance and the disclosure of litigation financing arrangements is that the disclosure of the defendant’s insurance (which was purchased before the occurrence of the underlying event triggering the claim) “does not disclose a defendant’s confidential financial assessment of the claim at issue, and, therefore do not prejudice a defendant’s ability to defend itself.”
By contrast, disclosure of litigation funding arrangements would reveal information about the claimant’s financial means, litigation budget, and potential pressure points; it would, the authors argue “provide the defendant with a roadmap to the plaintiff’s litigation strategy.” And since the majority of plaintiffs do not have litigation funding, the defendants would immediately know that these plaintiffs lack third-party financial support.
The authors contend that the imposition of these various harms on claimants through compelled disclosure of litigation funding arrangements lacks the policy rationale that justifies the required disclosure of insurance. The federal rules require the disclosure of insurance, by contrast to all other financial information potentially relevant to the defendant’s ability to sustain the litigation, because of the relevance of the insurance to the settlement or payment of any judgment.
Litigation funding, by contrast, cannot be used to satisfy the claim. So in that way, litigation funding is more like the other financial information that defendants are not required to disclose (that is, having to do with the party’s financial ability to sustain the litigation), than it is to insurance. And unlike the disclosure of insurance, the disclosure of a funding agreement “does involve a significant invasion of privacy and of attorney work product.”
The authors argue further that there are a number of recognized discovery protections available with respect to insurance that may not be available with respect to the disclosure of litigation funding arrangements. State and federal courts have long protected communications between insurers, the insured defendant and defendant’s counsel from third-party discovery under the common interest or joint defense doctrine. By contrast, “courts have been reluctant to recognize the applicability of the common interest doctrine or joint prosecution privilege for claimants’ communications with litigation funders under the attorney work product doctrine,” resulting in the threat of a burdensome, distracting, and even potentially prejudicial discovery sideshow.
The authors draw a contrast between compelled automatic disclosure of litigation funding with the disclosure arrangements Northern District of Ohio Judge Dan Polster recently made in the opioid multidistrict litigation (discussed here). Judge Polster ordered the parties to disclose, ex parte and in camera, any litigation funding arrangements, with the further provisio that “absent extraordinary circumstances, the Court will not allow discovery into [third-party litigation] financing.” The authors suggest that “if adopted by Courts on a broad scale, this approach would establish a reasonable middle ground for judges to assess financing agreements without affording defendants an unfair advantage.
The authors conclude by saying that while it may be “superficially appealing” to compare the disclosure of insurance and the disclosure of litigation funding, “the disclosures are different in nature.” The disclosure of litigation funding arrangements “will inevitably result in costly discovery sideshows that unnecessarily burden claimants and the courts – concerns that rarely, if ever, arise in the insurance coverage context.”
The authors may have a point that the policy justifications for the mandatory disclosure of insurance – that is, to facilitate possible settlement of the claim – are not present with respect to the disclosure of litigation funding arrangements.
There are, however, at least some ways that the two types of disclosure arguably are similar. Both involve discovery into a litigation-specific financial contract a party may have, without respect to any of the party’s other financial circumstances. Moreover, the existence of a liability insurance policy providing defense protection is relevant to a defendant’s ability to defend the claim; could and likely will affect the way the defendant conducts the litigation; and is important for the claimant to know about. All of these same things arguably might also be said of producing litigation funding information.
In addition, the comparison to producing insurance information is generally not cited as a justification for requiring litigation financing disclosure; rather, the comparison usually comes up to try and suggest that the production of the funding arrangements wouldn’t be that big of a deal. (As in, we already require parties to produce insurance information and that doesn’t cause too many problems.)
The usual justification for requiring the disclosure of litigation funding actually has nothing to do with the comparison to the production of insurance information. The usual justification for requiring litigation funding information is to provide a way to find out if the litigation funding arrangements create a conflict of interest.
Whether or not the concern about the possible existence of conflicts of interest has substance or is a sufficient rationale to require mandatory disclosure in all situations are matters for debate. However, this concern carries some weight with some legislators and policy makers who are generally suspicious of litigation funding in the first place. That is why Wisconsin recently adopted rules requiring mandatory disclosure of litigation funding arrangements. Concerns about conflicts of interest also were the primary consideration that Senator Grassley cited when he recently introduced the pending Senate legislation to make litigation funding disclosure mandatory in class action litigation and MDL litigation. Again, whether or not the conflict of interest concern is justified and sufficient to require disclosure in all cases, it seems to get some lawmakers’ attention.
Because of the persistent concerns about possible conflicts of interest (and the backdrop of suspicion about litigation funding in the first place), I think it is more likely than not that eventually there will be some form of required disclosure of litigation funding arrangements. The customized approach that Judge Polster took in the opioid litigation might also address these supposed conflict of interest concerns, but I wonder whether the existence of this alternative is going to satisfy the lawmakers and advocates who are more interested in a more structured (and mandatory) approach.
If we are going to have mandatory disclosure, we need to have safeguards to prevent litigation funding disclosure from turning into a distracting and expensive sideshow. One particular aspect of Judge Polster’s order in the opioid litigation that makes sense was its presumption against further discovery about the litigation funding arrangements absent extraordinary circumstances. The creation of a rebuttable presumption against further litigation financing discovery, requiring court approval before any party could pursue further discovery on litigation financing arrangements, would help to prevent the litigation financing issues from becoming a distraction.
The most critical issue is going to be whether the mandated disclosure should include the production to opposing parties of the actual financing agreements. I can certainly see the argument that without access to the actual details of the financing arrangement, opposing counsel will not be able to assess the agreement for signs of conflicts of interest or to have a basis on which to assess whether to seek further discovery. On the other hand, I can see the argument that claimants should not have to disclose the sensitive details of their private and confidential financial arrangements, or produce documents that reflect work product. Judge Polster’s requirement only that the parties produce the funding agreements ex parte seems like a practical compromise. It just may not be enough to satisfy the skeptics.