In April 2022, Chief District Judge Colm F. Connolly of the United States District Court for the District of Delaware issued a standing order requiring litigants appearing before him to disclose whether any part of their attorneys’ fees and expenses are being paid by a third party in exchange for a share of the litigation proceeds or “a non-monetary result.”
By requiring disclosures in cases involving funding “on a non-recourse basis”—either for “a financial interest that is contingent upon the results of the litigation” or “a non-monetary result that is not in the nature of a personal loan, bank loan, or insurance”—the court appears to be taking aim at concealed entities funding cases for motives beyond the purely economic and at the ever-expanding third-party litigation funding industry, which has been blamed for social inflation, particularly in the patent litigation context. Delaware is regarded as a popular patent litigation venue, given the many corporations incorporated there.
Per the standing order, parties to existing cases must make the necessary disclosures by June 2, 2022. Disclosures in new cases are required within 30 days of filing an initial pleading or of transferring the matter into the district.
Funded parties must disclose the funder’s name, address, and (if a legal entity) place of formation; whether the funder’s approval is needed for litigation or settlement discussions in the action and if so, the terms and conditions relating to that approval; and a description of the funder’s financial interest.
The order permits additional discovery about funding agreement terms after a showing that a third-party funder has authority to make material litigation decisions or settlement decisions in the case; the arrangement is not promoting or protecting the interest of any funded party or the class; the arrangement causes conflicts of interest; or “other such good cause exists.”
This new order is the latest development in a trend toward disclosure of litigation funding information. The U.S. District Court for the District of New Jersey adopted a similar rule in June 2021, and the Northern District of California has a standing order that requires parties to disclose the existence of third-party litigation financing in class actions. Some states, including Wisconsin and West Virginia, have passed legislation requiring disclosure of litigation funding information.
Business interest groups, including Lawyers for Civil Justice (comprised of corporate entities and defense attorneys) and the U.S. Chamber (of Commerce) Institute for Legal Reform are urging the Advisory Committee on Civil Rules to amend Federal Rule of Civil Procedure Rule 26(a)(1)(A) to require disclosure of third-party investments in all federal civil litigation at the outset of a case. These groups feed a narrative that the “rapidly expanding, $9 billion-plus third-party litigation finance industry” encourages frivolous or abusive litigation and compromises the attorney-client relationship, trapping lawyers between the client’s best interest and maximizing investor returns.
Many plaintiffs’ representatives would counter that the industry does the valuable work of removing financial barriers so their clients can access justice through the courts and that increased regulation of funders could have a chilling effect on filing new cases.
As LevelEsq continues to follow developments in this area, we proudly offer solutions to help plaintiffs get their cases into court that are not subject to disclosure rules involving non-recourse funding. Learn how we can help you finance your cases, insure your out-of-pocket costs against a trial loss, and grow your law firm business.