Emerging possibility of required disclosure of litigation funding

October 17, 2021

Taking a magnifying glass to litigation funding
October 17, 2021

Emerging possibility of required disclosure of litigation funding

As the public has become more aware of third-party litigation funding in recent years and judges and lawyers have grappled with the ethical implications of these arrangements, the concept of requiring parties to disclose information about litigation funding has gained traction.  

You may have read about the amended local rule 7.1.1 in the U.S. District Court for the District of New Jersey (DNJ), which took effect in June and requires parties to disclose information about non-parties that provide non-recourse funding for attorneys' fees and expenses. Parties must reveal the funder's name and address, whether the funder's approval is "necessary for litigation decisions or settlement decisions," and a "brief description of the nature of the financial interest." Litigants can also seek discovery of funding terms after a good cause showing.

The lead criticisms of the disclosure requirement charge that it is pro-defendant, vague (how does one describe the nature of a funder’s financial interest?) and broad (possibly requiring the disclosure of attorney contingency fee agreements) and promotes unnecessary motions practice that will tax the resources of litigants and the courts.  

The DNJ amended rule is not entirely unique. It is part of a trend toward transparency as the public perception of litigation funding seems to be that it encourages frivolous or abusive litigation and compromises the attorney-client relationship, trapping lawyers between the client’s best interest and maximizing investor returns.

In 2017, the Northern District of California adopted a standing order requiring parties to disclose the existence of third-party litigation financing in any class actions, which are likelier than other cases to have high amounts in controversy and involve litigation financing.

In April 2018, Wisconsin passed a statute requiring automatic disclosure of any agreement under which “any person” (not corporation) has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action. The law exempts the disclosure of lawyers’ contingency fee agreements, while the DNJ rule does not. West Virginia passed a similar statute in 2019.

In the meantime, bar associations and ethics boards have issued guidance and outlined best practices for attorneys who use litigation funders. And while there have been cases in which judges have considered whether the identity of such funders was relevant to the case, they have stopped short of requiring the disclosure of the actual funding agreement.

Given the trend, litigators should consider whether this shift toward disclosure might benefit them, enlightening defendants who think they can outspend plaintiffs and increase the reputation of plaintiffs’ firms with strong access to funding. This is not to say that parties should disclose the terms of their funding agreements. According to the International Legal Finance Association, most courts have ruled that financing agreements are not generally discoverable. Materials created for and provided to a potential financer because of litigation are typically protected under the work-product doctrine.  

It will be interesting to see where this transparency trend goes next. In the meantime, if you’re concerned about having to disclose your litigation cost funding under DNJ’s amended rule, you should consider LevelEsq’s solutions, which do not constitute non-recourse funding. Find out more at levelesq.com.

Source material: Proposed NJ Rule on Legal Finance Is a Solution in Search of a Problem; Who Is Paying? NJ Federal Court Orders Disclosure of Third-Party Litigation Financing; Push for Disclosure Grows as Litigation Financing Becomes More Commonplace; Push for Litigation Funding Disclosure Grows

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