Litigation Funding – Do Other Parties Have the Right to Know? | USA

As parties involved in high-stakes litigation are increasingly partnering with litigation funders, some courts are requiring disclosure of a litigation funder’s support of an action. There is considerable debate, however, as to whether such disclosure is relevant or privileged and, if so, to what extent. There are arguments for and against proposed disclosure regimes, but these need to be discussed in conjunction with the potential impact of this trend on high-stakes commercial litigation in the future.

“Third-party litigation funding” describes an arrangement in which a non-party funder funds a litigant and/or a law firm in exchange for a share of the potential settlement or payout from a lawsuit. These arrangements are non-recourse, meaning that if the lawsuit is not successful, the funder will not be repaid. Although defendants also engage in forms of litigation funding, this article discusses only plaintiff-side litigation funding.

Litigation funding in the United States has grown considerably in the last decade and shows no signs of abating. One recent study estimated that large US commercial litigation funders had a total of USD13.5 billion in assets under management as of 2022. The size of the industry is expected to double within five years.

The support of a litigation funder can “level the playing field” and ensure that a plaintiff has the resources needed to maintain a lawsuit against a better-resourced defendant. For plaintiff lawyers, funding spreads the downside risk of bringing a case with a contingent recovery, just as liability insurance helps defendants share the downside risk of a meritorious lawsuit. Funding also provides lawyers with the cash flow necessary to maintain suits that may only result in a contingency fee award several years later.

On the other hand, the existence of funding may incentivise plaintiffs to seek higher settlements, because typically, the lawyer and funder must be paid from a lawsuit’s proceeds, with lower total recovery for the plaintiff. Funding arrangements may also create the risk that a funder, seeking to preserve its return on investment, exerts control over litigation or settlement strategies. For similar reasons, a lawyer may improperly place the funder’s interests over their client’s.

Certain courts around the US have begun to implement rules mandating parties to disclose any funding arrangement to the opposing party in a litigation. Because there is no unifying rule, these requirements – which may be imposed by local rule, standing order, or individual judicial practices –vary greatly in the extent of disclosure required. For instance, Chief Judge Connolly of the United States District Court for the District of Delaware has issued a Standing Order requiring parties receiving litigation funding to:

However, the Standing Order only permits a party to seek further discovery if the funder “has authority to make material litigation decisions or settlement decisions”, there is a conflict resulting from the arrangement, or for “good cause”. The District of New Jersey’s Local Rules mandate disclosure of the same information and allow a party to “seek additional discovery of the terms of any such [litigation funding] agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions… or such other disclosure is necessary to any issue in the case.”

Noting the lack of a unified regime, some have called for a federal rule mandating disclosure of funding arrangements (and parallel state rules). Others, including the US Chamber of Commerce, go beyond advocating for disclosure of the funding relationship and propose that Federal Rule of Civil Procedure 26 be amended to require production of any underlying litigation funding agreement in the party’s initial disclosures. This proposal parallels Rule 26(a)(1)(A)(iv)’s existing requirement that a party against whom judgment is sought must produce any potentially applicable insurance agreement. Advocates for this position argue that disclosure of a funding agreement is the only way to clarify the extent of control or influence held by a funder.

Opponents of disclosure rules argue that the existence of a litigation funding relationship is irrelevant to any claim or defence. One court recently summed up this view in Petersen Energia Inversora SAU v Republic of Argentina, “[r]eject[ing]” the defendant’s “effort to inject [litigation funder] Burford Capital into these proceedings” and explaining that “the relevant question is what the [defendant] owes Plaintiffs… not what Plaintiffs have done or will do with what they are owed.” Similarly, New York’s Appellate Division, First Department recently found “palpably improper” a defendant’s request for discovery about litigation financing where the “defendant has not explained how discovery… would support or undermine any particular claim or defence” (Worldview Entertainment Holdings, Inc v Woodrow).

In response to the more expansive proposal to mandate production of a litigation funding agreement, opponents note that such disclosure would invade the work product protection, because the terms of the funding agreement would necessarily reveal information about how the funder, plaintiff and counsel value the risks of a specific case, and could also reveal information about the overall litigation strategy.

Existing disclosure rules have not dramatically altered the litigation funding industry because most rules require defendants to demonstrate good cause for any discovery beyond the fact of the funder’s involvement. Still, disclosure has incentivised defendants to argue for dismissal on the basis of the existence of funding (as occurred in an earlier phase of Petersen Energia) or for further discovery, suggesting that even minimal disclosure can lead to wasteful litigation over non-merits issues.

More expansive disclosure rules would likely impose additional costs on funders and plaintiffs. Awareness of the extent of a funder’s monetary support may encourage defendants to delay the case to the approximate point at which the plaintiff runs out of funding, then pursue an advantageous settlement with the knowledge that the plaintiff lacks resources. And even where an agreement disclaims the funder’s influence on litigation or settlement decisions, defendants may nonetheless argue that such influence exists based on other provisions in the litigation funding agreement, resulting in higher litigation expenses as those issues are raised.

Whatever disclosure rules are adopted, litigation funding is here to stay. With the explosive growth in the industry in the last decade and its clear benefits to plaintiffs and counsel, it is likely that funders will adapt their arrangements to new rules and potentially higher costs, rather than disappear in the face of increased disclosure requirements.