Update: Rules Governing Disclosure of Litigation Finance

Garrett Ordower | February 9, 2018

The U.S. Court’s Advisory Committee on Civil Rules signaled in its recently released report that litigation finance continues “growing and evolving” and that considering potential rules mandating disclosure of funding arrangements must begin “if at all, by undertaking a careful quest for information that may be hard to come by.” That process will not proceed quickly, and “the topic may be no more ripe for further work now than it was in 2014 or 2016,” when two prior proposals were rebuffed.

The committee delegated initial consideration of the proposal by the U.S. Chamber of Commerce to a subcommittee studying various issues related to multi-district litigation, or MDL. The subcommittee has been tasked with a six- to 12-month project aimed at gathering information on litigation financing and other MDL-related topics.  (The committee made its report of the November 2017 meeting public last week; the report confirms what had been previously reported in the press.)

The Chamber’s proposed amendment to Rule 26 of the Federal Rules of Civil Procedure would have required 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 advisory committee noted that the only “clear” aspect of the proposal is that “it is not designed to regulate third-party lending in any way” and would only mandate disclosure; “the benefits to be gained by disclosure are less clear.” The report rattled through the Chamber’s purported list of reasons for disclosure — such as protecting against the funder’s “undue influence” — but noted that opponents of the proposal argue “that the professed motives camouflage different motives” aimed more at the practice of litigation funding than lack of disclosure.

The advisory committee considered the argument that litigation financing is similar to insurance, which does need to be disclosed. It found some parallels but significant differences.  Disclosure of insurance agreements, for example, is limited to insurance businesses. “Other forms of indemnification agreements are not covered. Nor is discovery generally allowed into a defendant’s financial position, even though both indemnification agreements and overall resources may have impacts similar to, or even exceeding, the impact of liability insurance.”

In discussing the proposal, the committee members noted “possible difficulties” with the draft language. The proposal would reach all sorts of potentially unintended arrangements like loans from family and friends and subrogation interests including the rights of medical insurers to recover from a successful plaintiff.

More broadly, the committee questioned whether the federal rules could even play a “useful role” in addressing the issues raised by the Chamber. “Fears about confidentiality, conflicts of interest, vigorous advocacy, party control of settlement, and even fee-splitting resonate to rules of professional responsibility that are traditionally and peculiarly a matter of state regulation.” The substantive debate over litigation financing urged by the Chamber “demonstrate[s] a complicated and politically charged interplay between rules of procedure, rules of professional responsibility, and substantive regulation of third-party financing.” The committee reiterated that “much more must be learned before determining whether a useful role can be found for new procedures . . . .” Such a rule might also prove counterproductive by “rais[ing] potentially troubling questions that cannot be addressed within the framework of existing law.”

Caution in moving forward is particularly warranted, the committee found, because courts have had “no more than episodic encounters with the terms of actual financing arrangements, nor even a reliable sense of just how common these arrangements are or will become.”

For now, the disclosure landscape remains the same. Courts continue to uphold the work product protection for litigation finance arrangements and communications with funders. And with the advisory committee’s acknowledgment that litigation financing continues “growing and evolving” it appears committed to moving cautiously on developing a mandatory disclosure rule.

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