Another Effort to Amend Federal Rule 26 with a One-Size Fits All Litigation Finance Disclosure Requirement Does Not Persuade the Federal Rules Advisory Committee

Marla Decker

The decision should still be up to the litigant, the Advisory Committee on Civil Rules says in a new report.

In early October 2021 — citing “challenges” in the rulemaking procedure — the Advisory Committee on Civil Rules for federal courts again declined to recommend a rule be adopted requiring the disclosure of third-party litigation financing (TPLF) agreements.

Mandatory disclosures are generally governed by Rule 26 of the Federal Rules of Civil Procedure, which requires parties to reveal a broad range of information. This includes documents and other materials the party expects to use to support its claims or defenses, the computation of categories of damages, the identity of those with discoverable information, and insurance agreements.

As it stands, the rule does not require disclosure of TPLF.

The advisory committee said in its Oct. 5, 2021, report that it had placed the issue on the fall agenda in response to an inquiry from Sen. Charles Grassley (R-Iowa), ranking member of the Senate Judiciary Committee, and Rep. Darrell Issa (R-Calif.), ranking member of the House Judiciary Committee. Both lawmakers have introduced legislation concerning the disclosure of TPLF agreements.

These bills notwithstanding, the advisory committee’s report “does not recommend any immediate action, but provides an opportunity for Committee members to address these issues.”  One possible response, the report continued, “is to conclude that this collection of issues is too diverse to be handled by a civil rule amendment. Another is to conclude that regulation of TPLF is best left to other entities, such as state legislatures, rather than individual federal judges.”

The committee reviewed arguments in favor of and against rule-making, the nature and variety of TPLF, limitations and challenges with applications of a one size-fit rule, and approaches taken to date by various courts.  Ultimately, the Committee concluded that it would need “better grasp of the TPLF phenomenon itself, for devising a rule that suitably deals with it seems to depend on some confidence about how it works” while questioning “how much a rule change would improve the handling of [issues raised by TPLF]”.

A Long-Standing Effort

Over the years, many parties have proposed that the federal rules be changed to require TPLF disclosure. The U.S. Chamber of Commerce Institute for Legal Reform first recommended that a requirement to disclose TPLF be added to Rule 26 in 2014. At that time, the advisory committee concluded that not enough was known about the rapidly changing field.

The Chamber and its allies have submitted proposals regularly ever since. The latest salvo came in late September, when the Chamber, various state chambers, the American Property Casualty Insurance Association, the American Tort Reform Association, and the Association of Defense Trial Attorneys, among others, submitted a letter to the secretary of the Committee on Rules of Practice and Procedure of the Administrative Office of the U.S. Courts.

Citing several factual disputes regarding TPLF, the letter suggested “implementing the proposed rule on a trial basis and observing what it reveals.” The letter proposed a one-year TPLF disclosure pilot project for civil cases in several federal districts through an amendment to Fed. R. 26(a)(1)(A).

The pilot program could offer “valuable insights on several key questions,” the letter said. These include how exactly TPLF should be defined, the amount of influence or control exerted by TPLF companies over litigation, and whether a federal rule is necessary in light of existing local rules.

For example, the advisory committee report mentioned a local rule adopted in early 2017 by the Northern District of California calling for disclosure of TPLF arrangements in connection with class actions. And, in late June 2021, the District of New Jersey addressed TPLF with a local rule.

Like previous submissions from the U.S. Chamber and its allies, the September letter failed to sway the advisory committee.

“It is clear that there are strong views on both sides of the disclosure issues,” the report stated. “It is not clear that either set of views is correct in all instances, or most of the time.”

The pro-TPLF camp — which believes disclosure is unnecessary — noted that such funding helps people with valid claims to sustain litigation. The validity of the claims is carefully scrutinized before a funding decision is made because the viability of the business model demands it, according to the report.

Insurance Coverage and TPLF

Much of the debate on the Chamber’s proposed rule over the years has revolved around the merits of litigation financing in general.

Perhaps the most facially appealing argument for the rule is that since the 1970s, Rule 26 has required the disclosure of “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 Chamber has argued that such arrangements are analogous to TPLF and therefore disclosure of the latter is warranted.

Insurance coverage and TPLF, however, function and impact litigation dynamics in different ways. TPLF provides resources to prosecute an action, whereas insurance mainly provides resources to satisfy a judgment.

Settlement authority is a further distinction between insurance companies and TPLF companies. Insurers always retain this authority, while litigation funders rarely do.

Lake Whillans’ Code of Conduct, for example, states that in the customary case where the claimant retains settlement authority “there should be no terms that limit or inhibit the claimholder’s exercise of that control right for its own economic advantage.”

In the rare event that a litigation funder does retain settlement authority, courts already have tools to require the funder to attend any court hearings or mediation sessions, the advisory committee has noted in past reports.

Another relevant consideration is the purpose of the Rule 26 disclosures. They are intended to expedite the routine or inevitable. By the time Rule 26 required disclosure of insurance, courts were routinely ordering this anyway.

As the advisory committee noted: “Long before 1970, liability insurance had come to play a central role in supporting actual effectuation of general tort principles. . . . The role of insurers in settlement negotiations is familiar, and in many states has led to rules of liability for bad-faith refusal to settle.”

It is far from clear that disclosure of TPLF arrangements is necessary, much less routine or inevitable. In fact, in the normal discovery process, courts have repeatedly rejected attempts to obtain the disclosures the Chamber seeks on the basis that it could prejudice the funded party.

For example, the Delaware Chancery Court held in the 2015 case Carlyle Investment Management LLC v. Moonmouth Company S.A. that the terms of the “final [litigation funding] agreement — such as the financing premium or acceptable settlement conditions — could reflect an analysis of the merits of the case” and were thus protected from disclosure by the work product doctrine.    Most recently, a Massachusetts Magistrate Judge denied Facebook’s motion to compel disclosure of a funding agreement in a dispute alleging that the company misappropriated trade secrets of the plaintiff, finding the requested information irrelevant or “not proportional to the needs of the case.”

The advisory committee’s report recounts another recent treatment of the disclosure issue.

In a 2020 case from the U.S. District Court for the District of Arizona, Continental Circuits LLC v. Intel. Corp., the plaintiff asserted that Intel had infringed several of its patents. Intel sought discovery of any final agreement between the plaintiff and any funder, the identities of all persons or entities with a fiscal interest in the outcome, and “the identities of any potential funders who declined to provide funding after being approached by plaintiff,” the report said.

The district court ordered the plaintiff to identify its funders, but denied further discovery. T he court,following Ninth Circuit precedent as to the definition of work product, found that the agreement was produced “because of” the litigation and thus entitled to work product protection.

“As this case demonstrates,” the report said, “the handling of discovery requests in given cases depends considerably on the specifics of those cases. It does seem that district judges have inquired into funding and provided discovery about it when justified in a given case. At the same time, it is apparent that tricky work-product issues may arise with some frequency, particularly if funders seek and obtain opinion work product as part of their scrutiny of requests for funding.”

‘An Increasingly Big Deal’

The advisory committee’s report also recognized that “TPLF is, according to some, an increasingly big deal.” It quoted a 2021 Vanderbilt Law Review article that states: “Litigation finance is our civil justice system’s killer app. Unheard of yesterday, it is a mainstay today.”

For now, at least, litigants entering funding arrangements need not disclose them as a matter of course. Some may decide to do so anyway to show the case’s strength or drum up publicity, but the decision remains the litigant’s to make.

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