Claimants considering litigation financing often ask whether financing must be disclosed to U.S. courts. The answer in federal courts – for now – is no (save one limited exception).
Rule 26 of the Federal Rules of Civil Procedure currently requires initial disclosure of a broad range of information including the documents and other materials the party expects to use to support its claims or defenses, the computation of categories of damages, the identification of those who might have discoverable information, and insurance agreements. But the rule doesn’t require all potential disclosures, including for example, litigation financing arrangements.
The U.S. Chamber of Commerce wants to change that. Earlier this year, the Chamber proposed that Rule 26 be amended to require disclosure of all litigation financing arrangements in federal cases. Specially, “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 Chamber made this same proposal in 2014, but the Advisory Committee on Civil Rules rejected it at the first step in a long rulemaking process. The renewed proposal will return to the advisory committee, which under its regular process will review the proposal at its biannual meeting this fall. If the advisory committee moves the measure forward this time around, it will face further review, including by Congress. The earliest the rule change can become law will be December 1, 2019.
Although the Chamber’s previous proposal didn’t proceed past the initial committee, the members engaged in a thoughtful discussion. In the end, the advisory committee concluded that because “litigation financing practices are in a formative stage . . . [w]e should not act now”: “[T]he issue is important but . . . rulemaking is not yet appropriate. Litigation finance is a relatively new field. Besides, judges already have tools to obtain this information when relevant. And the absence of a mandatory-disclosure rule does not appear to hinder the resolution of cases involving litigation financiers.”
In 2016, a local rule change was proposed that would have mandated disclosure of litigation funders in the Northern District of California. But that broad proposal was batted down; instead, the Court opted to require that “in any proposed class, collective, or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.”
Predictably, the Chamber’s renewed proposal (supported by many members of the defense bar) has met with significant opposition. Notably, opponents argue, if rulemaking was premature just three years ago, not much has changed. Litigation finance is still a developing field and while there have been continued inroads since 2014 the field is still relatively new.
Much of the current debate on the Chamber’s rule centers not on the value of disclosure itself but on the overall merits of litigation financing. But perhaps the Chamber’s most facially appealing argument 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 argues that such arrangements are analogous to litigation financing and therefore disclosure is warranted.
Insurance coverage and litigation finance, however, function and impact litigation dynamics in different ways. Litigation finance provides resources to prosecute an action, whereas insurance mainly provides resources to satisfy a judgment. The distinction becomes obvious when considering settlement dynamics: a party that finds out the amount an insurance company can pay will be incentivized to settle for that amount knowing that the defendant is also incentivized to settle at or below its insurance coverage, and more money may not be readily available. A party that finds out the amount available through litigation financing may be incentivized not to settle but instead to bleed the other party in litigation until its finite resources run out.
Moreover, while insurance companies almost always retain settlement authority litigation funders rarely do so. 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, as the Advisory Committee recognized in 2014, courts already have the tools to require the funder to attend any court hearings or mediation sessions if the absence of settlement authority is perceived as a problem.
Another relevant consideration is the purpose of the Rule 26 disclosures, which are intended to shortcut what are otherwise routine or inevitable necessary disclosures in every case. By the time Rule 26 required disclosure of insurance courts routinely ordered such disclosure anyway. As the advisory committee noted, “[l]ong 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 litigation finance 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 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 was thus protected from disclosure by the work product doctrine. (Litigants may seek information on litigation financing outside of Rule 26 — though these efforts, as in the Carlyle case, have been largely unsuccessful. A forthcoming article will discuss these cases, and for further discussion also read here).
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 unless the Chamber succeeds this time around that decision will likely remain the litigant’s to make.