Litigation Funding Disclosure in Delaware: Emerging Standard?

Mandatory disclosure of litigation funding has arrived in the District of Delaware — at least in the courtroom of Chief Judge Connolly. In an April standing order, the Chief Judge directed parties appearing before him to disclose the identity of any third-party funders within 45 days for currently pending cases and 30 days for newly filed actions.

In addition to identity, parties are required to describe the financial benefit the funder stands to gain in the event of a successful outcome, and they must also disclose whether the funder’s approval is required for litigation decisions or settlement. Opposing parties may seek additional discovery of the terms of a funding agreement only:

upon a showing that the Third-Party Funder has authority to make material litigation decisions or settlement decisions, the interests of any funded parties or the class (if applicable) are not being promoted or protected by the arrangement, conflicts of interest exist as a result of the arrangement, or other such good cause exists.

Readers who follow these issues may find that the rules sound familiar. Indeed, they closely track those adopted by the full court of the District of New Jersey last year. While Chief Judge Connolly’s rules neither break new ground nor apply to his District of Delaware judicial colleagues, these rules may evidence a trend towards settling on an approach to resolve the long-running tussle over proposed mandatory disclosure of litigation funding, nationwide and internationally.

A long history

The U.S. Chamber of Commerce Institute for Legal Reform has advocated for broad mandatory disclosure of litigation funding since 2014, when it first recommended a change to Federal Rule 26 that would require parties to disclose litigation funding agreements as part of a party’s initial disclosures. At that time, the Advisory Committee on Civil Rules for federal courts determined that a rule change would be premature given that the funding landscape was relatively new and rapidly evolving. In subsequent years, the Chamber has continued to advocate for this proposed change to Federal Rule 26 without success.  In response to a 2021 letter from the Chamber and various allies advocating the proposed rule change, the advisory committee concluded (after considering the “strong views” evinced by both those advocating for and against a rule change) that it was not persuaded that the proposed changes were warranted and  declined again to make a change to the rules.

While no nationwide disclosure rule has been adopted, some federal districts have adopted disclosure rules concerning litigation funding in their local rules. In 2017, the Northern District of California adopted a local rule change to require disclosure of funding arrangements in connection with class actions. In 2021, the District of New Jersey adopted a broader rule change, applying not just to class actions but to civil litigation generally.  Judge Connolly’s adoption of disclosure rules in his courtroom in the District of Delaware becomes the latest example.

Disclosure requirements have also become increasingly common in international arbitration. Substantially all of the major global arbitral institutions have now adopted limited funding disclosure requirements. In March, ICSID Member States approved the requirement to disclose the name and address of any non-party funding a claim. Disclosure of the funding agreement is not generally required, although ICSID tribunals may order more fulsome disclosures if merited under the particular circumstances of a case. Similarly, Article 11(7) of the 2021 ICC Rules requires disclosure of “the existence and identity of any non-party” funder that “has an economic interest in the outcome of the arbitration.”  This is a domain worth watching because third-party funding gained prominence in international arbitration earlier than in American commercial litigation, and the arbitration institution rulemaking may offer a preview of developments in the domestic court context.

Arguments for and against mandatory disclosure

The disclosure reforms in international arbitration have largely been motivated by concern about conflicts of interest. Arbitral tribunals are typically assembled on an ad hoc basis, and it is not uncommon for senior arbitration practitioners to serve as tribunal members in some cases and appear as advocates in others. Many in the arbitration community therefore emphasize the importance of disclosing all non-party entities with a financial interest in a claim, which enables tribunal members to verify that they have no conflict of interest with respect to a funder.

In the domestic litigation context, the demarcation between judge and counsel tends to be more fixed, such that conflicts of interest arise less frequently. Nevertheless, it is conceivable that a judge could have a connection to a funder that could be revealed by a disclosure rule. Another argument in favor of disclosure in the litigation context applies uniquely to class actions, as illustrated by the Northern District of California’s local rule. Having a more complete picture of funding arrangements may help the court fulfill its duty to ensure class interests are adequately represented and protected.

Chief Judge Connolly’s standing order seems to have been motivated by a different consideration: the possibility that a plaintiff’s funding arrangement with a non-party could have implications for standing. In 2020, Chief Judge Connolly granted a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction in Uniloc U.S., Inc. v. Motorola Mobility, LLC, holding that plaintiff Uniloc lacked standing to pursue its patent infringement claim. At issue was a loan that Uniloc received from Fortress Investment Group to fund various patent litigation efforts. Under the terms of the funding arrangement, if Uniloc’s lawsuits collectively failed to return a specified threshold amount, Uniloc ceded rights in the patents to Fortress. Because Uniloc had not met its contractual return target, Motorola argued that Uniloc had defaulted on the loan and had accordingly ceded critical rights to Fortress such that it no longer had standing to pursue the infringement claim. Chief Judge Connolly agreed, as did two other judges hearing cases brought by Uniloc against Apple and Google in the Northern District of California.  While the particular facts of Uniloc’s funding arrangement and subsequent default are unique, Judge Connoly’s apparent concern that the real party in interest be known to the court is an oft-cited argument in favor of disclosure.

Notwithstanding these arguments in favor of disclosure, there are risks to adopting broad disclosure mandates. When the participation of a funder is revealed, it tempts the opposing party to seek to pivot the merits of the claim to a sideshow inquiry into the funder’s role. Defendants often raise the specter of the funder controlling litigation strategy and settlement decisions in the background, though a typical funding arrangement does not cede control to the funder.  A magistrate judge in New Jersey acknowledged these concerns when she denied defendants’ motions for discovery into plaintiffs’ litigation funding arrangement and rejected defendants speculative theories and warning of a ‘parade of horribles’ that might occur from litigation funding, holding that “plaintiff’s litigation funding is a ‘side issue’ that has nothing to do with addressing the key issues in the case.”

To the extent defendants seize on funding as a discovery distraction and source of delay, it counteracts the access-to-justice boost that funding can provide to meritorious claims, and increases the costs and time of litigation.  Moreover, gaining access to a claimholder’s funding agreement or underlying communications with a funder may  provide its adversary with potentially prejudicial insight into the financial position of the claimant or its financial or merit assessment of its case, without any reciprocal disclosure of the adversary’s litigation budget or analysis.

A template for disclosure?

Chief Judge Connolly’s standing order — and the District of New Jersey rule on which it was based — may reflect the emergence of an approach that may become the standard adopted more broadly in federal courts.  It appears that the courts, like the arbitration institution’s rulemakers, are attempting to balance the perceived need for some disclosure without unduly prejudicing the funded party in the process. To the extent more intrusive inquiries are sought, they must be justified by a showing of good cause.  Further, there is already precedent of courts using other balancing measures like conducting in camera review of sensitive documents as has been done in other instances of litigation funding disclosure to avoid prejudice to the funded party.

While it remains to be seen how widespread the adoption of disclosure rules will become across U.S. courts, we believe the continued normalization of litigation finance is driving the adoption of these rules, and for the same reason, will encourage courts to avoid prejudicial impacts to funded parties as a result.