Litigation Funding? Hardly Relevant (To Claims and Defenses That Is).

Marla Decker

A magistrate judge in New Jersey overseeing an MDL related to an allegedly contaminated pharmaceutical drug recently denied the defendants’ request for discovery into the plaintiffs’ potential litigation funding arrangements.  While the denial of litigation funding discovery is not unique, the decision–which holds that the sought-after information was not relevant to the claims or defenses–is significant in that it leaves no doubt that, without more, requests for fishing expeditions into litigation funding arrangements fail when examined.  And that the trend in the case law is in agreement.

At the early stages of discovery, the defendants In Re: Valsartan N-Nitrosodimethylamine (NDMA) Contamination Products Liability Litigation sought “all documents and communications related to funding or financing, if any, [plaintiffs] or [its] counsel have obtained to pursue this litigation.”  Order, Civil No. 19-2875 (RBK/JS) (Sept. 18, 2019, D.N.J.), at 4. While the defendants offered no basis to show that the plaintiffs were funded or such funding was affecting the litigation, the defendants advanced various arguments as to why the discovery was relevant to (1) determining whether a funder was the “real party in interest” in the litigation; (2) the credibility/bias of the plaintiff; (3) the scope of proportional discovery; (4) the scope of sanctions, should they arise and (5) “the medical necessity and reasonableness of plaintiff’s treatments.”  Id. at 5-6.  Judge Schneider rejected each basis, citing the “plethora of authority” that have similarly rejected discovery into litigation finance arrangements and distinguishing cases where discovery was permitted.

For example, Judge Schneider cited six different cases denying discovery on the basis that how a plaintiff funds a litigation is irrelevant to a party’s claims and defenses.  The court held that “carte-blanche” discovery of litigation funding is unwarranted, and that it would only order such discovery if there was good cause to do so, such as when the party seeking discovery has made a sufficient showing that a “non-party is making ultimate litigation or settlement decisions, the interests of plaintiffs or the class are sacrificed or are not being protected, or conflicts of interest exist.”  Id. at 9.  The court held that Defendants did not establish relevance  by raising speculative theories and warning of a “parade of horribles” that might occur from litigation funding.  Rather, the court agreed with the position frequently argued by those opposed to disclosure, i.e., that “Plaintiff’s litigation funding is a ‘side issue” that has nothing to do with addressing the key issues in the case.”   Id. at 10.

In so holding, the court distinguished cases where litigation funding discovery was ordered because there were specific factors in those cases to warrant the discovery.  For example, in the case of Gbarabe v. Chevron, the court had to determine whether plaintiff’s counsel (who were solo practitioners) were able to provide adequate representation to the class, which was in part dependent on the financing available to them, and any control exercised by such funders.  (The plaintiffs in that case conceded that the discovery was relevant.) The Valsartan court rejected any generalized application of Gharabe (or other fact-specific decisions ordering disclosure) to justify discovery of litigation financing arrangements in all cases.    Likewise, the Court rejected the argument that discovery was necessary to “decide the scope of discovery, the outcome of discovery cost-shifting, and the proper assessment of sanctions,” reasoning that the “Court routinely decides these issues without inquiring as to how the parties finance their cases.”  Id. at 12.

The court also rejected an offer by the plaintiffs in Valsartan for automatic in camera review of any litigation funding agreement “where the litigation funding company has control or input into litigation decisions, including settlement, which could interfere with a plaintiff’s control of his or her lawsuit and the attorney-client relationship.”  This approach was likely modeled after the decision by Judge Polster, who is overseeing the opioid MDL in Ohio, who ordered in camera review of any litigation funding arrangement accompanied by “two sworn affirmations – one from counsel and one from the lender – that the [funding arrangement] does not: (1) create any conflict of  interest for counsel, (2) undermine counsel’s obligation of vigorous advocacy, (3) affect counsel’s independent professional judgment, (4) give to the lender any control over litigation strategy or settlement decisions, or (5) affect party control of settlement.”  In re: National Prescription Opiate Litigation, Case No. 1:17-MD-2804, WL 2127807, at *1 (N.D. Ohio May 7, 2018).  That decision was viewed by some as striking the right balance between the competing arguments for and against disclosure. (For a discussion of those considerations, see here).

Rather than taking Judge Polster’s approach, Judge Schneider declined to order automatic in camera review of any litigation funding agreement, instead agreeing to conduct the review only when necessary, and gave plaintiffs’ counsel the discretion “to exercise their best professional judgment when the review would occur,” i.e, determine if any of the criteria proposed had been tripped. (Defendants could also seek disclosure if they had good cause to believe that in camera review was necessary.)

This decision not to allow fishing expeditions into potential litigation funding without more than speculative theories of relevance points to a stabilizing trend disfavoring automatic disclosure of litigation finance arrangements or their details absent good cause to do so.  Indeed, the Valsartan Court expressly disagreed with the defendants’ statement that there is a “shifting tide towards disclosure of third-party litigation funding information in the courts . . . couple by a similar movement in the legislative realm.”  Rather, the emerging preference is for a balanced approach that weighs the substantiated reasons why disclosure might be warranted in a particular case, the risk of prejudice to plaintiffs from either disclosure or side-show litigation, and the burden on the court.

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The best way for companies and their counsel to determine if litigation finance is an attractive option is to discuss it with us.