Legal Groups Push for Mandatory Disclosure of Litigation Funders

Lawyers for Civil Justice (LCJ) and the U.S. Chamber of Commerce Institute for Legal Reform (ILR) on March 10 submitted a rules suggestion to the Advisory Committee on Civil Rules and its Third-Party Litigation Funding (TPLF) Subcommittee, proposing an amendment to Federal Rule of Civil Procedure (FRCP) 26(a)(1)(A) to require mandatory disclosure of TPLF in federal civil litigation.

The proposed rule aims to guide courts and litigants in TPLF disclosure while preserving judicial discretion and protecting privilege assertions. Federal courts currently lack uniform procedures for addressing TPLF disclosure, and courts are divided on whether the relevance standard of Rule 26(b)(1) bars disclosure of TPLF agreements.

The Need for Uniformity

Federal courts are deeply divided on TPLF disclosure, with federal district courts granting 40% of disclosure motions and denying the remaining 60%, according to a study by the International Legal Finance Association (ILFA). Some federal appellate and district courts have adopted local rules requiring automatic disclosure of TPLF use or of any persons with financial interests in a case, but these rules vary significantly. The U.S. Court of International Trade recently adopted a mandatory TPLF disclosure requirement.

TPLF contracts typically give a nonparty funder the right to benefit from the outcome of a lawsuit and provide tools for such funders to exercise varying degrees of control or influence over litigation and settlement decisions. “Funders have flatly told the Advisory Committee that they exercise no control over the lawsuits they finance,” but say the opposite to their investors and to courts, said the LCJ-ILR comment.

The comment added that “opponents of TPLF disclosure adamantly disavow any role in litigation, insisting they are neither litigants nor lawyers” and “ask special treatment for their contracts (presumably, arms-length business agreements with nonparties to litigation) with a categorial presumption of protection that does not apply even to the most sensitive documents courts routinely handle.”

Proposed Rule Mechanics

The LCJ-ILR proposal would add the following new provision to the list of required initial disclosures in Rule 26(a)(1)(A):

(v) the name, address, and telephone number of any non-party individual or entity (other than counsel of record) that, whether directly or indirectly, is providing funding for the action and has a financial interest therein and, for inspection and copying as under Rule 34, any agreements or other documentation concerning the funding for the action or the financial interest therein.

The term “funding” includes both past payments and future obligations to pay all or part of attorney fees, costs, or expenses related to the action. The comment clarifies that the rule does not apply to funding in the nature of contingency fee arrangements, insurance, or ordinary personal and bank loans.

The proposed rule would streamline the approach to TPLF disclosure requests, which currently  require individualized judicial attention, said the comment letter.

Case Management Purposes

According to a joint press release issued today by the LCJ and ILR, the lack of a uniform approach to TPLF disclosure creates case management problems for U.S. courts, including:

• Conflicts of interest between funder and parties to the case and/or witnesses remain hidden
• Time wasted in negotiations between parties who do not have the authority to make dispositive decisions about the resolution of the litigation. 
• “Zombie” litigation in which litigation continues at the behest of funders despite the parties’ desire to settle.
• Inability to manage settlement conferences effectively because parties are not empowered to make dispositive decisions. 

TPLF and Patent Litigation

In the IP context, many proponents of TPLF have argued that it is the only way for small inventors and businesses to go up against large companies. When the House Judiciary Committee in January considered the Protecting Third Party Litigation Funding (TPLF) From Abuse Act, which was introduced by Representative Darrell Issa (R-CA) and would require any party in a civil action to disclose third-party sources of funding in most cases, the Inventors Defense Alliance (IDA) came out in opposition to the bill, arguing that “it would harm America’s small businesses, deter investment, and weaken the innovation ecosystem.”

IDA’s chief policy counselor, Kristen Osenga, explained that “for many innovators, third-party litigation funding is not optional—it is the only way to stand up to large corporations that rely on delay and intimidation to avoid accountability.”

Image Source: Deposit Photos
Author: iqoncept
Image ID: 23375360