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INSIGHT: Forced Disclosure of Litigation Financing Agreements a Lost Cause

June 19, 2019, 8:01 AM

We should probably be flattered.

By “we,” I mean those of us in legal finance. Collectively, we have become the subject of an intense effort by the U.S. Chamber of Commerce to push through rules that would force parties in lawsuits to disclose their litigation finance arrangements.

The Chamber has opened several fronts in this campaign.

First, it supports federal legislation on the topic, which was introduced by four Republican U.S. senators earlier in 2019.

Second, it is lobbying the federal judiciary’s Committee on Rules of Practice and Procedure to create a special rule of civil procedure mandating the disclosure of litigation financing.

And third, it is pushing for legislation across the country to mandate disclosure at the state level.

Initiatives like the ones the Chamber is pursuing have failed in the past. In 2018, a similar version of the legislation failed to make it out of committee. Meanwhile, the procedural rule has an even longer history of defeat. The Advisory Committee on Civil Rules rebuffed it in 2014, 2016, and 2017, and the Chamber has reanimated it, zombie-like, again this year.

The persistence of the effort is admirable. It is also a telling indication of just how effective litigation finance is as a tool to level the judicial playing field between the corporate defendants the Chamber represents and parties asserting claims against them. So yes, we are flattered.

But thankfully, flattery does not get laws passed (at least in this instance). Instead, the Chamber’s proposal for compulsory disclosure should stand or fall based on the merits of the arguments behind it. And it has fallen—repeatedly. Indeed, the forced disclosure of litigation finance is bad policy for any number of reasons.

We will review the most obvious of them here.

Forced Disclosure is Bad Policy

Forced disclosure is unnecessary. In the great majority of cases, the involvement of a litigation finance provider has no bearing on the merits of the dispute. However, in the rare instances where it does the parties have a well-established mechanism to obtain information about it—existing Federal Rule of Civil Procedure 26 (and its state analogs), which call for the production of relevant information in discovery. Creating a special rule that would allow discovery of all litigation finance agreements, even when irrelevant, accomplishes nothing positive; to the contrary, it would wrest control of the discovery process away from judges.

It’s discriminatory. Imagine three different plaintiffs with claims against a corporation, which they are financing in three different ways. One received a bank loan, one hired a lawyer willing to work on a contingency basis, and one secured litigation financing. Proponents of forced disclosure would demand information about the third plaintiff’s financing, even while recognizing that details about other financing sources should remain off limits. This is a discriminatory and illogical result.

It’s unfair. Litigation financing is uncomfortable for large corporate interests because it puts parties with fewer resources on an equal footing with them. A rule requiring disclosure of litigation finance would hand them a significant tactical advantage, tipping the scales of justice back in their favor. Armed with knowledge of finance agreements and their terms, defendants could craft litigation strategies around them, opportunistically exhausting financing, delaying achievement of milestones that trigger additional financing, or otherwise interfering with their opponents’ access to justice through litigation finance.

It’s counterproductive. Discovery rules are designed to resolve disputes efficiently. Forced disclosure directly opposes that goal. Mandating the production of irrelevant litigation finance agreements only encourages fishing expeditions and secondary disputes that distract and delay the achievement of a just result on the underlying dispute. All of those negative effects, of course, play right into the standard defense strategy.

To the contrary, preserving disclosure as a tool to be used at the discretion of the party being financed furthers the goal of efficient resolving disputes. When settlement negotiations reach critical junctures, revealing funding arrangements to mediators or counterparties can offer insight into the financed party’s mindset necessary to break through an impasse and get to a settlement. We have seen it happen.

It is based on a faulty premise. In a letter earlier this year resuscitating its attempt to amend the rules of civil procedure, the Chamber plainly stated the foundation of its argument for forced disclosure.

“When litigation funders invest in a lawsuit,” it said, “they effectively become real parties in interest.”

That is not true. As we previously explained, providers of litigation finance do not control the underlying litigation, and as a Northern District of Illinois court has held, they do not become “real parties in interest” within the meaning of federal rules. Only parties holding the substantive right being enforced meet that definition.

Any number of third parties may ultimately benefit from a plaintiff’s recovery, including a litigation financier, but that does not mean we waste resources compelling their disclosure. Otherwise, plaintiffs would have to disclose their mortgage holders, car salesman, and financial advisors, among other irrelevant relationships.

It’s ironic. Finally, we should note the irony in the fact that a number of large corporations have played along with the Chamber’s crusade for a rule of forced disclosure. Those corporations sometimes bring lawsuits as plaintiffs, and the fact is that even large corporations do not have unlimited legal budgets to pursue offensive claims. Which explains why even Fortune 100 companies regularly take advantage of litigation finance.

That, I suppose, is the ultimate form of flattery. And the ultimate reason to believe that even the Chamber’s constituency is not fully behind its losing cause.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Patrick Dempsey is the U.S. chief investment officer at Therium Capital Management, where he is responsible for deploying capital to the U.S. legal market, including through litigation finance, judgment enforcement, and other forms of risk management solutions.