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Litigation Funders Risk Disclosure in Court Rules, GAO Moves (1)

Sept. 19, 2022, 9:30 AMUpdated: Sept. 19, 2022, 1:57 PM

Litigation funders risk public disclosure about their role financing lawsuits from a body that sets federal court rules and lawmakers who commissioned a study of their activities.

Lawyers for Civil Justice, a group of defense-side lawyers, are seeking to amend procedures so that plaintiffs would need to disclose financial backing from investors in federal appeals courts.

An existing rule “is failing to provide circuit judges any information” on financing that could pose conflicts, Lawyers for Civil Justice said in its request this month to the Advisory Committee on Appellate Rules.

While corporate defense groups have long pushed for disclosures about litigation finance—so far, without much success—this new twist has them arguing that judges need the information to police their own conflicts of interest.

The rule request, one of two pending before judicial bodies, and a Government Accountability Office study pushed by lawmakers, represent new possible avenues of information about the workings of the litigation finance industry.

Litigation finance companies such as Burford Capital and Longford Capital provide plaintiffs money up front for the cost of bringing actions and in return earn slices of settlements or court awards at the back end of lawsuits.

VIDEO: Making Millions Off Other People’s Lawsuits: How Litigation Finance Works

The industry controls more than $12.4 billion in assets, based on a survey by brokerage and consulting firm Westfleet Advisors. Litigation funding companies in the U.S. committed $2.8 billion toward new deals in 2021, an 11% increase from the prior year, according to Westfleet.

GAO Study

The GAO, which provides nonpartisan research to Congress, has scheduled a conference call Tuesday with litigation finance participants to advance a study of the industry it began last year.

Lawmakers who requested the study have asked for detailed information on how many requests for funding have been received; how many cases funders have backed; how many have concluded; and what types of returns they generated.

Those lawmakers include Senator Chuck Grassley (R-Iowa) and Representative Darrell Issa (R-Calif.), who have in the past proposed legislation requiring greater disclosure in litigation finance. Rep. Andy Barr (R-Ky.) also requested the study to investigate, in part, “potential options to address data gaps” in the market.

Legislative attempts to regulate the industry have so far been a dead end. A proposal that would force disclosure of financial backers in class-actions or multi-district litigation has stalled in Congress on multiple occasions, most recently early last year.

Gary Barnett, executive director of the trade group International Legal Finance Association, said in a statement that members of his group have engaged “extensively” with the GAO throughout its research.

Rules Proposal

Lawyers for Civil Justice put forward a second proposal this month in conjunction with the US Chamber of Commerce Institute for Legal Reform.

That proposal asks judges to consider inquiring about third party litigation funding in federal cases.

The change is a watered-down version previous Chamber efforts to require mandatory disclosure. The new proposal would give judge’s discretion to inquire about funding on a case-by-case basis.

“Many federal judges are presiding over lawsuits in which, unbeknownst to the court, a non-party investor has a direct, contingent financial interest in the proceeds produced by any judgment or settlement due to third-party litigation funding,” Lawyers for Civil Justice and the Chamber wrote in their Sept. 8 request. “Courts remain largely in the dark about the existence of third-party investments in their cases.”

Barnett said the Lawyers for Civil Justice and Chamber rules requests are similar to others the federal courts in the past have decided not to adopt.

“The Chamber’s longstanding calls for a catch-all forced disclosure rule ignore a related fact: federal courts can easily handle any conflict of interest and discovery issues under existing” rules or authority, he said.

(Adds ILFA comment in 12th, 17th and 18th paragraphs. )

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com; John Hughes at jhughes@bloombergindustry.com