A fight is brewing in New Jersey over a proposal that would force litigants to tell their adversaries when they’ve received third-party investments to pay for lawsuits.
Litigation finance companies and an industry group urged New Jersey’s federal court to abandon a proposed rule that would require the disclosure of so-called litigation finance, according to comments filed with the local clerk and obtained by Bloomberg Law.
The U.S. Chamber of Commerce, a frequent critic of the growing litigation finance industry, said in its comment that the proposal was essential to “fair” and “ethical” civil litigation. The Chamber has criticized litigation funding for years, saying in the past it turns the “courthouse into a casino.”
The debate marks the latest skirmish between the upstart litigation finance industry and pro-business groups over whether litigants who receive investments from third parties should be forced to tell their opponents.
The comments were filed in response to an April announcement by the New Jersey federal court that it’s considering a change to its local rules. The proposal would require parties to disclose the identify of any funder, whether the funder’s approval is necessary for litigation or settlement decisions, and “a brief description” of the nature of the financial interest.
The funding disclosure question has become a flashpoint in individual cases, and many judges have rebuffed defense counsels’ efforts to obtain information on litigation finance. Judges frequently rule the information is protected as the product of an attorney’s work on the case, or that it is irrelevant to the underlying litigation.
Efforts to shine more light on specific cases have increased as the industry has grown, attracting more than $10 billion in capital, according to a survey this year. Investors have flocked to the relatively young business model that typically sees investors pay a portion of a case’s legal fees for a share of any potential award from the litigation. If the case turns up nothing, the funders typically do not get repaid.
Commercial litigation funders often invest in cases that target large corporate defendants with claims including patent infringement, antitrust allegations, or large contract breaches.
The U.S. District Court for the Northern District of California in 2017 adopted a rule requiring disclosure in class-action cases. But efforts to pass federal legislation that would require disclosure have stalled on numerous occasions in recent years. There have also been a series of unsuccessful attempts to advance disclosure proposals through the body that drafts the rules of federal litigation, the Civil Rules Advisory Committee.
Video: Bloomberg Law’s Roy Strom explains what the growth of litigation finance means for the future of the business of law.
All Eyes on New Jersey
The New Jersey disclosure effort arose after defense lawyers in a products liability case asked a judge to force the plaintiffs to turn over funding information. Magistrate Judge Joel Schneider in late 2019 denied the request for production, calling it a “side issue” that should be handled on a case-by-case basis.
The rule was proposed to create consistency in how judges in New Jersey handle such requests, the New Jersey Law Journal reported last month, citing Steven Richman, a Clark Hill member involved in drafting the rule.
The International Legal Finance Association, a trade group that advocates for the industry, urged the New Jersey committee to share an internal study the group said it conducted to rely on its proposed rule change.
Asked to respond to ILFA’s comment by Bloomberg Law, Richman said he could not disclose the committee’s confidential deliberations.
“In view of the fact that some 24 other federal districts have disclosure rules on this and we have decisions in our own district on the subject, we undertook the analysis and made the recommendation,” Richman said in an email.
The 24 districts Richman referred to comes from a 2018 survey. Those districts typically require plaintiffs to provide a list of parties with financial interests in the case. Judges then decide if the information should be shared with the other parties in the lawsuit, or subjected to further discovery for signs of conflicts or ethical violations.
The New Jersey proposal, if adopted, appears to require a separate docket filing detailing the funding information available to all parties. Lawyers from Ropes & Gray who studied the proposal said it would be “one of the broadest rules” of its type so far.
The U.S. Chamber of Commerce said disclosure should be required to avoid conflicts of interest or unethical fee-splitting with non-lawyers.
“The only way to know whether a particular litigation funding arrangement is violating core legal and ethical precepts or impeding settlement is to make the practice more transparent,” the Chamber’s letter, penned by Harold Kim and Anthony Anastasio, said. Kim is President of the U.S. Chamber Institute for Legal Reform and Anastasio is president of the New Jersey Civil Justice Institute.
ILFA said the rule would lead to an increase in litigation and “fishing expeditions” that would further jam up court dockets.
“Courts would then be obliged to analyze whether disclosure is appropriate, which would lead to increased expenditure of judicial and party resources on an issue adjudged to be irrelevant in nearly every instance,” ILFA’s letter, penned by Executive Director Shannon Campagna, said.
Kenneth Harmon, director of risk and deputy general counsel at litigation funding company LexShares, said under-resourced plaintiffs who could access the courts through third-party financing will lose out if they have to spend more money defending efforts to disclose their funding agreements.
“There is a growing judicial consensus that disclosures about litigation funding are simply not relevant to the litigation at hand,” Harmon wrote.
But others thought the rule wouldn’t go far enough. DRI Inc., which represents defense counsel, said funders should also be required to turn over the agreements they sign with litigants.
The New Jersey Lawyers Advisory Committee is set to review the comments. Local rules require a majority of judges to adopt a new rule. It’s unclear how long that process could take. Inquiries to the New Jersey federal court’s information line were not returned.