Litigation Funding Disclosure Proposals Rely on Flimsy Arguments

For more than a decade, attorneys have been asking the Judicial Conference Advisory Committee on Civil Rules to require disclosure of third-party litigation funding contracts, based on the argument that litigation funders have significant control over their clients’ litigation.

While creative, this argument is heavy on hypotheticals and light on facts.

The “control” narrative has been considered—and rejected—by the Delaware judiciary, the Texas judiciary, and a group of prominent practitioners in the commercial litigation funding field. Disclosure of litigation funding contracts remains a solution in search of a problem.

Judiciary Rejections

In the past two years, the Delaware and Texas judiciaries engaged in rulemaking exercises similar to that of the federal Advisory Committee. Both dismissed proponents’ “control” arguments in declining to recommend automatic disclosure requirements.

In Delaware, a study committee surveyed the state and federal bars. Its 2023 report and recommendations found that “in practice, litigation funders do not obtain rights concerning control over a lawsuit or over settlement.” Accordingly, “this issue does not appear to be of present concern in the Delaware courts.”

In Texas, the Supreme Court Advisory Committee voted 14-5 against rulemaking. One member remarked that proponents of disclosure “want disclosure because they want to deter people from participating … because the goal here isn’t disclosure. It’s to end litigation funding, because there’s a source that makes those litigations possible.”

Practitioners Weigh In

Eleven attorneys and advisers submitted a rules suggestion to the Advisory Committee on Civil Rules on Oct. 15. This group of prominent practitioners have represented interests on all sides of commercial funding arrangements, including funded parties. The practitioners debunked control arguments in five ways.

Material Contractual Terms. They explained that broad disclaimers of control are standard and material terms of litigation funding agreements.

Experience. The practitioners described their substantial experience, stating they were “not aware of funders having an ‘indirect—but still powerful—influence’ on cases.” Contracts submitted by disclosure proponents don’t reflect prevailing norms in the US commercial litigation funding market, they said, and characterized them as “an odd assortment of stale, foreign, and plainly idiosyncratic agreements.”

Ethical Rules. They discussed existing ethical guardrails against third-party control contained in the Rules of Professional Conduct. They noted that funding agreements routinely recognize non-interference with the attorney-client relationship and the controlling nature of counsel’s ethical obligations in the event of any conflict.

Practical Considerations. They discussed various practical factors inhibiting funder control. This includes the simple reality that “with limited exceptions (such as post-judgment scenarios and outright claim assignments), funded parties steadfastly insist on maintaining full control of their claims.” They emphasized that even if funders could control litigation, it would be impractical and imprudent to do so without access to critical evidence and rulings shielded by protective orders.

Definitional Issues. The practitioners took issue with disclosure proponents’ broad definition of “control.” Specifically, they said that under proponents’ view, virtually any contractual term could be construed as potentially exerting direct or indirect control over a litigant.

If this reasoning were adopted, disclosure “could logically include everything from recourse lenders and creditors to private equity or venture capital backers, to law firm partners, to shareholders, to customers, to family and friends, to personal reputational considerations” for both plaintiffs and defendants.

They concluded that this approach “would obviously be imprudent, with no purpose other than serving as a point from which to launch costly fishing expeditions for strategic advantage.”

Hypotheticals Fall Short

For more than a decade, advocates of litigation funding disclosure have used arguments spanning control and undue influence, champerty, conflicts, insurance, settlement efficiency, fee-splitting, proportionality, aggregate litigation concerns, and national security risks.

Yet they still can’t articulate actual problems with commercial litigation funding that could warrant a nationwide disclosure rule. Instead, they continue to propound hypothetical concerns that have been contradicted by multiple judiciary bodies, as well as the attorneys and advisers that work in commercial litigation funding on a daily basis.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Dai Wai Chin Feman is managing director and corporate counsel for Parabellum Capital in New York.

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