Litigation Funding’s Influence on Cases Warrants Disclosure Rule

Third-party litigation funding, or TPLF, is a multibillion dollar industry of financing lawsuits in exchange for a cut of any judgment or settlement. Leaders of these businesses have disavowed any control over the cases they finance.

But a recent analysis of their own contracts reveals that funders have significant control over their clients’ litigation, despite their claims to the contrary. To ensure fairness in the legal system, the Advisory Committee on Civil Rules should adopt a rule requiring disclosure of TPLF contracts.

An executive of Burford Capital, the world’s largest litigation funder, in 2022 told an audience of judges, “I don’t know how to say this any more clearly; we don’t control settlement. If we do … I would find it really loathsome to misrepresent that to a court.”

At around that time, Burford was seeking to enforce its contractual rights to prevent its client, Sysco Corp., from consummating a settlement agreement in a lawsuit that Burford had funded.

A new analysis based on the limited number of TPLF contracts that have become public shows that such contracts give non-party funders specific mechanisms of control or significant influence over litigation, including the authority to reject settlement terms if funders don’t find their return satisfactory.

The potency of these hidden control mechanisms may be “rather amazing”—as the US Bankruptcy Court of the Northern District of Texas found in In re Fresh Acquisitions, LLC—given funders’ disavowals of control. Generally, courts and litigants have no awareness of such provisions because the funding contracts typically prohibit the plaintiff and counsel from divulging the agreement’s existence or discussing its terms.

Control by non-party funders matters, because our litigation system is set up to enable parties and their lawyers to resolve disputes based on facts (rather than speculation) with the aid of the court.

Control Over Litigation

When non-parties dictate or influence crucial decisions such as going to trial, settling, and replacing counsel, it can have a profound or disruptive effect on the litigation. At a minimum, it prevents parties who are unaware of the funding agreements from making a full and fair appraisal of their case—an ability that is fundamental to our legal system.

Some TPLF contracts expressly give non-party funders complete control over the litigation. Others ensure that funders have indirect (but still powerful) influence by requiring the funded plaintiffs and lawyers to pursue the claims and maximize proceeds, and by allowing funders to stop the cash flow at any time.

TPLF contracts also may give funders remarkable influence over plaintiffs’ counsel, including the selection and replacement of counsel. Some extend this influence further by obligating the plaintiff to take directions from counsel.

Provisions of TPLF contracts can shape outcomes and undermine court orders, such as by requiring the plaintiff to pay the funder the monetary value of any injunctive relief or specific performance awarded. This is a strong incentive against non-monetary relief that can skew the remedies presented to, and ultimately ordered by, the court.

Some TPLF contracts require that the plaintiff and counsel provide all documents obtained in the course of litigation to the funders, a provision likely inconsistent with most protective orders, and which may even risk improper dissemination of intellectual property.

And some TPLF contracts undermine court orders to pay costs and sanctions by obligating plaintiffs to pay all such penalties—even where the misconduct being sanctioned originated with the funder or its selected-and-controlled counsel, not with the plaintiff.

Need for Disclosure

As more disputes over TPLF contracts come to light, judges are increasingly recognizing the need to know whether non-parties have control over the named parties’ litigation decisions and the ability to influence key decisions in the litigation.

All courts should understand that when funders are participating in litigation, their involvement and agreements should be disclosed just like all other participants in public litigation, who must identify themselves openly with very limited exceptions.

The Federal Rules of Civil Procedure require companies to disclose their insurance agreements so that “counsel for both sides to make the same realistic appraisal of the case.” Courts routinely insist that the insurer’s decision-makers participate in key events in the litigation, including pre-trial and settlement conferences.

Last year, a letter signed by more than 100 companies representing the technology, financial services, health care, transportation and telecommunications industries called for a rule requiring TPLF investors to disclose their contracts.

Even today, despite the widespread knowledge of its legal maneuvering to wrest control of the Sysco litigation (through provisions in the contracts), Burford still maintains that it “is a passive financier and does not control the legal assets in which we invest, except in extraordinary circumstances agreed to in advance by the client.”

At least one funder thinks it is time for the industry to come clean. A co-founder of RiverFleet said in a Legal Funding Journal podcast: “What do funders care about? They certainly do care about settlements and that should be recognized. They do care about who is the legal counsel and that should be recognized. They care about the way the case is being run. They care about discontinuing the legal action and they care about wider matters affecting the funder.”

The civil rules should require disclosure of TPLF contracts. In the meantime, companies should ask for discovery of TPLF contracts, and courts should order disclosure as a matter of fairness rather than deny them based on a narrow view of relevance. Courts must prioritize sound case management and uphold public trust in a transparent legal process.

Legitimate funders should welcome such sunshine—only those with something to hide benefit from operating in the shadows.

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

Alex R. Dahl is general counsel of Lawyers for Civil Justice.

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