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INSIGHT: If Litigation Finance is Such a Good Thing, Why the Secrecy?

Aug. 2, 2018, 11:06 AM

In a recent opinion piece on third-party litigation finance, Christopher Bogart, the co-founder and CEO of Burford Capital, one of the largest lawsuit funders in the world, defended the view that litigation finance should remain shrouded in secrecy and dismissed the idea that transparency is coming to the multibillion-dollar business of funding other people’s lawsuits.

Mr. Bogart makes the unsupported claim that there exists strong support for litigation finance in the business community (including among U.S. Chamber members) and that litigation finance is good for business. Of course, what Burford and other litigation funders do is hidden from view, so there is no way to verify his assertion. But as someone who served for 20 years as General Counsel and, before that, head of litigation for a major American company, I am skeptical of his contention. Companies are adept at evaluating and funding their own litigation. And companies are generally wary of developments that increase the cost and frequency of litigation. Make no mistake about it, litigation finance does just that.

But don’t take my word for it. Earlier this year, the chief investment officer for the U.S. division of Australia-based litigation financier IMF Bentham admitted to The Wall Street Journal that litigation funders “make it harder and more expensive to settle cases.”

Of course, this is the truth. Litigation funders make money by taking a cut from legal settlements or judgments. To grow, they must make litigation more expensive, and make more of it. Where does this money come from? Business.

‘Mirror Image’ of Insurance

But I write not to debate the value of litigation finance (although I do observe robust litigation systems have existed for centuries without it), but to question whether it should be hidden and immune from any disclosure. There is simply no good reason for litigation finance to be secret and shielded from scrutiny.

For example, defendants have long been required to disclose insurance policies in litigation at the very outset of a case. The federal courts adopted that policy in 1970, and, with one exception, all states require similar disclosure. Corporations and insurance companies fought that change, just as the litigation finance industry is fighting any transparency now.

The reason behind the mandated disclosure of insurance policies is sound. As the Advisory Committee on Federal Rules said in 1970, “Disclosure of insurance coverage will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.”

Disclosure of litigation finance agreements would serve those same purposes, since litigation funders effectively play a role similar to insurers in litigation, but on the side of plaintiffs. Mr. Bogart disagrees, urging that litigation finance is quite different from liability insurance. Of course, that’s a curious flip-flop from only a few years ago when the litigation funding industry embraced Prof. Charles Silver’s view that “[t]hird-party litigation funding is the mirror image of [liability insurance]” and that if companies are allowed to obtain liability insurance, plaintiffs should have access to litigation financing. Ironically, now that we’re talking about imposing on litigation funding agreements the same disclosure requirement that applies to liability insurance, Mr. Bogart and others in the industry are suddenly singing a different tune, arguing there’s no “mirror image” at all.

Mr. Bogart also argues that documents pertaining to litigation funding are protected under the work-product doctrine. But litigation financing agreements, just like insurance policies, do not resemble classic work product. From what we have been able to see, they do not deal with legal or factual strategies nor are they built on witness interviews, statements, briefs, correspondence or the like. These are all business contracts. They simply don’t fit the definition of work product, and even if they did, this alone would not warrant that such business arrangements be wholly secret. Before the rules were changed in 1970, federal courts were divided on the question of whether insurance agreements were discoverable, just as such rulings on litigation finance agreements are mixed today. Exactly as the federal courts did in 1970 with respect to insurance arrangements, they should resolve this debate by adopting a uniform national rule requiring disclosure of litigation finance agreements.

Troubling Funding Arrangements

The few times that litigation finance agreements have been made public have been quite revealing. Indeed, over the past two years, courts in five different cases have found particular litigation funding agreements to be illegal under state law. In other cases, the funding arrangements have been even more troubling.

For example, a few years ago, lawyers for Ecuadorian plaintiffs in an environmental lawsuit against oil company Chevron were forced to disclose their funding agreement with Burford. The contract provided “control to the Funders”—aka Burford—including the power to install “nominated lawyers.” In this case the law firm of Patton Boggs was tasked with monitoring the litigation and approving costs and outside experts.

Chevron wasn’t litigating against a group of Ecuadorian villagers, but a London finance firm and the Washington lawyers it had hand-selected. Furthermore, the funding agreement revealed the details of how Burford would reap millions—before any money went to the indigenous Ecuadorians they purported to help.

Since the Burford contract was first made public, the Chevron-Ecuador litigation has been found by U.S. federal courts to be a massive fraud, and its chief plaintiffs’ lawyer, Steven Donziger, had his law license suspended.

This fraudulent, frivolous case was sustained, in part, by the speculative bets made by litigation funders.

Growing Call for Disclosure

Even in the most legitimate of cases, disclosure helps facilitate better settlement negotiations. Plaintiffs may reject an otherwise reasonable settlement offer not because of the merits of the case, but because of onerous financial terms demanded by the hedge fund hiding in the background. Lawyers may advise their clients to accept a deal, not because it’s good for their clients but because of their own concerns about how much money will be available to pay fees. Given the impact of litigation funding on our civil justice system and the risks it brings, it is no wonder that there is a growing call for disclosure. While Mr. Bogart argues regulation is the exception, that is because appropriate disclosure is catching up with litigation finance, as often happens with new financial developments (e.g., mortgage backed securities).

For example, the U.S. Senate is considering the Litigation Funding Transparency Act of 2018, sponsored by, among others, the head of the Senate Judiciary Committee. That bill would require plaintiffs in federal class actions and multi-district litigation to reveal any parties who have a contractual agreement to receive a portion of the monetary relief awarded in a lawsuit.

Wisconsin passed a similar law a few months ago, the first of its kind at the state level, and is certain not to be the last.

The federal Advisory Committee on Civil Rules is studying a proposal that would require disclosure of litigation financing in all federal civil cases nationwide. Contrary to Mr. Bogart’s article, the Committee has never rejected a disclosure requirement; it simply deferred active consideration of the proposal, which it has now undertaken.
Two years ago, the U.S. District Court for the Northern District of California adopted a disclosure rule specifically requiring disclosure of litigation funding in class actions.

A federal court researcher recently observed that the local rules of half of our federal courts of appeals and around 25 percent of our federal district courts already require identification of parties funding litigation.

The European Union, which is considering a proposed directive on collective redress to its member nations that would allow for litigation funding, has included provisions for disclosure of these arrangements and other necessary safeguards for this industry.

Obviously, these developments have litigation funders nervous or they wouldn’t be making a big push to discredit the movement to bring litigation funding out of the shadows.

As in so many instances, the argument for secrecy is a false one. We all benefit from sunshine. Only when we have full disclosure of litigation financing will we truly know the details of who is using it, and for what types of cases—and be in a position to ensure it is not abused and serves justice.