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Making Litigation Funding Agreements Discoverable Is Good Public Policy

June 17, 2021, 8:01 AM

The U.S. District Court for the District of New Jersey is considering a local rule requiring discoverability of third-party litigation funding (TPLF) agreements—but allows the plaintiff to self-describe the agreements.

It would require disclosure of information about “funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.”

While laudable, the proposed rule does not go far enough. However, DNJ should still adopt discoverability of third-party litigation funding agreements, as should all other jurisdictions.

Insurance Agreement Disclosure Rules

In 1970, the Federal Rules of Civil Procedure were amended to include a requirement in Rule 26(b)(2) that defendants produce copies of insurance policies that may apply to a pending claim.

Twenty-three years later, the Federal Rules were again amended with the adoption of Rule 26(a)(1), including the requirement in subsection (iv) that, without awaiting a discovery request, defendants produce “for inspection and copying as under Rule 34, any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.”

Neither the 1970 nor the 1993 rules allowed the defendant to merely produce information about or a description of the insurance. Rather, for the past 50 years, the defendant has been mandated to produce a copy of the insurance agreement itself.

Further, as the 1970 Notes of the Advisory Committee on Rules state, cases and commentators at the time were “sharply in conflict on the question of whether defendant’s liability insurance coverage is subject to discovery in the usual situation when the insurance coverage is not itself admissible and does not bear on another issue in the case.” (Emphasis added.) Resolving the issue “in favor of disclosure,” the Advisory Committee based its decision as follows:
“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. It will conduce to settlement and avoid protracted litigation in some cases, though in others it may have an opposite effect.”

With the continuing and evolving growth of the $5 billion third-party litigation funding industry— including agreements with attorneys, rather than parties and portfolio funding—and agreements that sometimes directly impact evidence, the exact same policy reasons that led to requiring defendants to disclose and produce copies of insuring agreements apply to the discoverability of TPLF agreements.

Agreements Don’t Have to Be Relevant

Some argue that TPLF agreements are not “relevant” to the claims and defenses, and are therefore not discoverable. But like insurance agreements, TPLF agreements do not have to be relevant to be discoverable.

Defendants, no less than plaintiffs, are entitled to have information to make a “realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The existence and terms of a TPLF agreement will impact the ability to settle a case. As stated by the chief investment officer of one of the largest TPLF companies: “We make it harder and more expensive to settle cases.”

This is true even as many of the large players in the market insist (while shielding their agreements from scrutiny) the TPLF agreement itself may not be relevant or admissible. But increasingly, the TPLF company does have input into the handling of the litigation it funds, and sometimes the agreement impacts the evidence and issues before the court, and becomes admissible on such issues as witness bias.

VIDEO: A look at the growing field of litigation finance and what it means for the future of the business of law.

Proposed District of New Jersey Rule Should Go Further

The proposed New Jersey District rule is good, but not good enough. It requires disclosure, but allows the plaintiff and the TPLF company to self-describe the TPLF agreement, and puts the defendant to the near-impossible task of making a good cause showing “that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.”

But, as noted in Gbarabe v. Chevron Corp. (N.D. Cal. Aug. 5, 2016): “Plaintiff’s proposal for in camera review of the agreement by the Court is inadequate because it would deprive Chevron of the ability to make its own assessment and arguments regarding the funding agreement and its impact, if any, on plaintiff’s ability to adequately represent the class.”

A better practice was enacted in Wisconsin and West Virginia, following the same procedure as Fed.R. Civ.P 26(a)(1): requiring production of the TPLF agreement without awaiting a discovery request. See, Wis. Stat. § 804.01(2) (bg) and W. Va. Code Ann. § 46A-6N-6.

It’s good public policy for both sides of a litigated matter to be entitled to know when non-parties have a financial interest in the outcome of the lawsuit. At present, the rules only provide that information to the plaintiff. The rules ought to be amended to level that playing field.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

David Levitt is a partner at Hinshaw & Culbertson LLP. He advises and represents clients in intellectual property matters and assists clients with insurance, commercial, products liability, and trucking disputes. He is also the chair of DRI’s task force on third party litigation funding and principal author of the organization’s white paper.

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