We Don’t Need More Disclosure Rules for Litigation Funding

More litigants are obtaining financing from third-party litigation funders due to rising legal costs, the complexity of litigation, and the need to balance financial disparities between parties. Proponents argue that third-party litigation funding empowers plaintiffs to pursue cases against wealthier defendants.

The necessity of disclosing litigation funding remains contentious. Several US courts—in states such as New Jersey, Texas, and California—have begun requiring parties to disclose funding arrangements. But the rules vary. The US Supreme Court’s Advisory Committee on Civil Rules created a subcommittee to consider the issue of funding disclosure, but the committee’s work will likely be a years-long process.

There are concerns that third-party litigation funding may encourage plaintiffs to seek higher settlements and could improperly sway case strategies, potentially compromising legal integrity. Critics worry lawyers might prioritize funders’ interests over their clients’.

Defense counsel say funding agreement disclosure is essential to clarify the funder’s influence on the case, and courts are cautious about external parties with financial interests but without the ethical obligations attorneys have. The interests of the plaintiffs’ counsel may diverge from their client, especially if a settlement doesn’t adequately cover or exceed the client’s recovery and the third-party litigation funder’s claim.

The ethical rules governing an attorney’s duty to consult with and keep their clients informed are primarily outlined in Rule 1.4 of the American Bar Association’s Model Rules of Professional Conduct. These rules are intended to ensure that clients are well-informed and can make educated decisions about their legal representation.

The justification for third-party litigation funding disclosure hinges on the assumption that attorneys may prioritize their personal interests or the funder’s interests over their clients.’ But existing attorney ethics rules, such as Rule 1.7 and New York Rule of Professional Conduct 1.8(i), already address potential conflicts. These rules aim to ensure attorneys remain loyal to their clients, making additional disclosure requirements redundant.

The question is whether special rules are needed to ensure compliance with existing ethical rules.

Judges are vigilant about ethical violations, including conduct they suspect may result from third-party litigation funding. They recognize unreasonable behavior through various courtroom interactions, including motions and mediations. Inevitably, irrational and unreasonable behavior becomes apparent and judges know how to deal with it.

Attorneys are the face of a case to the court. They—not the third-party litigation funder—risk sanctions when they cede control over litigation. Attorneys had better know that risk when they sign up for the litigation funding that includes giving control to the third-party litigation funder.

Law firms may use other forms of financing to fund litigation such as a firm line of credit, which may be used for day-to-day operating expenses as well as to fund litigation. And the firm’s overall financial health can affect litigation strategies. Disclosure of third-party litigation funding may lead to revealing other potential direct and indirect financial influences on case strategy to the defendant’s advantage.

Disclosure of litigation funding gives an advantage to the defense counsel in knowing how long it can run the meter of its adversary before bringing the adversary to its knees.

Courts should decide cases with third-party litigation funding the same way as those without: on the law and the facts. The existing ethics rules and careful judicial oversight are sufficient safeguards against misconduct.

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

Author Information

Kenneth Rosen practices debtor and creditors’ rights law and advises companies on practical strategies for resolution of financial distress.

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