On April 3, 2018 the Wisconsin State Legislature passed an omnibus judicial reform law, Wisconsin Act 235. Among many tweaks to the judicial rules in Wisconsin, the law contained a provision requiring litigants to “provide to the other parties any agreement” under which third-party funders are entitled to share in any earnings from a civil action, settlement or judgment. There does not appear to have been much deliberation over the inclusion of this mandate and, as such, it is difficult at this early stage to ascertain the legislative intent and motivation.
On its face the provision appears to apply to all civil litigation finance arrangements between the funder and the litigant. It does not distinguish between commercial arrangements which are typically corporate financing transactions between sophisticated funders and counterparties and consumer funding arrangements with relatively unsophisticated individuals who are involved in personal injury and similar tort litigations. More importantly the Wisconsin law appears to require the disclosure of the entire funding agreement with all of its terms including pricing, withdrawal provisions and settlement mechanisms. Such open ended disclosure raises significant issues about the protection of attorney work product which is implicitly imbedded in the terms of the transaction. In addition, the likely legal maneuvering to limit the scope of disclosure of these terms has the potential to add significant delay and discovery cost to the litigation process in Wisconsin.
To date the debate over litigation finance disclosure in the commercial context has been fairly limited. The outspoken advocate for disclosure is the US Chamber of Commerce which appears to be advocating on behalf of its largest members which, when sued, have traditionally used their financial advantage to stymie smaller plaintiff’s efforts to seek fair redress in the courts by pursuing extensive motion practice to drive up the plaintiff’s legal costs and delay the proceedings in order to extract a discounted settlement down the road. Because third party litigation finance enables smaller plaintiffs to adequately finance the cost of litigation without compromising the company’s cash flow, litigation financing levels that playing field for these smaller litigants. The Chamber’s larger constituents see this as an impediment to their scorched earth strategy and prefer to undermine the access to litigation finance by any means. If disclosure has a chilling effect on litigation funding transactions, it helps to advance that agenda.
The Chamber’s formal response to the Wisconsin statute was to say, “Wisconsin’s law brings litigation funding out of the shadows, so that funders in the state can’t anonymously ‘pull the strings‘ of a lawsuit without the other parties’ knowledge.” In our view this response inaccurately characterizes the nature of litigation finance. It is common knowledge that the litigation funders in the US do not “pull the strings” of the litigation that they fund. In fact, litigation funding agreements routinely disclaim any control by the funder of the plaintiff’s right to call the shots in the litigation. Once it is understood that the funder does not “call the shots” we have to ask why it matters whether or not the funder chooses to remain anonymous.
That brings us to the Chamber’s second point, advocacy of a generic “right to know” who all the parties in interest are in a particular litigation. The Chamber attempts to draw a parallel to disclosure of insurance coverage on the defense side. While on the surface this sounds equitable, there are significant differences. The insurance carrier, unlike the litigation funder, does in fact call the shots. The carrier typically hires and controls the legal team for the defense. In addition, the insurance coverage is clearly relevant as it often defines the outer limit of the defendant’s settlement range. In that sense disclosure helps in the settlement process. Neither of those considerations applies to a litigation funder who neither controls the litigation decisions nor contributes funding to a potential settlement.
For argument sake let us assume the legitimacy of the “right to know” argument. There does seem to be a societal push toward total transparency. The next question would be how far should the parties in interest chain extend? There are many parties with an interest in the outcome of litigation and many of those parties, unlike the litigation funder, have a great deal of control over the litigation. Does the disclosure requirement extend to the lenders to the company who depend on the successful outcome of litigation for repayment? What about equity investors who advance money to the company in part to finance the claim with the expectation that the equity will increase in value after a successful settlement? Should contingent fee lawyers be required to disclose the terms of their engagement? We have to ask, what relevance does disclosing those interests have to the subject matter of the dispute and how does disclosure advance the cause of justice?
On the other side of the ledger the litigation funding community believes that disclosure should he at the discretion of the plaintiff and its counsel. Themis believes that in some instances it may well be advantageous to disclose the existence of litigation funding to signal to the defendant that the plaintiff’s case is funded. The knowledge of funding can in some circumstances discourage the scorched earth defense and bring the parties to the settlement table. On the other hand, however, disclosure often invites the defendant to open a new front in their scorched earth defense by bringing extraneous discovery motions to identify the funder, obtain the funding agreement and even access work product shared with the funder. This extraneous motion practice is expensive, time consuming and risks compromising the confidentiality of the work product. To date, consistent with these concerns that the funder and the plaintiff may have, most of the courts that have considered disclosure of the litigation funding arrangements have found them to be irrelevant and outside of the scope of discovery.
As we consider these issues in the US, it could be instructive to see how this issue is handled in Australia where litigation finance had its start and in the UK which has a longer history with it than the US. The rule in the UK is that there is simply no obligation to disclose. In Australia as it relates specifically to class actions the rule is more nuanced. Plaintiffs are required to disclose litigation funding agreements but the rules specifically offer protections by authorizing redactions specified to protect work product. Redactions may include the measure of the return to the funder whether a percentage of the recovery, a multiple of its investment or a hybrid, any agreed controls over the settlement process and provisions dealing with termination rights.
Prior to the enactment of the Wisconsin statute, the only other meaningful encroachment into the plaintiff’s right to disclose the existence of funding in the US is also limited to class actions and is designed to assure that the class will be adequately represented. Gbarabe v. Chevron Corp. was a class action filed in the Northern District of California in which a small plaintiff’s boutique sought to represent a class against Chevron. The court granted Chevron’s motion to disclose the funding. The court’s rational was that it needed to understand the funding arrangement to the small law firm in order for the court to determine whether the small firm had sufficient resources to adequately represent the class. Subsequently after some debate about whether to require disclosure of litigation funding generally, the Northern District of California amended its standing case management order to require disclosure of funding but only in the case of class actions. As in Gbarabe, in the context of class action litigation the argument is that the availability of funding may be relevant to the determination that the class will be adequately represented.
What should the standard be in the US? Themis believes that any rule should balance the competing interests and err on the side of promoting efficiency in the litigation process without disadvantaging either party. We believe that the majority of US courts which have found the existence of litigation funding and the terms of the funding to be irrelevant and, therefore, beyond discovery to have applied sound reasoning. While transparency seems like a noble concept, authorizing or requiring an inquiry into the existence of funding, the identity of the funder, the terms of funding and potentially the information exchange with the funder, offers no insight into the merits of the case but does almost certainly lead to wasteful delay, cost and distraction from the real matter at hand. That is particularly true in the case of US funding transactions in which the funder typically disclaims any control over the case management decisions and is therefore a relatively passive provider of capital. We also feel very strongly that if disclosure is mandated, in order to avoid unnecessary cost and delay, the scope of the disclosure should be narrowly defined to limit the discovery to the fact that the case is funded and cut off the inquiry before disclosing the terms of the funding agreement and certainly the disclosure of information exchanged between the funder and plaintiff to protect relevant work product.
In conclusion, it is our view that the true interests of the parties are best served by not requiring disclosure of funding arrangements and keeping the focus on the issues in dispute in the case rather than the financing back-story. That leaves it to the plaintiff and its attorney to determine whether the case offers a strategic opportunity to signal that the plaintiff is funded in order to try to promote an earlier settlement. If the plaintiff does not see an advantage in disclosure, most likely because it perceives that defendant as an adversary committed to a scorched earth defense in any event, then the case can proceed on the merits without the distraction of a scorched earth inquiry into the funding arrangements.
About the Author
Before co-founding Themis Legal Capital, Ed Reilly was a corporate partner with several international law firms, including Goodwin Procter; Morgan Lewis & Bokius and LeBoeuf, Lamb, Greene & McRae. Over the course of his career, he represented corporations and financial sponsors including prominent venture capital, mezzanine, private equity and hedge funds for more than 30 years.
Ed routinely acted as his clients’ de facto general counsel and advised them on a broad spectrum of issues ranging from the prosecution, defense and resolution of litigation and pre-litigation disputes to the structuring and closing of innovative financial transactions. During his tenure in private practice, Ed enjoyed leadership roles including rotations as a managing partner of a growing regional office, a member of a firm-wide administrative committee and the head of a firm’s international private equity initiative.
Since 2012 Ed has immersed himself in the Claim Based Funding business developing a sourcing network, collaborating on case evaluation and transaction structuring with established and emerging fund managers and contributing to academic efforts to promote best practices in the field.
Ed is admitted to the bar in New York, Connecticut and the District of Columbia. He is a graduate of the University of Notre Dame and the Columbia University School of Law.