Why Third-Party Litigation Funding Should Be More Transparent

A recent Bloomberg Law News Insight suggests that expansion of third-party litigation funding is a positive development, yet brushes aside the fact that its use is largely undisclosed despite its outsized influence, and minimizes justifiable concerns that litigation funding may be harming the legal system.

Disclosure Can Provide Data

In support of that position, the author asserts contradictory points. On the one hand, there have not been any public scandals involving sophisticated commercial funding groups. On the other, federal courts have not mandated disclosure of when plaintiffs use litigation funding.

In the absence of knowing when litigation funding is used and the contours of its use, it should come as no surprise that no public scandals have been reported.

But groups like the US Chamber of Commerce have noted that funders typically decline to elaborate on the sources of their capital, adding to the industry’s opaqueness.

Congressional action on the disclosure of litigation funding has stalled, in part, because there is little data to support the policy arguments for and against disclosure. Congress, therefore, asked the non-partisan Government Accountability Office to report on the use and policy options concerning the litigation funding industry.

The GAO report acknowledges gaps in the availability of market data on third-party funding of lawsuits. Those gaps prevented the agency from assessing important issues, including how often there are conflicts of interest, consumer protection holes, and so forth.

The report ultimately suggests several options for how additional data might be collected in the future.

Data is Lacking

The limited benefit of the GAO report, due to lack of data, should be a call to action. This column is not advocating a prohibition on litigation funding. In the absence of data, that would be premature.

Limited disclosure of when litigation funding is used does nothing to inhibit its availability to plaintiffs. At the same time, it can help alleviate the problem of the legislative and judicial branches making policy decisions without data.

Disclosure Can Aid Pretrial Resolution

Those routinely opposing disclosure of litigation funding say that courts have denied discovery of these funding agreements in the litigation process because the presence of funding will not impact the legal merits of the dispute. Relevance to the merits of a particular legal dispute is not the issue for routine disclosure.

Pretrial settlement discussions—mandated by the court or voluntary—are intended to resolve disputes short of trial and to alleviate the burdens that trials place on courts and juries.

Defendants typically must disclose whether they have insurance to cover their legal liability. This can make settlement discussions more productive and encourage resolution of the dispute.

For example, a plaintiff may accept a lower settlement amount if it knows that the insurance policy is the only source of recovery.

Similarly, to negotiate and resolve a dispute, a party should understand the other side’s motivation. Does the plaintiff primarily want an apology and payment for expenses incurred? Is the plaintiff more interested in effecting a change in the defendant’s business operations?

Is the plaintiff seeking to punish financially the defendant? Or, in the case of for-profit funders, are they looking for a resolution to a dispute that maximizes their return on investment?

Disclosure Can Reveal Avoidable Conflicts

Disclosure of litigation funding would also shed light on questions the GAO was unable to answer for Congress. For example, we are left to speculate on the frequency of conflicts of interests. As a defendant, you would want to know if the judge assigned to your case owns stock in the litigation finance company funding the lawsuit.

And, to be fair, the judge would likely want to know the same to avoid even the appearance of a conflict. This is why parties are already required to disclose to the court any person or entity that owns/controls more than 10% of the party’s stock. Judges will recuse themselves if they have a financial interest in the dispute.

Some Jurisdictions Act Alone

Federal courts haven’t implemented any disclosure requirements.

Individual jurisdictions and judges, however, have begun to take matters into their own hands. For example, disclosure of litigation funding agreements is required for some cases in the Northern District of California and the District of New Jersey. Likewise, these disclosures are required in the state courts of Wisconsin and West Virginia.

Data Can Aid Policymakers

Policymakers are interested in understanding, for example, whether litigation is becoming more expansive due to the use of litigation funding.

Do we really want the court system to become more of a money-making venture? There are important consumer protection and economic issues to consider.

Overall, there is no downside to the disclosure of litigation funding while the upsides are transparency, the opportunity to make public policy decisions based on real data, and consumer protection.

If the litigation funding industry is truly “maturing,” it should welcome these inquiries, not disparage those looking to address legitimate questions posed and concerns raised by having litigation funded by parties who are neither plaintiffs nor defendants.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Michael Menapace is a partner at Wiggin and Dana. An insurance lawyer, he is primarily defends insurance companies, reinsurers, and related companies from a wide range of claims that threaten clients’ businesses.