June 23, 2021
by Sarah Williams and Marlon Becerra
As the use of litigation finance has become more widespread, so too has the debate over whether — and to what extent — its use should be disclosed.
The latest chapter is unfolding in New Jersey, where the U.S. District Court for the District of New Jersey has proposed a new local rule that would require automatic disclosure of third-party litigation funding.
If enacted, the rule would mark a sharp departure from existing disclosure requirements nationwide, as well as the weight of federal authority holding that funding arrangements are not relevant to the substance of a dispute and thus, not discoverable.
First, some background: Most courts and jurisdictions have not imposed a disclosure requirement for third-party financing, and the Advisory Committee on Civil Rules has consistently rejected calls from policy groups to amend the Federal Rules of Civil Procedure to mandate disclosure.
Against this backdrop, New Jersey's proposed rule would require a litigant receiving third-party funding for some or all of the attorney fees and costs of the case on a nonrecourse basis in exchange for a contingent financial interest in the outcome to disclose:
- The identity of the funder, including its name, address and place of formation;
- Whether the funder's approval is necessary for litigation decisions or settlement and, if so, the nature of the terms and conditions relating to that approval; and
- A brief description of the nature of the financial
Opposing parties could then seek additional discovery regarding the specific terms of the agreement upon a showing of good cause that:
- The third party has the authority to make material litigation or settlement decisions;
- The interests of the parties are not being protected or conflicts of interest exist; or
- Disclosure is necessary to any issue in the case.
Comments on the proposed rule have been collected and, though the court has not announced when it will vote on its enactment, it could happen any day.
Supporters of the proposed rule argue it will create consistency in how New Jersey courts treat litigation finance and increase transparency into legal and ethical conflicts that could arise in the context of third- party financing.
Opponents respond that these concerns are sufficiently mitigated by the procedural rules governing disclosure and discovery and the ethical rules already in place that govern lawyers' conduct.
As noted above, a minority of courts have imposed a disclosure requirement for third-party funding. But those courts take a much narrower approach than the proposed New Jersey rule, sometimes mandating disclosure only in representative matters like class actions, or merely requiring identification of nonparties with a financial interest in the case.
New Jersey's proposed rule goes several steps further, and its breadth presents problems for attorneys and litigants alike.
As an initial matter, as written, the rule appears to require disclosure of even traditional contingency fee arrangements, as well as other increasingly common alternative fee structures.[1] Indeed, a typical contingent fee involves a third party to the case — the attorney — funding some or all of the fees and costs of the case on a nonrecourse basis.
Compulsory disclosure of third-party funding also unfairly burdens plaintiffs over defendants, who are not required to reveal the source of their funding, and it subjects them to the increased delay and expense of the inevitable motion practice that will follow disclosure.
Although the proposed rule purports to limit additional discovery into the specifics of a funding agreement to instances of good cause, it is difficult to imagine that opponents, once a funding arrangement is confirmed, will be satisfied by the scope of the disclosure.
Realistically, the rule amounts to an invitation for parties to engage in motion practice regarding whether further disclosure is warranted under the particular circumstances of their case. This is particularly problematic given that the majority of federal courts — including those in the District of New Jersey — generally have held that a plaintiff's funding agreement is irrelevant to the merits of the case.[2]
Finally, the implications of New Jersey's proposed rule extend even beyond cases involving third-party funding. Mandatory disclosure of litigation finance places plaintiffs without funding at a distinct disadvantage.
Consider the classic David vs. Goliath scenario in which an individual inventor sues a multinational conglomerate for infringing the inventor's patent.
Under the proposed rule, the defendant would have insight into the plaintiff's financial constraints at the outset of the case. An inventor's shoestring budget might invite a scorched-earth litigation strategy by the defendant to simply outspend the opposition.
Even worse, it could raise questions regarding the merits of the inventor's case. This is because funders do extensive due diligence on every aspect of a case before committing to invest. After all, if the case is unsuccessful, the funder receives nothing.
As litigation finance continues to become more prevalent, its absence may beg the question of whether funders deemed a case unworthy of investment.
Exacerbating these problems, New Jersey's proposed rule would take effect immediately and apply to pending cases, robbing claimholders of the ability to weigh the costs and benefits of obtaining funding and the associated requirement for disclosure before filing suit.
For these reasons, both attorneys and litigants should hope the District of New Jersey abandons the proposed rule or, at a minimum, significantly scales back the scope of disclosure to conform with the more limited requirements of other jurisdictions, such as by limiting the requirement to certain representative matters or mandating identification only of financially interested nonparties.
Sarah Williams is a former portfolio counsel at Validity Finance LLC.
Marlon Becerra is an equal access fellow at Validity Finance and a student at Harvard Law School.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1]See proposed R. 7.1.1, available at https://www.njd.uscourts.gov/sites/njd/files/NoticeBarNewRule2021.pdf, (stating disclosure is required of "any person or entity that is not a party and is providing 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 bank loan or insurance").
[2]See In re Valsartan N-Nitrosodimethylamine Contamination Liab. Litig ., 405 F. Supp. 3d 612 (D.N.J. 2019) (holding information regarding plaintiffs' litigation funding was irrelevant and not subject to discovery).