On April 3, 2018, Wisconsin Governor Scott Walker signed into law Wisconsin Act 235 specifying that in civil actions in Wisconsin’s state courts litigation funding agreements must be disclosed. This legislation follows the decision by the Northern District of California to amend its Standing Order last year to require disclosure of third party funding arrangements in class actions. The Wisconsin statute is notable as the first law of its kind in the United States.
The relevant statutory provision states that even without first requiring a discovery request, a litigant must provide to other parties “ any agreement under which any person … has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment or otherwise.” The provision does not apply to lawyer contingency fee arrangements.
There is also a current proposal pending that would revise the Federal Rules of Civil Procedure to require disclosure of third-party funding arrangements. The Committee is expected to take up the proposal later this year.
It has been suggested that this could be the start of a wider trend toward mandatory disclosure of transparency in third-party funding arrangements. If that’s right, does this matter to the growth of the industry and should it factor into a litigant’s pursuit of financing?
The worst-case scenario, often touted by funders opposed to the idea of mandatory disclosure, is that opposing parties use knowledge of the case funding arrangement to embark upon extensive and costly discovery of the funder, which in theory could include details of the funder’s case assessment, sensitive materials reviewed by the funder and the funder’s (or counsel’s) views on the strengths and weaknesses of the case. If this became a reality, it would put a significant dent in the litigation finance market, an outcome that opponents of the industry would clearly welcome.
However, if litigants and third-party funders observe the basic formalities of executing a Non-Disclosure and Common Interest agreement and considering carefully what information is shared and in what format, the risk of disclosure of sensitive case material can be mitigated. Courts will be slow to shred the work product doctrine and indeed many courts have, when asked, declined to allow discovery of sensitive case information provided by counsel to funders, as long as it was shared under NDA
Reasons to Embrace Disclosure
Less-commonly discussed are the reasons why litigants might welcome the disclosure of their third-party funding agreements. First, if the rules are clear, as in the Wisconsin statute, the parties are on-notice that they must hand over their funding agreement and can take this into account when drafting and negotiating the agreement. This disclosure need not necessarily be burdensome or costly.
Second, the disclosure of a litigation funding arrangement may be a show of strength in relation to the opponent. A funding agreement with a well-known and reputable funder shows that the plaintiff’s case been subjected to extensive due diligence by a neutral third-party. Litigation finance firms are often staffed with excellent internal counsel and typically rely on external counsel as well prior to offering non-recourse funding. Therefore, a funding agreement is proof that multiple independent lawyers have concluded that the case is likely to prevail.
Finally, the disclosure of a litigation funding arrangement shows defendants that a plaintiff cannot be bullied to abandon the case or accept a low-ball settlement offer due to financial pressure created by the Defendant’s case strategy. External funding is usually structured to cover the full litigation budget, meaning that the plaintiff has the resources to litigate as long as is necessary to get the right result.
In conclusion, wider disclosure of funding arrangements should not in and of itself be a concern for funders or prospective users of funding, provided that case sensitive information can be protected. If the process is handled carefully, the risks associated with disclosure can be mitigated and potentially encourage continued growth of the market. TheJudge is experienced in navigating the complexities and sensitivities associated with seeking and obtained litigation finance. Contact us to discuss your requirements.
Vice President and General Counsel
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