Wisconsin became the first state to pass legislation that requires the disclosure of third-party litigation funding—regardless of whether parties request the information in discovery. Under Wisconsin Act 235, a party must disclose “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.” While the law does not apply to lawyer contingency fee arrangements, Wisconsin’s new legislation serves as a groundbreaking move towards disclosure of outside litigation funding arrangements.
Litigation Funding Increases in Prominence
Third-party litigation funding involves a financier, who is not a litigant in a case, paying litigation expenses in return for a portion of any judgment or settlement of a case. The practice, well-established in Australia and the United Kingdom, has grown in popularity in the United States.
A group of lenders used litigation funding to finance about $35 million in lawsuits brought by September 11 Ground Zero workers in New York. The lawsuits later settled for approximately $680 to $710 million. The lenders earned about $11 million by funding the litigation.
Terry Gene Bollea’s suit against the website Gawker Media was another, more controversial, example of the practice. Bollea, better known as wrestler Hulk Hogan, brought an invasion of privacy suit against the website for releasing an explicit tape that featured him. A Florida jury awarded Bollea $140 million.
Peter Thiel, a billionaire entrepreneur who has had his own contentious relationship with Gawker, funded Bollea’s lawsuit as revealed through media coverage. A confidentiality agreement protects Bollea’s arrangement with Thiel, the details of which the parties cannot reveal.
The increase in litigation funding creates concerns of transparency among judicial bodies, lawmakers, and advisory committees alike. While Wisconsin is the only state to require disclosure of such funding arrangements, a movement towards disclosure of litigation funding in federal courts exists.
In January 2017, the Northern District of California amended its Standing Order to require disclosure of third-party funding arrangements in class action suits. There is a proposal pending before the Advisory Committee on Rules of Civil Procedure that would revise the Federal Rules of Civil Procedure to require disclosure of third-party funding arrangements.
Emerging Ethical Concerns with Funding Arrangements
Some emerging concerns with litigation funding are the possible ethical violations that may arise with third-party financiers. For instance, the inadvertent waiver of privilege, and the consequence of such waivers, is an ethical issue that may arise in third-party financing. If an outside financier requests information or updates about a case before or after committing funds, the request may inadvertently waive privileges, such as attorney-client privilege.
American Bar Association Model Rule 5.4 governs the professional independence of a lawyer. The rule states, “[a] lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”
If a financier understands that its involvement is strictly monetary, third-party litigation funding is less likely to create conflict. However, “without regulation of the funding agreements, it appears that no standard form or model exists for these types of arrangements,” observes Kenneth M. Klemm, New Orleans, LA, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee.
A method to guard against third-party financiers influencing an attorney’s litigation strategy is to require disclosure of litigation funding. “By requiring disclosure, it provides both litigators and judges with a complete perspective on the parties holding a financial stake in particular litigation. The lack of such full disclosure further seems to place both judges and opposing parties at a disadvantage in terms of attempting to resolve matters on a reasonable basis,” informs Klemm.
Wait-and-See Approach on Disclosure Requirements
As third-party litigation funding grows in popularity, the question remains about whether more jurisdictions will follow the lead of the state of Wisconsin and the Northern District of California in imposing disclosure requirements. Section leaders seem divided about whether state and federal jurisdictions will impose disclosure requirements.
Some leaders think disclosure requirements will emerge. “It is likely that other states will adopt regulations that require disclosure of third-party funding of cases. In general, courts would probably want to know if there is third-party funding in a case,” states Louis F. Burke, New York, NY, cochair of the Section of Litigation’s Class Actions & Derivatives Suits Committee.
While other leaders predict that jurisdictions will be more cautious in imposing disclosure requirements. “Most jurisdictions will take a wait-and-see approach,” predicts Alexander C. Wharton, Memphis, TN, cochair of the Section’s Minority Trial Lawyer Committee.
“A lot of it will depend on how much a push for or against the changes that respective lobbying groups will take in the state legislatures. I can see this becoming a big issue in Florida and other areas where there is mass tort and class action litigation seeking large damages,” advises Wharton.
Onika K. Williams> is an associate editor for Litigation News.