April 13, 2020 Top Story

Relevance Required to Discover Funding Agreements

Court says discovery of funding agreements allowed in certain circumstances

By Martha L. Kohlstrand

Litigants must have specific reasons for the disclosure of information about their opponents’ litigation funding arrangements, a magistrate judge in the District of New Jersey has ruled. In In re: Valsartan N-Nitrosodimethylamine (NDMA) Contamination Products Liability Litigation, the court opined that absent special circumstances, litigation funding deals are not subject to discovery since they are generally irrelevant to the merits of a case. This ruling follows a trend concerning the discovery of such arrangements, ABA Section of Litigation leaders say.

Are litigants' private funding arrangements discoverable?

Are litigants' private funding arrangements discoverable?

iStockphoto by Getty Images

Defendants Seek to Discover Evidence Related to Third-Party Funding

The plaintiffs in this multidistrict litigation were a group of consumers who alleged that the defendants’ drug contained carcinogens and caused them personal injuries and economic losses. The defendants issued discovery to the plaintiffs and requested “all documents and communications related to funding or financing, if any, you or your counsel have obtained to pursue this litigation.” The plaintiffs objected to this request, arguing that their private financial information was irrelevant to their claims and defenses. However, the plaintiffs agreed to produce some documents for in camera review so the court could determine whether the litigation funding company had control or input into litigation decisions. Other than this possibility, though, the plaintiffs contended that the defendants had no legitimate need for the information.

The defendants filed a motion to compel, arguing that any third-party funding was relevant to discovering the real party in interest as to the plaintiffs’ claims. They contended that the funding information was relevant to determining: (1) the plaintiffs’ credibility and bias; (2) the scope of proportional discovery; (3) the scope of potential sanctions; and (4) the medical necessity and reasonableness of plaintiffs’ treatments. The defendants also argued that much of current mass tort litigation is plagued by undisclosed third-party involvement.

Attorney May Condition Destruction of Data on Indemnification

Before addressing the motion to compel, the judge noted that courts are split on the issue of discoverability of litigation funding arrangements and that the U.S. Court of Appeals for the Third Circuit had not weighed in. Furthermore, there was no published New Jersey District Court authority on the matter.

The court began its analysis by considering Federal Rule of Civil Procedure 26(b)(1), which permits discovery regarding “any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case[.]” The court noted that the majority of courts addressing the issue have held that discovery regarding litigation funding is irrelevant. Agreeing with those rulings, the court denied the motion to compel.

However, the court emphasized that discovery concerning litigation funding may sometimes be appropriate. For instance, in cases where it can be shown that a party acted unethically, or that the litigation funder made ultimate litigation or settlement decisions—sacrificing the plaintiffs’ interests—then such discovery could be relevant. Litigation funding, according to the court, will be discoverable only if there is good cause to show that the discovery is relevant to the claims and defenses in the case. In this case, however, the defendants had made no such showing. Moreover, even if the discovery had been relevant, the defendants’ requests would not be proportional to the needs of the case, the court concluded.

Implications of In re: Valsartan

“Litigation funding is a huge emerging issue,” notes Angela Foster, North Brunswick, NJ, cochair of the Section of Litigation’s Trial Evidence Committee. “Third-party funding is a growing business,” she continues. “Intellectual property litigation in particular is affected by litigation funding,” observes Alex Chan, San Francisco, CA, cochair of the Section’s Minority Trial Lawyer Committee. “A small business without money may have an IP claim, but no money to pursue it,” he explains.

Section leaders agree that relevance is a key issue for courts considering this type of discovery request. “Remember, the key issue is how the requested discovery affects claims or defenses in the lawsuit,” Foster says. “Although courts vary on how they interpret relevance, the decision whether to allow discovery ultimately comes down to this,” Chan agrees. “There are a few circumstances in which litigation funding could be relevant, and the court acknowledges this. But it needs to clearly tie to the issues in the case,” he adds.

Even if the party who seeks the discovery can show relevance, there are other hurdles to overcome. “Some courts have found that the work product doctrine applies to documents related to litigation funding,” Chan explains. “And that’s a really high bar to overcome,” he says.

Foster has some ideas for managing litigation in which a funder is involved. “If you are a plaintiff, make sure you have a nondisclosure agreement in place with your litigation funder,” she advises. “This way, if your opponent requests these documents, there’s another roadblock. Also, be careful about what you share with the litigation funder. You might decide to redact certain information that you provide to the funder, which could protect you later,” Foster recommends. Chan notes that it is rare for a court to allow this type of discovery. “I’ve never seen a case in which the defendant overcame both the relevance hurdle and the work product issue,” he says.

 

Martha L. Kohlstrand is an associate editor for Litigation News.


Hashtags: #litigationfunding #discovery #motiontocompel #relevance

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