The US litigation finance industry is valued at over a billion dollars and has continued to grow as potential funders increasingly see litigation as an investment opportunity. Despite the growing presence of litigation funders, courts continue to extend work product protection and confidentiality regarding the existence of and communication with litigation funders.

Critics argue that this is an unfair advantage to plaintiffs who are able to protect information regarding litigation funding, while many jurisdictions require defendants to automatically make disclosures regarding corporate interests and insurance agreements. 

What Is Litigation Funding And What Problems Can It Raise?

Litigation finance describes a situation where a nonparty funds a plaintiff’s lawsuit in anticipation of reaping a profit from a favorable judgment. Prior to receiving outside funding, the client and prospective funder examine confidential information regarding the strength of the case. The prospective funder will usually sign a nondisclosure agreement and conduct due diligence, ascertaining the case value from information provided by the client. The financing agreement may have provisions that give the funder additional rights to consult or approve decisions throughout the litigation. Once the financing agreement is signed, the funder and plaintiff may also continue to communicate about the case throughout the litigation. When opposing parties have sought discovery regarding funding agreements or communications with funders, which may contain confidential and important case-specific information, courts have tended to protect the funding documents and communications from disclosure.

For example, in December 2021, the US District Court for the Northern District of Illinois issued a decision upholding the work product protection for litigation funding documents containing confidential information. In Neural Magic Inc. v. Facebook Inc., the Court denied the defendant’s attempt to secure Neural Magic’s litigation funding documents.^[1] There, the court recognized that litigation funding documents may be relevant to some issues such as damages and the valuation of certain intellectual property.^[2] However, the court declined to compel the plaintiffs to produce their litigation funding documents, in part, because (1) the weight of authority holds against disclosing litigation funding documents and (2) other documents already produced addressed the same valuation information the defendant sought.^[3]

In protecting the confidentiality of litigation funding documents, other courts have also weighed factors such as the existence of an executed nondisclosure agreement, the type of information requested, and the funder’s role in the litigation.

Some critics argue that parties have been treated unequally in terms of financial disclosure. For instance, while courts consistently uphold work product protection over litigation funding documents, Federal Rule of Civil Procedure 7.1 requires that nongovernmental corporate parties file disclosure statements identifying “any parent corporation and any publicly held corporation owning 10% or more of its stock.”^[4] Rule 7.1 applies automatically to any nongovernmental corporate party and a Rule 7.1 filing must be made before or at the same time as the party’s first filing. Federal Rule of Civil Procedure 26 also mandates disclosure of “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.^[5]

Addressing the Inequity

Calls for a reciprocal rule for plaintiffs to disclose litigation funding have grown over the years. In May 2018, Republican Senators introduced a bill entitled “The Litigation Funding Transparency Act of 2018.” The bill sought to require any claimants in federal class actions or multidistrict litigation proceedings to reveal the existence of litigation funding. Moreover, class counsel in any federal class action must disclose in writing to the court and all other named parties the identity of any commercial enterprise (other than a class member or class counsel) that has a right to receive payment contingent on the receipt of monetary relief in the case. A similar bill was introduced in the US House of Representatives in 2021.^[6]

Various states have started to enact their own laws regarding the disclosure of litigation funding. In 2018, Wisconsin enacted a law mandating that litigants disclose any outside legal funding arrangements. West Virginia enacted related legislation in 2019. And in 2021, New Jersey enacted L. Civ. R. 7.1.1 that requires the automatic disclosure of any nonparty “providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis.” ^[7] 

The increasing prevalence[8] of litigation finance continues to bring its own set of challenges related to ethics, privilege, and discoverability and various jurisdictions are passing their own rules regarding funding disclosure. There is yet to be a Federal Rule, however, which has led to some inconsistency at the state and district court level. For example, although Wisconsin, West Virginia, and New Jersey have disclosure requirements, Illinois’ litigation funding statute, enacted in May 2022, has no provisions regarding disclosure.

FOOTNOTES

^[1] Neural Magic, Inc. v. Facebook Inc., No. 20-cv-10444 (D. Mass.), ECF No. 224.

^[2] See id.

^[3] See id.

^[4] Rule 7.1. Disclosure Statement | Federal Rules of Civil Procedure | US Law | LII / Legal Information Institute (cornell.edu)

^[5] Federal Rule of Civil Procedure 26(a)(1)(A)(iv).

^[6] See Text - H.R.2025 - 117th Congress (2021-2022): Litigation Funding Transparency Act of 2021 | Congress.gov | Library of Congress

^[7] NJ L. Civ. Rule 7.1.1 available here, (2022).

^[8] How Big Is The Litigation Finance Industry? » Baker Street Legal Funding (bakerstreetfunding.com)