Whether parties using Third-Party Litigation Funding (TPLF) should be required to disclose the TPLF agreement (or at least information about their litigation funding arrangement) to the opposing party as part of claims litigation continues to be a hotly debated topic. This topic has been of particular interest to the author and the focus of several of my prior (and recent) TPLF articles.
Regarding the TPLF disclosure issue, efforts continue at both the federal and state levels to establish TPLF disclosure rules as part of litigation discovery practices. By way of examples, 35 industry groups recently renewed calls for a federal TPLF disclosure rule, while the United States District Court for New Jersey and the United States District Court for the Northern District of California have enacted local TPLF disclosure rules, while other federal courts have issued local rules focused more on TPLF disclosure to assess potential judicial recusal issues.[1] Last year, Chief Judge Colm F. Connolly issued a TPLF Standing Order regarding cases before him in the United States District Court for the District of Delaware, which is closely patterned after District Court of New Jersey’s local rule. Meanwhile, at the state level, earlier this year Montana and Indiana enacted TPLF disclosure statutes, thereby joining West Virginia and Wisconsin[2] which enacted their own TPLF discovery statutes a few years back. In the big picture, these efforts are primarily focused on the individual case level as part of litigation discovery practices, with transparency being a major goal in terms of providing opposing parties with TPLF-related information to help assess potential claim impact, and general awareness of certain circumstances such as whether there may be funder control over litigation, settlement decisions and financing amounts, and to assess potential conflicts of interest issues.
Taking the TPLF disclosure issue in a slightly different direction (at least to some degree), the author notes interesting discussions between TPLF stakeholders regarding TPLF “data” as part of the Government Accountability Office’s (GAO) TPLF report[3] released at the very end of last year. Specifically, the TPLF stakeholders who participated in the GAO study identified several TPLF “data gaps” and discussed, very generally, possible options to collect TPLF data to address them. In contrast to TPLF disclosure efforts in the litigation discovery context, which are mainly focused at obtaining TPLF information for an individual case, some of the options presented in the GAO’s report appeared to contemplate obtaining TPLF data to assess litigation funding’s impact more broadly, regarding such issues as, the extent to which TPLF is being utilized, overall funding amounts, funder rates/fees, and the number of funders; consumer and investor protection concerns; larger policy questions regarding TPLF practices; and potential regulatory considerations. Going forward, it will be interesting to see if TPLF stakeholders and/or policy makers continue to explore the ideas presented as part of the GAO review and to what extent they may impact, or combine with, on-going TPLF disclosure efforts in the litigation discovery context.
To further assess this interesting development, the author outlines the following for consideration:
Identified data gaps
One of the TPLF focus areas the GAO was asked to review concerned “data gaps in the markets, and policy options to address them.”[4] To address this question, the GAO noted that they convened a virtual roundtable of 12 TPLF stakeholders which consisted of law professors, attorneys, a litigation funder, and representatives from the U.S. Chamber Institute for Legal Reform to discuss this issue.[5] The GAO also consulted with three litigation funding associations.[6]
These participants identified the following TPLF data gaps: (i) the funders’ rates of return; (ii) the number of funders operating in the U.S; and (iii) the total amount of funding provided.[7]
According to these participants, addressing the data gaps could help assess a number of issues including: TPLF’s impact on litigation, potential judicial conflict of interest issues, consumer and investor protections, and providing more transparency and increased market competition.[8] In addition, the GAO report states that one participant commented “that a lack of information about the industry may be the motivating force behind some stakeholders wanting to regulate it, and more data could provide a greater understanding of TPLF, thereby serving as an alternative to regulation.”[9]
Collecting TPLF data – presented options (and challenges)
To address the identified data gaps outlined above, the participating stakeholders presented six potential policy options to collect TPLF data (along with potential challenges) as follows:
1. Arbitration institutions
One idea discussed involved using arbitration institutions to help collect TPLF data as it was noted that some arbitration institutions have disclosure rules that “could provide an avenue for obtaining data on commercial TPLF.”[10] However, one litigation funding association noted that limiting data procurement solely to arbitration institutions would not provide a complete view of the commercial TPLF market.[11]
2. State regulators
Another idea discussed was potentially requiring funders to obtain licenses and report consumer TPLF data as part of state licensure requirements.[12] However, one potential complication noted was getting the various states to enact legislation imposing these requirements.[13] From another angle, a litigation funding association expressed concerns that, depending on the type of data collected, this idea “could result in defendants receiving information about plaintiffs that they would not ordinarily receive.”[14] It was also suggested that the funders could report the data “on an aggregated, anonymized, or confidential basis.”[15]
3. Federal regulators
Requiring funders to report TPLF data to federal regulators was another option discussed. One suggested idea was using the Consumer Financial Protection Bureau (CFPB) to collect data about consumer TPLF. However, some litigation funding associations questioned the CFPB’s authority to obtain data from funders and questioned whether Congress would have to pass legislation to allow the CFPB to collect this information.[16] One participant also raised the idea of using the Securities and Exchange Commission (SEC) to obtain data from commercial TPLF funders subject to SEC regulation.[17]
4. Court system
Another option discussed involved potentially using the federal or state courts help collect TPLF data. Suggested ideas included having the courts issue TPLF disclosure rules, issuing surveys to litigants, and possibly utilizing the National Center for the State Court to help coordinate efforts among state courts.[18] However, some potential complications were noted. For example, one stakeholder noted that differences in the jurisdiction of state courts could make collecting standardized data difficult,[19] while a litigation funder expressed concern that collecting data only through federal courts would not capture claims funded by TPLF filed in state courts.[20] In addition, the GAO mentioned that “[l]itigation funding associations we interviewed also expressed concerns that disclosures could give defendants a tactical advantage over plaintiffs, for example, if the funding were revealed.”[21]
5. Litigation funders
Having litigation funders voluntarily provide the data was another potential option raised. One idea discussed to achieve this included having the “judiciary or Congress” send funders a request or survey.[22] Another idea mentioned involved incentivizing the funders to voluntarily provide data, although the GAO observed that “[t]he experts did not provide examples of potential incentives or who would provide them.”[23] The participants noted, however, potential complications with this option. For example, it was noted that some funders may be unwilling to provide the data due to confidentiality concerns or to voluntarily provide information if not legally required to do so.[24] Further, some participants noted that it would be difficult to obtain data from funders without first knowing who the funders are which could, in turn, create issues of selection bias and result in any collected data not being representative of all funders.[25]
6. Lawyers or law firms
Another idea discussed involved having lawyers or law firms report TPLF information through state bar registration systems.[26] However, one expert and a litigation funding association reportedly expressed concerns that lawyers’ confidentiality and ethical requirements could limit the data they could report.[27]
Consideration points
In reviewing the above options, the GAO noted several important points for consideration. First, the GAO cautioned that inclusion of these options in their report "should not be interpreted as a recommendation to federal agencies or a matter for congressional considerations.”[28] Second, the participating stakeholders did not include potential advantages and disadvantages of each option.[29] Third, the GAO did not evaluate these options in terms of their potential effectiveness or what steps may be necessary to implement them.[30] Fourth, the GAO explained that the options were not presented within their report in any “specific rank or order,” and they acknowledged that “other options may exist that were not raised.”[31] In addition, the GAO report does not reflect any discussions regarding exactly what data should be reported.
From another angle, the GAO also commented that they recognized that some of the presented options “may … require legal action or other steps to implement. For example, federal or state lawmakers may need to pass legislation authorizing relevant agencies to act or compelling disclosure by private parties.”[32] Likewise, the GAO noted that “Federal or state agencies may need to issue or modify regulations, or in the case of courts, promulgate or modify procedural rules … [while] [s]ome options may require cooperation by nongovernment stakeholders.”[33]
Going forward
In assessing the above, several interesting questions surface on different levels. The first question set concerns inquiries such as: Where does this all go (if anywhere) from here? Will the TPLF stakeholders continue to develop these possible data collection options? Can the various TPLF stakeholders find common ground in developing TPLF data collection processes? Will the ideas discussed serve as a framework for possible regulatory or legislative action? Will other options be explored? On this latter question, by way of an example, could a single data collector or more centralized data aggregation process be considered versus the disparate options discussed?
On a more practical level, several questions arise including: What data should be reported? How should the data be reported? On these points, there would likely be robust discussions and debates between TPLF stakeholders. By way of example, as noted above, one participating stakeholder in the GAO study expressed concerns that disclosing TPLF data may give defendants an unfair tactical advantage. Meanwhile, another participant suggested providing data on an “aggregated, anonymized, or confidential basis.” These, and other considerations, will likely present challenges to the extent the TPLF stakeholders (or others) proceed further in exploring the presented options. From another angle, it will also be interesting to see if the discussed options influence the separate and on-going efforts to establish TPLF disclosure rules as part of litigation discovery practices at the claims level.
Going forward, all these questions will certainly be interesting to follow, especially given the reality that use of litigation funding continues to increase each year. The author will be closely monitoring future developments on all these fronts and provide updates as warranted.
Questions?
Please do not hesitate to contact the author if you have any questions. Also, click here to view the author’s other TPLF articles and resources.
[1] On this point, a well-researched memorandum prepared for the Advisory Committee on Civil Rules’ April 2018 meeting noted that, as of late 2017, six U.S. Courts of Appeals and 24 out of the 94 federal district courts had, as of the date of the memorandum, formulated local rules requiring identification of litigation funders, with these rules differing in terms of the cases to which the rules apply, the scope of information to be provided, the reasons for disclosure, as well as when and how this information must be disclosed. See, Patrick A. Tighe, Survey of Federal and State Disclosure Rules Regarding Litigation Funding, February 7, 2018, at 210, as contained in the Advisory Committee on Civil Rules Booklet, April 10, 2018.
As contained in Appendix A of Mr. Tighe’s survey, the following U.S. Circuit Court of Appeals were noted to have local courts rules regarding disclosure of TPLF finance arrangements, with the scope and type of disclosure varying by circuit: “Third Circuit (3rd Cir. L.R. 26.1.1(b); Fourth Circuit (4th Cir. L.R. 26.1(2)(B); Fifth Circuit (5th Cir. L.R. 28.2.1); Sixth Circuit (6th Cir. L.R. 26.1(b)(2)); Tenth Circuit (10th Cir. L.R. 46.1(D)); and Eleventh Circuit (11th Cir. L.R. 26.1-1(a)(1); 11th Cir. L.R. 26.1-2(a).” See, Patrick A. Tighe, Survey of Federal and State Disclosure Rules Regarding Litigation Funding, February 7, 2018, at 220, as contained in the Advisory Committee on Civil Rules Booklet, April 10, 2018.
As contained in Appendix B of Mr. Tighe’s survey, the following U.S. District Courts were noted to have local district court rules regarding disclosure of TPLF finance arrangements, with the scope and type of disclosure varying by district: “Arizona (no local rule, but corporate disclosure statement); C.D. California (C.D. L.R. 7.1-1); N.D. of California (N.D. Cal. L.R. 3-15; Standing Order for All Judges of the N.D. Cal (1/17/2017); M.D. Florida (Interested Persons Order for Civil Cases 6/14/2013, only applies to some judges; no local rule or order applicable to all district court judges); N.D. Georgia (N.D. Ga. L.3.3); S.D. Georgia (S.D. Ga. L.R. 7.1); N.D. Iowa (N.D. Iowa L.R. 7.1); S.D. Iowa (S.D. Iowa L.R. 7.1); Maryland (M.D. L.R. 103.3(b)); E.D. Michigan (E.D. Mich. L.R. 83.4); W.D. Michigan (Form-Corporate Disclosure Statement; No local rule order); Nevada (Nev. L.R. 7.1-1);E.D. North Carolina (E.D. N.C. L.R. 7.3); M.D. North Carolina (Form-Disclosure of Corporate Affiliations; No local rule order); W.D. North Carolina (Form-Entities with a Direct Financial Interest in Litigation Form, No local rule or order); N.D. Ohio (N.D. Ohio L. Civ. R. 3.13(b); Form – Corporate Disclosure Statement); S.D. Ohio (S.D. Ohio L.R. 7.1); E.D. Oklahoma (Form-Corporate Disclosure Statement, No local rule order); N.D. Oklahoma (Form-Corporate Disclosure Statement; No local rule or order); N.D. Texas (N.D. Tex. L.R. 3.1(c), 3.2(c), 7.4, 81.1); W.D. Texas (W.D. Tex. L.R. CV-33); W.D. Virginia (Form-Disclosure of Corporate Affiliations and Other Entities with a Direct Financial Interest in Litigation; No local rule order); and W.D. Wisconsin (Form-Disclosure of Corporate Affiliations and Financial Interest; No local rule or order).” See, Patrick A. Tighe, Survey of Federal and State Disclosure Rules Regarding Litigation Funding, February 7, 2018, at 223-229, as contained in the Advisory Committee on Civil Rules Booklet, April 10, 2018.
Notably, however, per Mr. Tighe’s survey, of these local rules reportedly require the production of the litigation funding agreement itself. Further, these rules have reportedly focused more on TPLF disclosure for the purposes of helping courts assess potential judicial recusal or disqualification issues, rather than providing defendants with third-party funding information as part of litigation discovery. See, Patrick A. Tighe, Survey of Federal and State Disclosure Rules Regarding Litigation Funding, February 7, 2018, as contained in the Advisory Committee on Civil Rules Booklet, April 10, 2018.
[2] Wisconsin’s law is codified at Wis. Stat. Ann. § 804.01(2)(bg) and states: “Third party agreements. Except as otherwise stipulated or ordered by the court, a party shall, without awaiting a discovery request, provide to the other parties any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.” West Virginia’s statute, codified at W. Va. Code Ann. § 46A-6N-6 states: “Except as otherwise stipulated or ordered by the court, a party shall, without awaiting a discovery request, provide to the other parties any agreement under which any litigation financier, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.
[3] This report is titled GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022). The GAO addressed its report to Senator Chuck Grassley (R-IA), Representative Any Barr (R-KY), and Representative Darrell Issa (R-CA). Id. at 1. The GAO also provided this report to the Consumer Financial Protection Bureau, Department of Justice, the Federal Judicial Center, and the Securities Exchange Commission. Id. at 35. The GAO noted that Sen. Grassley, Rep. Issa, and Rep. Barr “asked us to review several issues related to TPLF. This report describes (1) characteristics of and trends in the commercial and consumer TPLF markets, (2) data gaps in the markets, and policy options to address them, (3) potential advantages and disadvantages of TPLF for users and investors, and (4) regulation and disclosure of TPLF in the U.S. and selected foreign countries. “Id. at 2.
[4] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 2022), at p. 2. In addition to the above referenced “data gaps,” the GAO was also asked to address “(1) characteristics of and trends in the commercial and consumer TPLF markets, (2) potential advantages and disadvantages of TPLF for users and investors, and (3) regulation and disclosure of TPLF in the U.S. and selected foreign countries.” Id.
[5] In this regard, the GAO described its methodology and process in addressing this particular issue as follows:
To address the second objective, we convened a virtual roundtable of 12 experts. These experts discussed possible data gaps in the U.S. TPLF markets; whether the gaps need to be addressed and, if so, policy options for addressing them; challenges posed by the options; and potential implementation steps for the options.
To identify a list of experts to select from, we reviewed a list of TPLF industry stakeholders (compiled by the methods described earlier) and reviewed literature. We then conducted internet searches to identify additional information on the experts’ experience, education, and published work. We selected the 12 experts for our roundtable based on (1) their published work on TPLF, (2) their knowledge of TPLF (as measured by how long they have worked in their fields and their number of publications on TPLF), (3) their type of work experience (to obtain a mix of varied experiences, such as professors, attorneys, and others), and (4) their perspectives on TPLF (to obtain a mix of roundtable participants with various positions on TPLF).
The 12 experts we selected were Charles Agee, Managing Partner of Westfleet Advisors; Ronen Avraham, law professor at the University of Texas at Austin School of Law and Tel Aviv University; John Beisner, attorney at Skadden, Arps, Slate, Meagher & Flom LLP and author of publications for the U.S. Chamber Institute for Legal Reform; Page Faulk, Senior Vice President of legal reform initiatives at the U.S. Chamber Institute for Legal Reform; Radek Goral, attorney at Dentons; Tripp Haston, attorney at Bradley, Arant, Boult, Cummings LLP; John McCarthy, attorney at Smith, Gambrel & Russell, LLP and member of the New York City Bar Association Litigation Funding Working Group; Lucian Pera, attorney at Adams and Reese LLP and ethics advisor for Westfleet Advisors; Victoria Sahani, law professor at Sandra Day O’Connor College of Law, Arizona State University; Anthony Sebok, law professor at Cardozo School of Law and ethics consultant for Burford; Maya Steinitz, law professor at University of Iowa College of Law; and Robert Weber, law professor at Georgia State University College of Law. To help identify any potential biases or conflicts of interest, we asked each expert who participated in the roundtable to disclose whether they had investments, sources of earned income, organizational positions, relationships, or other circumstances that could affect, or could be viewed to affect, their view on the options. For our purposes, there was sufficient variation among the experts’ backgrounds and positions on TPLF for the roundtable. The comments of these experts generally represented the views of the experts themselves and not the university, law firm, or other organization with which they were affiliated, and are not generalizable to the views of others in the field. GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at. P. 39-40.
[6] On this point, the GAO stated, in an endnote, as follows:
We also met with litigation funding associations (the International Legal Finance Association, American Legal Finance Association, and the Alliance for Responsible Consumer Legal Funding) to gather their perspectives about the data gaps and potential advantages and disadvantages of the options the experts identified. We asked roundtable participants and the litigation funding associations we interviewed to describe the potential advantages and disadvantages of the options, but the discussions primarily focused on potential challenges posed by the options. GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 39 endnote 4.
[7] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 15.
[8]GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 15.
[9] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 15-16.
[10] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 16.
[11] Id.
[12]Id.
[13]Id.
[14] Id.
[15] Id.
[16] Id.
[17]GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 17.
[18] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 17. Regarding the National Center for the State Courts, the GAO noted that “[a]ccording to its website, the National Center for State Courts is an independent, non- profit organization that works with judicial leaders to promote the rule of law and improve the administration of justice in state courts. National Center for State Courts, About Us, accessed Oct. 10, 2022, https://www.ncsc.org/about-us.” Id. at n. 40.
[19] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 17.
[20]Id.
[21] Id. at n. 41.
[22] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 17.
[23] Id. at n. 42.
[24] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 17.
[25]Id.
[26]Id.
[27]Id.
[28] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 40.
[29] On this point, the GAO commented: “We asked roundtable participants and the litigation funding associations we interviewed to describe the potential advantages and disadvantages of the options, but the discussions primarily focused on potential challenges posed by the options.” GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p. 16, n. 38.
[30] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022), at p.18 and 40.
[31] Id.
[32] GAO Report, Third-Party Litigation Financing – Market Characteristics, Data, and Trends (December 20, 2022, at p. 18.
[33] Id.
