Bring third-party funders out of “the shadows,” U.S. Chamber asks federal rules committee

June 15, 2017


By Karen Rubin


Litigation funding is in the news again, with the U.S. Chamber of Commerce spearheading a request to amend the Federal Rules of Civil Procedure to require initial disclosure of all third-party agreements for compensation that are “contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”

The Chamber joined with 28 other organizations in a letter sent earlier this month to the federal courts’ Rules Committee, saying that its aim is to bring third-party litigation funding out of “the shadows” and to identify “a real party in interest that may be steering a plaintiff’s litigation strategy and settlement decisions.”

The new push follows up on a 2014 proposal that the Chamber and a few other organizations made to the same rulemaking committee, which was rejected.  Things have changed since then, the Chamber’s June 1 letter said, citing expansion of third-party funding in the U.S., with several significant players reporting significant and steady growth, and on-line marketplaces opening the way for investors to shop for individual cases to contribute to.

Shift in momentum?

As we reported in February, the U.S. District Court for the Northern District of California became the first court to mandate disclosure of litigation funding that parties in class actions receive from outside sources, under a revision to the court’s standing order.  That was followed up in March, when the U.S. House of Representatives passed the Fairness in Class Action Litigation Act of 2017, which likewise would require disclosure of third-party funders in class actions.  The bill is now before the Senate Judiciary Committee.

Problems with alternative litigation funding

The process for amending the federal civil rules is a lengthy one.  But with at least some momentum on its side, the U.S. Chamber cited several justifications for the rule change it seeks, including:

  • The champerty problem.  This old legal doctrine, which seeks to prevent buying and selling lawsuits, still continues to be in play, with at least three state courts of appeals citing it or suggesting it as a viable defense in 2016-17, and a U.S. bankruptcy court in January finding an agreement to be champertous.
  • Fee-sharing issue.  Model Rule 5.4(a) bars almost all forms of sharing legal fees with non-lawyers, with the goal of preserving the lawyer’s independent professional judgment. But some models of third-party litigation funding apparently involve plaintiffs’ counsel repaying the funder’s investment out of the lawyer’s attorney fees, if any.
  • Confidentiality and conflicts.  To the extent that funding arrangements require disclosure of client information to the financier they could raise confidentiality concerns under the ethics rules, as well as privilege issues.  And lawyers who have “contracted directly with a funding company may have … duties to it that are … perhaps inconsistent with” the duties of loyalty to the client, including conflicts arising from steering clients to favored funders.

Watch and wait

In a press release, one large litigation funder, Bentham IMF, said that the Chamber’s proposal was misguided, including because the law firms using such financing were assisting under-served and under-funded clients — small-to-mid-size businesses and individuals — who could not otherwise afford to litigate their claims.  Bentham also said that the rule amendment proposal was unfairly one-sided, and that defendants should have to abide by similar disclosure rules.

Litigation funding will continue to be a hotly debated issue, and if your clients are involved in civil litigation, these are developments that bear watching.  Stay tuned.

Content courtesy of The Law for Lawyers Today: Ethics, Professional Responsibility and More blog. Ohio State Bar Association member Karen Rubin is an attorney for Thompson Hine.


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