For the first time, court requires “litigation funders” to be disclosed—but only in class actions

Feb. 9, 2017

By Karen Rubin

On January 26, 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 applicable to all cases.  The rule provides that “in any proposed class, collective or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.”

Final rule—more “funder friendly”

The final rule is more limited than an earlier draft, which would have expressly mentioned “litigation funders,” and required their identification in the first appearance in all civil proceedings.

The court’s request for comments on the earlier draft, during summer 2016, drew input from two large litigation funders.  The CEO of Burford Capital, which calls itself “the largest provider of strategic capital to the legal market,” criticized the earlier draft proposal as “unnecessary and discriminatory” in a comment he filed in July.  He told Law360 (subs. req.) that Burford was happy with the district court’s “incremental approach” to disclosure reflected in the final rule.

Another litigation funder, Bentham IMF, based in Australia, also commented this past summer on the earlier draft rule, expressing concern that it would open up wasteful “discovery sideshows,” intrude on attorney-client privilege and “give defendants in all cases the unprecedented and unintended advantage of knowing which claimants lack the resources to weather a lengthy litigation campaign.”

The U.S. Chamber of Commerce has supported disclosure of litigation funding, and told Law360 that the rule would force law suit investors out of the shadows, where they shouldn’t be allowed to control litigation, especially in class actions.

A growing segment—but is it champerty?

In its comments, Burford said that commercial litigation funding is in its infancy in the U.S., and that fewer than 75 cases in federal district court involve such funders each year.  That limited figure would appear to exclude the many other forms of third-party funding available to plaintiffs and investors.   And the market for litigation investing is lucrative and growing, according to Forbes, which headlined a story last year “The next great investment idea:  Somebody else’s lawsuit?”

Which raises the question—do law schools need to start teaching the law of champerty and maintenance again?  If you’ve never heard of the doctrines, here’s a 2003 explanation from the Ohio Supreme Court:
The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law.
The modern trend has been away from applying these old doctrines (which some jurisdictions codify by statute) to third-party funding agreements, as exemplified by a Delaware trial court decision last summer, involving Burford Capital.  And the 2003 Ohio ruling, which voided a contract as champerty and maintenance, was later abrogated by statute.

Some courts, however, are sticking to the champerty analysis.  For instance, a recent decision of the Pennsylvania court of appeals held that “champerty remains a viable defense in Pennsylvania,” invalidating a third-party funding agreement between plaintiff’s lawyer and the funder.  New York’s highest court this fall likewise interpreted a litigation funding transaction to be a sham attempt to evade the state’s champerty statute.

Trendline to watch

It will be interesting to watch the trend toward a growing litigation funding marketplace as it meets up with a possible push for more disclosure and a potential resurgence in champerty jurisprudence.  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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