USA: An Introduction to USA - Nationwide

Litigation Finance: The Case for Limited Disclosure of Funding

As the litigation finance industry continues to grow – US funders surpassed USD13 billion in assets under management last year – so too have calls for greater transparency. These demands are typically associated with industry opponents, including those representing large corporations. Outside observers, meanwhile, tend to frame the prospect of mandatory disclosure as a “risk” to litigation finance, with one commentator going so far as to call it “tantamount to a declaration of nuclear war”.

But at Longford, we are not opposed to limited disclosure of litigation funding – specifically, the existence of third-party funding and the funder’s identity. We believe that if defence counsel and judges know litigation funders like us are involved, they will understand the strength of the case and may be more likely to resolve the dispute without a protracted legal battle. Faster resolutions, in turn, help clear our country’s congested civil court dockets.

Transparency trends look to ensure fairness 

Disclosure requirements typically focus on two issues: (i) determining whether third-party funders have any control over the outcome of the case; and (ii) whether the funder presents a conflict of interest to the parties involved or the court.

Several states – including Wisconsin, West Virginia, and most recently Montana – have already implemented laws for these purposes, requiring those involved in civil litigation to disclose whether a matter is funded.

They are not alone: the Northern District of California also requires parties in any class, collective or representative action to disclose the identity of litigation funders, while the District of New Jersey mandates disclosure of specific information related to litigation funders. Chief Judge Colm F. Connolly of the US District Court for the District of Delaware, a major venue for patent litigation, also issued a standing order requiring such disclosures.

While there is currently no nationwide disclosure requirement, Congress and the Supreme Court’s Advisory Committee on Civil Rules have repeatedly considered proposals for transparency mandates. Other states (including Kansas, Mississippi, and Louisiana) are also considering disclosure requirements this year – another sign that these requirements may soon become the norm.

Disclosure requirements may change the game – for the better

Despite claims to the contrary, disclosure requirements can be a good thing, namely because they lend credibility to litigants, encouraging faster resolution of cases and ultimately improving the efficiency of our civil courts.

Case in point: when a well-financed corporate defendant is facing a smaller, less-established company in civil litigation, such defendants have traditionally relied on an “outspend and outlast” strategy, counting on their deep pockets to exhaust the other side’s resources without the need to settle. The backing of an experienced litigation funder disrupts this strategy not only by fronting the costs and absorbing the risk of litigation, but by sending a powerful message to the judge and opposing party about the strength of the plaintiff’s claims.

That is because judges and defence counsel know that top litigation finance firms undertake an extensive due diligence process and fund only what they believe to be the most meritorious cases. At Longford, for example, we conduct a rigorous, two-stage examination of a case’s merits that involves a detailed internal review from our experienced attorney team alongside an independent analysis by an outside law firm with subject matter expertise.

Since we invest on a non-recourse basis, we only provide financing for a small percentage of the cases we assess – those we believe to have the strongest likelihood of success.

When defence counsel discovers through new disclosure requirements that litigation funders like us are involved, they may be inclined to change course – encouraging settlements and swift resolutions rather than years of expensive litigation.

Disclosure should not be a distraction 

Existing disclosure requirements mandate only general information about the funder to ensure that the funder does not pose a conflict of interest or exert control over the litigation (with established players like Longford, litigants retain control over their cases). The specific financial terms of the transaction are not part of these required disclosures, and there is a growing consensus in the case law that these terms are irrelevant and non-discoverable.

There is good reason for this: litigation funding should not distract from the underlying case. While knowing about the existence of funding and the identity of the funder may offer legitimate benefits, the particulars of a funding agreement are irrelevant to the underlying litigation. Proposals that would force litigants to disclose the entire third-party funding agreement risk upending the benefits offered by litigation finance – by, for instance, putting the “outspend and outlast” strategy back on the table if defendants know their litigation budget dwarfs that of their opponent.

Furthermore, firms such as Longford take additional steps to prevent lengthy discovery disputes by executing non-disclosure agreements at the outset of every engagement, providing that the information shared with us is highly confidential and is to be used only for the assessment of potential funding. Such agreements are intended to ensure that this information remains confidential and is protected by the attorney work product doctrine as recognised by the overwhelming majority of courts that have taken up the issue.

Turning challenges into opportunities 

We expect the trend toward transparency to continue in the coming years, especially since litigation finance has become a popular funding option in today’s volatile economy.

As long as these disclosure requirements remain narrowly tailored and do not distract from the underlying case, we view them as an opportunity to build a better, more efficient civil court system.