Third-Party Litigation Funding
Leo Arzumanyan, Law Clerk
Schwartz Semerdjian Cauley & Moot LLP
Given the precarious nature of funding in litigation, the last couple of years have provided attorneys the opportunity to ponder a rather uncertain question – to what extent must third-party financial arrangements be disclosed in discovery? Driving this question is an abrupt increase in funding by third parties for plaintiffs involved in litigation. This trend begs questions about the structure of these arrangements, their legality, and most importantly, what does and does not need to be disclosed through discovery.
Continuing a nationwide trend, Judge Illston of the Northern District of California recently rejected a discovery request into a plaintiff’s litigation funding arrangements. MLC Intellectual Property, LLC v. Micron Technology, Inc., 2019 U.S. Dist. LEXIS 2745 at *4 (N.D. Cal. 2019); Kaplan v. S.A.C. Capital Advisors LP, No. 12-cv-9350, 2015 WL 5730101, at *5 (S.D.N.Y. Sept. 10, 2015) (rejecting discovery of plaintiff’s funding agreement where defendants failed to show that the requested information was relevant); In re National Prescription Opiate Litig., No. 1:17-MD-2804, 2018 WL 2127807, at *1 (N.D. Ohio May 7, 2018) (holding that discovery into third-party funding arrangements would not be permitted “[a]bsent extraordinary circumstances.”) In MLC, Defendant Micron sought discovery regarding “persons and entities that have a financial interest in th[e] litigation” as well as identification of any third party funding the litigation. Id. In accordance with the present trend of judge’s denying such inquiries, Plaintiff MLC’s objection to the discovery as privileged and irrelevant seems to be a winning argument and meritorious objection. The defendant argued that the request was relevant in order to reveal any potential conflicts of interest and to uncover possible bias issues of jury members relating to MLC’s non-party witnesses. Id. However, Judge Illston picked apart arguments arising from that line of reasoning by finding that Micron was not entitled to the discovery it sought because it was not relevant, and if the case proceeded to trial, “the Court can question potential jurors in camera regarding relationships to third party funders and potential conflicts of interest.” Id. at *5.
The denial in Micron highlights a recent understanding that disclosure of third-party funding to litigation is unnecessary, as potential bias and conflicts of interest are rather speculative and can be dealt with in a different manner. The rejection of any authority for broad discovery into a third party litigation fund is of importance going forward, as Judge Illston held that the cases cited by Defendant Micron did not support any such broad request, because the courts in the cited cases held that fee and litigation funding arguments (in the class action context) could be discoverable only when there was a specific, articulated reason to suspect bias or conflicts of interest. Id. at *6.
In another case highlighting the battle between discovery and third-party litigation funding, Google moved to have a company produce board minutes which discussed potential litigation funding, in addition to requesting that one of the company’s board members be compelled to answer deposition questions regarding the funding. Space Data Corp. v. Google LLC, et al., No 16-cv-02360, 2018 WL 3054797 at *1 (N.D. Cal. June 11, 2018). The court in Google, adhering to recent trends, denied the defendant’s motion to compel production of such documents and communications regarding potential litigation funding, rejecting Google’s argument that discussions with third-party funders and their identities are not privileged. Id; see also Telesocial Inc. v. Orange S.A., No. 3:14-cv-03985 (N.D. Cal. Sept. 30, 2016) (denying defendant’s motion to compel production of documents and communications about potential litigation funding).
The court did not focus on privilege issues however, and instead zoned in on the defendant’s assertion that the discovery is relevant and held that the defendant did not articulate how disclosure of such third-party funding (if any existed) was relevant to the case at hand. Furthermore, the court turned its attention to the burden at hand and went on to say that, “Even if litigation funding were relevant (which is contestable), potential litigation funding is a side issue at best … [a]nd the burden of responding would outweigh its likely benefits to defendants.” Id. Besides the fact that the court was not persuaded to the relevancy of materials sought, it also cited Federal Rules of Civil Procedure 26(b)(1) and found that defendants’ requests were not “proportional to the needs of the case.” Id. As a result, the court denied defendants’ request to compel further discovery and established that parties challenging third-party funding, who are looking to expose the funders’ identities and the arrangements at play, are facing an uphill legal battle. Additionally, the court helped clarify that only when a party provides a specific and coherent argument as to why it should be entitled to third-party funding information would the court then find the issue worthy of discussion.
Giving weight to the steady trend of denying such discovery requests, a study done by litigation funding broker Westfleet Advisors found that litigants who attempt to force disclosure of an opposing party’s litigation financing documents regarding third-party funders are overwhelmingly unsuccessful. Sarah Jacobson, Study Finds Attempts to Force Disclosure of Litigation Funding Agreements “Overwhelmingly Unsuccessful,” Bentham IMF (June 7, 2018). Westfleet’s review of federal and state case law found that judges increasingly determined that litigation financing documents are outside the scope of discovery. In 24 of the 30 cases that were studied, Westfleet found that the judge denied discovery into third-party litigation funding, of which 20 times the cause and rational for denial and non-disclosure was the work-product doctrine. As such, if recent trends are anything to go by, courts are starting to consolidate around protecting the identity of third-party funders and are establishing precedent that will be quite difficult to challenge absent clear and direct, not speculative, arguments.
Class Action Exceptions
Absent a specific showing of relevance, litigation funding arrangements should not be disclosed. Recent decisions handed down by courts throughout California and the nation help elicit the understanding that there is now a growing list of precedent rejecting attempts to uncover the identity of third-party litigation funders, absent on-point reasons to assume the identity would be of relevance to the case at hand. One caveat, however, is with respect to class actions. In such suits, the trend bucks in the opposite way, as evidenced by the Northern District of California, which imposed a standing order for all judges mandating the disclosure of people or entities who “In any proposed class, collective, or representative action . . . fund the prosecution of any claim or counterclaim.” N.D. Cal., Standing Order for all Judges of the Northern District of California, § 19 (Jan. 17, 2017). This order follows Gbarabe v. Chevron Corp., No. 14-cv-00173, 2016 WL 4154849 (N.D. Cal. Aug. 5, 2016) which compelled a named plaintiff in a class action claim to produce his litigation funding agreement to the defendant.
A Funder’s Murky Future
In conclusion, attorneys should have confidence (at least for now) going forward when facing discovery requests to disclose any third-party who may be financing the litigation. That is not to say that there isn’t reason to be wary. In 2018, Senators Chuck Grassley of Iowa, Thom Tillis of North Carolina, and John Cornyn of Texas introduced a bill titled “The Litigation Funding Transparency Act of 2018” which would have required disclosure of litigation funding arrangements (and the contents of the agreements themselves) in any federal class action and federal claim that is aggregated into a federal multi-district litigation proceeding. According to Senator Tillis, the purpose of the bill was to “keep the civil justice system honorable and fair.” Matthew Harrison, The Litigation Funding Transparency Act of 2018, Bentham IMF (May 14, 2018). The bill ultimately went nowhere.
However, one eye should be kept on the near future, as those same senators, along with Ben Sasse of Nebraska, have once again reintroduced the Litigation Funding Transparency Act, this time further widening its scope. The 2019 version of the LFTA introduced in February goes beyond disclosure in only class actions and would require all plaintiffs to disclose when they’ve secured third-party cash funding in litigation. The president of the U.S. Chamber Institute for Legal Reform said in support that “Congress . . . sees the dangers that secretive lawsuit funding deals pose to fairness and justice in our courts … [i]t’s time for the lucrative business of betting on other peoples’ lawsuits to get examined in the light of day, and the Litigation Funding Transparency Act will do just that.” Ross Todd, Republican Senators Reintroduce Bill Pushing for Disclosure of Litigation Funding, The National Law Journal (Feb. 13, 2019).
The reintroduction of the bill also follows a group of 30 in-house counsel at major companies that have backed a proposal to amend the Federal Rules of Civil Procedure to require full disclosure of third-party funding in litigation. Their reasoning? Top lawyers within the group argued that “[w]hen litigation funders invest in a lawsuit, they buy a piece of the case; they effectively become real parties in interest. Defendants (and courts) have a right to know who has a stake in a lawsuit and to assess whether they are using illegal or unethical means to bring the action.” Caroline Spiezio, General Counsel Push for Full Disclosure of Third-Party Litigation Funding in New Letter, The Recorder (Jan. 31, 2019).
This hot-button topic of litigation funding disclosure is also being examined by the U.S. Court’s Advisory Committee on Rules of Civil Procedure, which has so far resisted the U.S. Chamber of Commerce, which is targeting efforts to procure some sort of regulation or rule change with respect to this issue. In 2014 and 2016 the Advisory Committee rejected a proposal by the Chamber to amend FRCP 26 (the amendment would require automatic disclosure of funding arrangements at the outset of all civil cases). In 2018 the Committee released a report stating that litigation finance is “growing and evolving” and that they will tread carefully as “the topic may be no more ripe for further work now than it was in 2014 or 2016.” Memorandum from Advisory Committee on Civil Rules to the Committee on Rules of Practice and Procedure (Dec. 6, 2017).
As we can see, although courts are trending in a way that is positive for third-party funders, some Congress members, the U.S. Chamber Institute for Legal Reform, U.S. Chamber of Commerce, and legal spokespeople across the country may ultimately give rise to change which would stop this trend dead in its tracks. For now, the disclosure landscape remains the same, and understanding how courts respond to such discovery requests will allow attorneys to react and object properly. The rest, well, time will tell, as litigation and legislation on this issue is surely to continue for the foreseeable future.