Following the Money: Should Federal Law Require Litigants to Disclose Litigation Funding Agreements?

Following the Money: Should Federal Law Require Litigants to Disclose Litigation Funding Agreements?

Legal Sidebari

Following the Money: Should Federal Law
Require Litigants to Disclose Litigation
Funding Agreements?
May 31, 2018
On May 10, 2018, several Members of the 115th Congress introduced the Litigation Funding
Transparency Act of 2018 (S. 2815) (the Act), which would require litigants in certain types of cases to
disclose whether any commercial enterprise has a contingent right to receive payment in the event that
litigant ultimately obtains monetary relief in the lawsuit. The Act is the latest development in an ongoing
debate over whether federal law should mandate disclosure of third-party litigation funding agreements—
and, if so, to whom and under what circumstances.
This Sidebar analyzes the Act and its significance to federal litigation. After providing a brief overview of
litigation funding generally, the Sidebar discusses the ongoing debate over whether federal law should
require litigants to disclose litigation funding agreements to their opponents and/or to the court. The
Sidebar concludes by describing the relevant provisions of the Act, as well as provisions of another bill
currently pending before the 115th Congress that would likewise impose similar disclosure requirements.
Background on Litigation Funding
Third-party litigation funding, also known as litigation finance, occurs when a third party—rather than the
parties themselves, their insurers, or their counsel—agrees to cover some or all of the costs of a litigant’s
lawsuit. In exchange, the litigant agrees to pay that third party a percentage of any settlement the parties
ultimately negotiate in the case, or of any judgment the court ultimately awards against the opposing
party.
As litigation funding has become increasingly prevalent in the United States in recent years,
commentators have debated whether the practice is socially desirable. Supporters of such arrangements,
emphasizing that some litigants lack the economic resources necessary to adequately pursue a meritorious
claim, argue that litigation funding ensures that injured parties can “bring legitimate claims that otherwise
might not be brought.” Proponents further contend that, “by putting plaintiffs on ‘more equal financial
footing against deep-pocketed defendants,’” litigation funding reduces the likelihood that economic
difficulties will force litigants to accept suboptimal settlement offers. Opponents, however, maintain that
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the ready availability of litigation funding undesirably increases the volume and length of litigation by
incentivizing litigants to initiate and prolong lawsuits even where doing so would otherwise not be
economically rational. According to critics, the “prolonged litigation” engendered by litigation funding
“hurts defendants, who are forced to divert additional time and money from productive activity to
defending litigation.”
In addition to disagreeing over whether litigation funding is socially beneficial, proponents and opponents
of litigation funding also disagree regarding the extent to which litigation funding agreements create
unacceptable conflicts of interest between attorneys, their clients, and third-party funders. Critics of
litigation funding argue that, because the third-party funder holds the purse strings to the litigation, the
funder may exert control over a party’s litigation strategy in ways that are not in that party’s best interests.
Critics similarly assert that “when funders are fronting the fees for the claimants’ lawyers,” those lawyers
will be motivated to place the funder’s interests ahead of those of their clients. Proponents of litigation
funding, by contrast, maintain that litigation funding arrangements do not pose any greater risk of ethical
conflicts than other capital arrangements that critics of litigation funding find unobjectionable, such as
when banks hold security interests in law firms’ fee receivables. Amidst this debate, some federal courts
have begun scrutinizing litigation financing agreements to assess whether they create improper conflicts
of interest, and a few federal courts have required parties to disclose litigation funding agreements to their
opponents.
Should Federal Law Require Litigants to Disclose Litigation Funding
Agreements?
Litigants generally try to keep litigation funding arrangements secret from their opponents. After all, if a
party knows whether its opponent was receiving third-party litigation funding—and, if so, how much—
that party would then have an insight into the size of its adversary’s litigation budget. In turn, that
knowledge could conceivably provide that party a tactical advantage in settlement negotiations and other
aspects of the litigation.
Although, as noted above, some federal courts have required parties to disclose litigation funding
agreements to the court itself to enable the court to examine whether conflicts of interest exist, federal
courts have only rarely required litigants to disclose litigation funding agreements to their opponents.
Thus, although some states have enacted laws requiring parties to disclose litigation funding agreements
to their opponents, federal law presently imposes no systematic requirement that litigants divulge their
financing arrangements to their adversaries.
Commentators have accordingly debated whether federal law should require litigants to disclose third-
party litigation funding agreements—and, if so, when and to whom. Some commentators—as well as
several Members of Congress—have advocated requiring attorneys to disclose litigation funding
agreements to the court and to all parties at the outset of the case so that the court may take appropriate
steps to protect the client’s interests by monitoring the funder’s potential influence over the case. Those
who oppose the mandatory disclosure of litigation funding arrangements, by contrast, argue that
automatic disclosure requirements would give opposing parties an unfair advantage by exposing their
adversaries’ litigation budgets. Opponents further contend that requiring parties to disclose litigation
funding agreements would embroil courts and litigants alike in costly and time-consuming discovery
disputes.

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The Litigation Funding Transparency Act of 2018
In response to this debate, several Members of Congress introduced the Litigation Funding Transparency
Act of 2018 (S. 2815) (the Act) on May 10, 2018. The Act, which would apply in class action cases and
multidistrict litigation, would require litigants to:
 disclose in writing to the court and all other parties the identity of any commercial
enterprise that has a right to receive payment that is contingent on the receipt of monetary
relief in the action by settlement, judgment, or otherwise; and
 produce agreement creating such a contingent right for inspection and copying.
The Act’s sponsors maintain that the Act “will shed light on third party litigation financing agreements to
ensure that the court and opposing parties are made aware of who is financing the litigation and whether
or not there are any conflicts of interest.” Opponents of the Act, by contrast, contend that “requiring
plaintiffs to disclose their sensitive financial arrangements to defendants” will “create expensive and
time-wasting frolics and detours in litigation” and will be misused “as a tactical device by defendants.”
The Act is presently pending before the Senate Committee on the Judiciary.
Other Pending Legislation
The Act is not the only bill pending in the 115th Congress that would mandate disclosure of litigation
funding agreements. The Fairness in Class Action Litigation and Furthering Asbestos Claim Transparency
Act of 2017 (H.R. 985) (FICALA) would similarly require plaintiffs’ attorneys in class action cases to
“promptly disclose in writing to the court and all other parties the identity of any person or entity, other
than a class member or class counsel of record, who has a contingent right to receive compensation from
any settlement, judgment, or other relief obtained in the action.” As of the time of this writing, FICALA
has passed the House and is pending in the Senate.
Non-Legislative Options
Congress is not the only entity that possesses authority to alter the rules governing the disclosure of
litigation funding agreements. A few federal courts have issued standing orders mandating the disclosure
of litigation funding arrangements in certain types of cases, and the Advisory Committee on Rules of
Civil Procedure has also considered whether to modify the Federal Rules of Civil Procedure to require
such disclosures. As noted above, however, at present there is no nationwide requirement that would
uniformly mandate disclosure of litigation funding agreements in federal litigation.

Author Information

Kevin M. Lewis

Legislative Attorney

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