The House of Representatives on Thursday approved a bill that would require class action attorneys to notify federal courts when a third-party litigation funder is bankrolling their case. If enacted, it would be the first federal measure to directly regulate the nascent litigation-funding industry in the United States.
You might expect a lobbying blitz from an industry that twice opposed court rules aimed at disclosures and has built something of a presence in Washington. In the past, major litigation funders have turned to top-shelf lobbying firms including the Podesta Group and Wilmer Cutler Pickering Hale and Dorr.
But amid the debate over the Fairness in Class Action Litigation Act (H.R. 985)—and the many other changes it would entail—the litigation funding industry has been absent.
Emma Murphy, a spokeswoman for Burford Capital Management, the largest U.S. litigation funder, said in an email prior to passage of the bill that because class actions “are not a core part of our business, we are not actively lobbying on that front, either ourselves or through a retained lobbyist.”
Bentham IMF’s chief investment officer, Ralph Sutton, said in an interview that the company is not worried about the disclosure provision and has “not taken any action on it.” Bentham has previously said that it does not directly fund class action litigation in the United States because of a legal ethics rule.
A House Judiciary Committee aide also said the panel had “heard no objections from the litigation funding industry on this bill.” Even the industry’s opponents at the U.S. Chamber of Commerce say they haven’t observed funders pounding the pavement in Washington.
“I haven’t seen anything publicly from them,” said Matt Webb, a senior vice president at the Chamber’s Institute for Legal Reform, which has championed the class action reform bill.
The fact that class actions don’t make up a major part of the major commercial funders’ portfolios is an obvious reason why they have declined to chime in. But there are other explanations for the industry keeping a low profile.
With mobilized opposition from trial lawyers, consumer protection organizations and other groups, Webb suggested the litigation funders might not see this as a battle they have to fight. “In some ways I think it’s probably easier for funders to hide behind the plaintiffs bar,” he said.
Litigation funders also may not see the House bill as much of a threat. Even assuming it gains legs in the Senate, they might even see the provision as bestowing a level of legal recognition to the industry, said one industry observer.
But the hands-off approach also has risks. By holding their fire for a bigger legislative fight down the road, the big funders may have missed an opportunity to kill the disclosure requirement and given opponents a toehold to push for more aggressive regulation in the future.
Footprints in the Capitol
First, it’s important to know that the big funders aren’t total strangers to Washington. The industry got caught flat-footed in 2015 when Senate Judiciary Committee Chairman Charles Grassley and John Cornyn, chairman of the Constitution subcommittee, demanded information about the way their financing operations work. After that, at least two of the funders quickly made connections on K Street.
According to public records, Gerchen Keller Capital—which has since been acquired by Burford—hired the Podesta Group in the fall of 2015. It engaged Matthew Johnson, a former chief counsel to Cornyn, and the relationship continued until just before Gerchen Keller was bought out. In total, the company spent $160,000 on lobbying fees, public filings show. (Burford does not appear to have hired lobbyists.)
Australia-headquartered Bentham, meanwhile, has been more active on Capitol Hill. In 2016, it paid $345,000 in lobbying fees to two firms—the Ken Cunningham Group, led by the former chief of staff and general counsel to Grassley, and Wilmer Hale. Sutton said the company’s outlays have been directed toward general “education” of lawmakers on litigation funding.
The lobbyist at Wilmer representing Bentham, Jonathan Yarowsky, also counts among his clients the American Association for Justice—the plaintiffs bar group that has been the chief opponent of HR 985. Yarowsky, a former special counsel to President Bill Clinton, didn’t respond to messages seeking comment.
Commercial litigation funders don’t have an industry association based in Washington (although they do in the U.K.). But they clearly have enough of an ear to the ground in Washington to know there are doubts about HR 985’s future. Grassley’s office has been noncommittal about how he’ll deal with the House bill; a Senate Judiciary Committee aide would only say the panel has begun “studying” the legislation. Given the uncertainty, funders may simply be keeping their powder dry for later.
Another possibility is that the industry—despite its opposition to mandatory disclosure requirements generally—may actually see light-touch legislation like this as a net positive, said Maya Steinitz, a professor at the University of Iowa College of Law who is a proponent of third-party funding but also advocates for regulation of the industry.
“In a way you could say that it’s a win for the chamber’s approach,” Steinitz said, “but really I think it normalizes litigation funding and it’s actually implicit permission in federal courts.”
As Goes California …
Funders say their primary reason for resisting disclosure is not that they don’t want the public to know they’re involved in cases; in fact they sometimes are open about being involved in big-ticket cases outside the United States. Instead, their position has mainly to do with what happens after disclosure, and the possibility of costly discovery battles over communications between funders and lawyers.
Adam Levitt, a class action attorney with Grant & Eisenhofer in Chicago who slammed the House bill as harming consumers, said driving up litigation costs is consistent with the overarching idea behind the legislation. “The primary goal of HR 985—and this is part of it—is to make it as cost-ineffective as possible for plaintiffs’ counsel to litigate class action and mass tort cases,” Levitt said.
It was the fear of those costly extra layers of litigation that led the funding industry to uniformly push back in 2014 against an amendment to the Federal Rules of Civil Procedure proposed by the U.S. Chamber of Commerce, which would have required disclosure of all third-party funding agreements at the outset of a case. The Judicial Conference of the United States didn’t take action on the proposal.
But the U.S. District Court of the Northern District of California revived the idea last year, and the funders again forcefully resisted. In the end, the Northern District adopted a narrower disclosure rule applying only to class actions. The House bill would basically make that the rule across the country.
For now, commercial funders seem not to be worried the possibility that this could represent the camel’s nose under the tent, laying the groundwork for a broader, catch-all disclosure rule. But that is how the industry’s opponents at the U.S. Chamber of Commerce view things.
“I think it’s fair to say with any policy debate or policy battle, it’s a question of incrementalism,” said Webb of the chamber’s Institute for Legal Reform. “From our perspective, I think this would be a sea change in the litigation funding regulatory space.”