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The market for commercial litigation funding has exploded in the United States. Following years of successful funding relationships among law firms, litigants and claimants in more mature funding markets overseas, the U.S. legal market has seen professional litigation funders either import their methods, measures and access to capital to a budding market or otherwise create successful litigation funding shops based here in the United States. Proponents of litigation funding are legion; they laud the investment of capital in the legal market, the increased access to justice and the resolution of disputes based on the merits of the case instead of the relative resources of the parties. All manner of “persons”—individuals, start-ups, charities, law firms and large corporations, among others—have turned to funding to benefit from a leveled playing field, a leveraged law department or the risk-shifting that results from a non-recourse funding investment.

Meanwhile, a small contingent of critics has raised concerns about the litigation funding industry. These critics have latched on to a small handful of cases where a combination of unscrupulous claimants, less-than-ethical attorneys and non-professional litigation funders have engaged in prohibited or unethical conduct to bemoan what they perceive as the opacity of the litigation funding industry. They support rules pertaining to litigation funding that would permit far-ranging discovery into the specifics of litigants’ funding arrangements. Such wide-ranging discovery could potentially derail the adjudication of the underlying dispute while the parties demand and oppose discovery of tangential, irrelevant and unduly prejudicial matters, such as the amount of money funders have invested in the claim, the commercial terms of the investment, the representations and warranties made during the course of such agreements, and any other issue that would give the party seeking the discovery a strategic advantage.

While the examples the critics cite are outliers and the rules they would propagate bear no relationship to the issue, a reflective view of the industry bears some level of recognition that there is a lack of transparency that can be properly remedied. The challenge then is to fashion a rule that supports the basic mission of “secur[ing] the just, speedy and inexpensive determination of every action and proceeding.” Fed. R. Civ. P. 1; see also, e.g., N.Y. C.P.L.R. §104 (similar). The end result should be a bright-line rule that provides litigants, litigation funders and the judiciary with direct and unambiguous guidelines on what disclosures need to be made, to whom, and when. Finding the proper balance here is not quite as simple as the critics of the funding industry would make it out to be. There would be real harm to litigants, their funders and the legal process generally if the rule they seek to have our judiciary adopt, essentially limitless discovery into any and all aspects of the funding arrangement, were to be accepted wholesale. Instead, stakeholders in this issue should look to existing principles and unemotionally apply them here: “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Fed. R. Civ. P. 26(b)(1).

So what, then, is the appropriate rule? Litigants, whether plaintiff or defendant, should be required in civil litigation to disclose at the outset that they are being funded by a litigation funder. Disclosure should be limited to two pieces of information: (1) the fact that a litigant has engaged a professional litigation funder and (2) the identity of that litigation funder. No further discovery into the size of the investment, the commercial terms of the agreement, the representations and warranties among the parties, or any other issue that involves the funding arrangement should be permitted absent a showing by the party seeking that information that it has been harmed as a result of some conduct arising from the fact of the funding agreement. In that unlikely circumstance, the court should then engage in an in camera review of the information requested to ensure that there has been no malfeasance.

Handling disclosure in this manner addresses the key issues raised by litigation funders and their critics. For the court, it identifies the existence of a funding arrangement and the identity of the funder so that the court may properly understand and navigate any potential conflicts that could theoretically arise as a result of the funding relationship not otherwise evident from the case caption. For the litigants, it permits them to holistically assess the relative merit and value of the case and results in a level playing field. For everyone, it results in a proportional rule of discovery that balances the need for information with the ability to protect the strategic interests of funded parties and the business interests of litigation funders. In total, it balances judicial economy, fundamental fairness and the finality of the determination of disputes.

Some critics of litigation finance will support this rule, while others will argue that it does not go far enough. The latter will seek discovery into the size of the funding facility offered, the terms of the agreement or other aspects of the relationship between litigation funder and client. All who have attempted justify such discovery have faced, and will face, the same fundamental problem: there is no legitimate argument for why that information “is of consequence in determining the action.” Fed. R. Evid. 401.

As a completely fictional example, the fact that Vannin has offered the Widget Company $5 million to bring an antitrust case against Acme Widget Company could not possibly have any bearing on any of the issues, facts, or legal principles either side would need to prove or disprove in the case. More so, even if there was some argument for why information of this type could possibly meet relevancy standards, discovery into these sorts of issues would plainly prejudice the funded party. A no more clear way of defeating a funded party could be imagined than giving the funded party’s opponent information regarding the amount of resources available to it. Savvy opponents would then find ways to litigate the case to a dollar amount conclusion (e.g., $5,000,001 in litigation costs where the facility is $5,000,000) instead of a final adjudication on the merits. Permitting discovery of the size of the facility would be akin to requiring corporate litigants to disclose the budget created for pursuing a litigation. Similar examples abound for information about other aspects of the funding relationship.

A recent article written by the U.S. Chamber Institute for Legal Reform and published in the New York Law Journal claims that increased transparency into all aspects of the funding relationship between funders and litigants is necessary because “[w]e don’t know [how the relationship among litigant, law firm and funder works], and we will remain in the dark until the law requires transparency.” Rickard, L, Third-Party Funders Fight Hard to Stay in the Shadows, NYLJ (Aug. 27, 2018). This proposition, claiming lack of knowledge on the part of an industry group, cannot possibly justify a requirement of disclosure of information that would prejudice the disclosing party. But the rule advocated for in this piece, coupled with some relatively basic observations about the industry, should answer any of the questions raised by the U.S. Chamber or groups with similar positions. First and foremost is the fact that litigation funding agreements are voluntary—clients can choose to enter into a relationship with a litigation funder or they can pursue their case as they would have traditionally before access to funding was available. In a market as competitive as the litigation funding market, that means that clients with meritorious cases are met with a litany of choices when deciding whom to select to fund the claims; the necessary corollary to this is that litigation funders who are overreaching, take too much control over the case or otherwise put the plaintiff in a worse position will not be successful and eventually will be forced to cease operations. Once reduced to a contract, in Vannin’s case, a tripartite agreement among litigant, law firm and funder, the litigation funder has an express and implied duty of good faith to support the client, coupled with an alignment of interest with the client: the litigation funder only recoups its investment, and a premium for accepting the risk, if the client wins as well. The net result is a relationship that allows litigants to pursue meritorious claims, leverage the underlying business or reduce risk, all while enjoying the access to justice and an adjudication based on the merits of the claims and not the relative resources of the parties.

Ultimately, the path forward is clear: The judiciary should adopt rules that require funded parties to disclose the fact they are being funded and the identity of the litigation funder funding the dispute. The rule adopted should expressly limit further discovery beyond those points except in the extreme circumstances described. And even when one party alleges facts potentially warranting such further discovery, the court should conduct an in camera review of the materials sought to ensure fundamental fairness. Until then, Vannin Capital is duty bound to support its litigants’ decisions with respect to disclosure of the fact of funding. After all, contractual relationships require Vannin to maintain its clients’ confidences without exception. However, Vannin will support (and will inform its clients that it supports) a general policy that advocates in favor of limited disclosure in all cases—provided that it goes no further. As Justice Brandeis said “[s]unlight is said to be the best of disinfectants,” but that fact alone should not allow it to be weaponized. Brandeis, L., What Publicity Can Do, Harper’s Weekly (1913).

Ultimately, the hope is that such a rule brings a bit more transparency to litigation funding while ensuring that the fundamental nature of the judiciary, and its mission, the just resolution of disputes, is supported with greater efficiency and without prejudicing litigants or the business community supporting the legal industry.

Michael German is managing director of Vannin Capital.