Shhh ... Litigation Funding Can Remain Confidential—For Now

Civil litigants in the Superior Court of New Jersey won’t have to reveal third-party litigation funding, at least for now, after a court committee declined to mandate disclosure of such arrangements.

The New Jersey Civil Justice Institute asked the state Supreme Court to adopt a rule making litigation funding disclosure mandatory, but the court’s Civil Practice Committee declined to do so in a report made public Feb. 2.

In rejecting a mandatory-disclosure rule, the committee concluded that “there is not sufficient experience to meaningfully develop and recommend a rule change at this time. Rather, if at some point in the future, the issue becomes ripe for consideration, the committee can consider a rule proposal.”

Litigation funding has emerged as a polarizing issue, with the U.S. Chamber of Commerce arguing that it allows hedge funds to invest secretly in lawsuits in exchange for a percentage of the proceeds.

Meanwhile, opponents of mandatory-disclosure rules maintain that they encourage discovery abuse by defendants, who allegedly use them to seek discovery of such as funding arrangements, litigation budgets and communications with funders that discuss a case’s strengths and weaknesses.

Pushback

There is some precedent for the Civil Justice Institute’s proposal.

Since 2021, civil litigants in New Jersey’s federal courts have had to announce any sources of third-party litigation funding.

The committee said it “agreed that new or revised rules may be appropriate at some future point, but declined to adopt any proposed changes, citing the need for further development through experience in this area.”

The NJCJI, which calls itself “the leading voice of New Jersey’s business community on matters of law and legal policy,” requested the rule change in April 2023.

The NJCJI said the rapid growth of third-party litigation funding has prompted some states, such as Wisconsin and West Virginia, to require disclosure. And some form of disclosure is mandated in the local rules of six U.S. Courts of Appeals, including the Third Circuit, and a quarter of all federal district courts, the institute said in its application to the court.

Anthony Anastasio, president of the New Jersey Civil Justice Institute. Courtesy photo

The proliferation of litigation funding and the lack of transparency surrounding its use represent “an area of considerable concern for our courts, lawyers, consumers and defendants,” the NJCJI said in its petition to the court.

The group cited research indicating that plaintiffs using third-party litigation funding are driven to reject fair settlements because they seek extra money to make up for the amount they must repay to funders.

In addition, litigation funding may encourage the filing of meritless suits, increasing litigation costs, because plaintiffs are not inclined to settle, which causes cases to run longer, the NJCJI said to the court.

In addition, litigation funders may exert control over a case, influencing decisions about litigation strategy or whether to settle, the NJCJI claimed.

Proposed Law

In rejecting the NJCJI proposal, the court committee referenced a bill, S1475, pending in the Legislature that would establish regulations for legal funders.

Among other things, the measure would forbid an attorney or law firm retained by the consumer in the legal claim from having a financial interest in the company offering funding to the consumer, but it would not make disclosure mandatory, the court committee said.

All told, the NJCJI’s petition to the court was 33 pages long, while the Civil Practice Committee’s response was less than three.

‘Outside Money’

The Civil Practice Committee’s decision on litigation funding is “disappointing,” the NJCJI’s president, Anthony Anastasio, said in an email.

“Over the past 10 years, the use of TPLF has exploded in popularity, resulting in a multibillion-dollar industry subject to minimal, if any, serious regulation. Consequently, we have seen the increased ‘financialization’ of certain types of civil litigation, including auto accident cases, mass torts and consumer class actions. The result is that outside money has a disproportionate influence on case selection and disposition in these types of litigation,” Anastasio said.

“Given the absence of regulations at the state level, these financial arrangements typically lack transparency, resulting in questions about who is in the driver’s seat in litigation and whether there are ethical issues for the judges and attorneys involved. Due to the lack of transparency in TPLF arrangements, parties to litigation and judges are oftentimes not aware of potential conflicts of interest, have no reasonable way of gauging improper outside influence by funders on litigation strategy or settlement decisions, or other ethical concerns with funding arrangements,” Anastasio said.

He added: “By seeking the disclosure of these arrangements during litigation, NJCJI’s proposal only sought to address the opacity surrounding TPLF so that the real parties in interest—namely, the courts, named plaintiffs and defendants—can all ensure that litigants direct the course of their own cases and that third-party funders do not interfere with the administration of justice in the pursuit of greater profits.”