To supporters, litigation funding groups promise to “level the playing field,” allowing parties to bring suits they otherwise would not have the resources to pursue and providing law firms with the cash they need to advocate with well-funded zeal.
To their critics, they are “buying and selling” lawsuits, generating unnecessary litigation, and creating a risk that investment concerns, rather than duties to the client, will drive cases. The U.S. Chamber of Commerce, for example, is perhaps the most vocal detractor of litigation financing and has repeatedly sought amendments to Federal Rule of Civil Procedure (26)(a)(1)(A) that would mandate the disclosure of third-party funding.
To judges, however, litigation funding is an issue often outside the scope of discovery. That’s the takeaway from a recent review by Westfleet Advisors, a litigation funding broker based out of Nashville, Tennessee. When it comes to discovery into third party funding, courts rarely grant such requests.
What Is Litigation Funding?
Litigation funding, also known as litigation finance or “lit fin”, has expanded from a rarity a few decades ago to a booming, billion-dollar industry in recent years. Third-party funding agreements may involve fronting the cost of prosecuting a claim, either to plaintiff’s counsel or to a plaintiff directly. In return, the financier is often entitled to a percentage of any settlement or judgement should the action be successful. If the action fails, the funders may get nothing. In some cases, the agreements may give funders non-negligible influence in the litigation, and almost all funding agreements are often bound by strict confidentiality requirements.
Lit fin has played a growing role in litigation over the past decade. It has been used, for example, to support a putative class action against Chevron brought on behalf of thousands of individuals allegedly harmed by the explosion of an oil well off the coast of Nigeria. It has been used to support whistleblowers claiming unlawful retaliation and small businesses facing patent trolls.
But most funding isn’t such a David v. Goliath endeavor—most is actually devoted to commercial litigation. In 2016, for example, British Telecom struck a $45-million litigation financing deal with Burford Capital, a leading litigation funding firm that spent nearly $400-million investing in lawsuits that year alone. “Corporate law departments and their law firms increasingly want to finance their litigation, just as other parts of the corporation finance their activities,” the firm’s CEO Christopher Bogart says.
Litigation funding remains largely an obscure, arcane topic. However, it briefly entered the popular consciousness after it was revealed that Silicon Valley billionaire Peter Thiel, had secretly funded Hulk Hogan’s lawsuit against Gawker Media, an internet publisher that Thiel had long criticized. That litigation ended up bankrupting the company.
Discovery Into Funding Agreements Remains Rare, Survey Shows
When it comes to discovering who is underwriting litigation—be it private individuals like Thiel or, as is more often the case, one of the growing numbers of lit fin companies—discovery is often off the table. According to a review of case law by Westfleet Advisors, the results of which were shared with Law.com but which are not yet available publicly, no discovery into funding was allowed in more than half of the federal and state cases to have addressed the issue. Out of those 30 cases, 24 denied discovery into litigation funding at least in part.
The biggest shield to disclosure was the work-product doctrine, cited in 20 of the 24 cases denying or limiting discovery. That doctrine generally protects against the discovery of materials prepared by attorneys or those acting under their direction in the course of representation and particularly when prepared in anticipation of litigation. Attorney-client privilege was less successful, being relied on to limit or allow disclosure in equal measure.
One outlier is the Chevron case mentioned above. There, the court granted the oil company’s motion to compel the disclosure of the suit’s funding agreements as necessary to determine the adequacy of counsel. It found the plaintiff lawyers’ argument that they were “under a contractual obligation to preserve the confidentiality of the funder's identity, as well as the terms of the agreement” unpersuasive. However, those attorneys did not assert that the documents were protected by privilege or the work-product doctrine.
By contrast, the U.S. District Court for the Northern District of Illinois rejected such discovery in a trade secrets dispute between manufacturers Miller U.K. and Caterpillar. There, Caterpillar discovered, via an unidentified tattle tale (the court’s characterization), that Miller’s suit was supported in part by third-party financiers. Claiming such funding was champerty and maintenance—common law doctrines meant to prevent frivolous litigation—Caterpillar sought discovery into the financing terms. The court, however, found that the funding documents were irrelevant to any of the applicable claims or defenses in the case.
That decision, the study indicates, marked a turn in courts’ treatment into litigation funding discovery requests. “Most decisions allowing significant discovery of the funding agreement and non-deal documents in the face of a strong work-product argument by the plaintiff were decided several years ago, before the decision in Miller v. Caterpillar in 2014,” the study explains.
It remains to be seen, however, if the secrecy around litigation funding will last. The lack of discovery into such funding agreements may be good news to financiers and the litigants who use them. But, the National Law Journal’s Ben Hancock wagers, it also “helps explain why opponents of the industry, chiefly the U.S. Chamber of Commerce, are pushing for legislative and rule changes to require that funding agreements be disclosed.”