DISCLOSE THIRD-PARTY LITIGATION FUNDING
Federal judges are presiding over cases without being aware that non-party investors have a direct, contingent financial interest in any proceeds produced from any judgment or settlement. This puts the courts at risk for financial conflicts of interest and unnecessary case management challenges. The financial interests of non-parties engaged in third-party litigation funding (TPLF) are not currently required to be disclosed under the Federal Rules of Civil Procedure or the Federal Rules of Appellate Procedure. LCJ urges adoption of federal rule amendments which will improve disclosure of non-party financial interests in litigation.
LCJ is proposing two rules reforms to assist federal judges in addressing TPLF transparency in both trial and appellate courts. Together with the US Chamber of Commerce Institute for Legal Reform, LCJ is urging the Advisory Committee on Civil Rules to amend Rule 16 of the Federal Rules of Civil Procedure to prompt judges to inquire about TPLF during pretrial conferences. LCJ is also asking the Advisory Committee on Appellate Rules to amend Rule 26.1 of the Federal Rules of Appellate Procedure to require disclosure of all non-party financial stakes directly tied to the proceedings.
Both of these suggested amendments would further the Judicial Conference’s goal of promoting a greater “culture of compliance” in the federal judiciary. The various local disclosure rules are inadequate, and LCJ’s proposals will help judges avoid conflicts of interest and better manage litigation.
LCJ also continues to advocate for a uniform rule requiring disclosure of third-party funding interests at the outset of litigation through Rule 26(a)(1)(A) as the most effective way to inform courts and parties about TPLF interests.
Federal judges are presiding over cases without being aware that non-party investors have a direct, contingent financial interest in any proceeds produced from any judgment or settlement. This puts the courts at risk for financial conflicts of interest and unnecessary case management challenges. The financial interests of non-parties engaged in third-party litigation funding (TPLF) are not currently required to be disclosed under the Federal Rules of Civil Procedure or the Federal Rules of Appellate Procedure. LCJ urges adoption of federal rule amendments which will improve disclosure of non-party financial interests in litigation.
LCJ is proposing two rules reforms to assist federal judges in addressing TPLF transparency in both trial and appellate courts. Together with the US Chamber of Commerce Institute for Legal Reform, LCJ is urging the Advisory Committee on Civil Rules to amend Rule 16 of the Federal Rules of Civil Procedure to prompt judges to inquire about TPLF during pretrial conferences. LCJ is also asking the Advisory Committee on Appellate Rules to amend Rule 26.1 of the Federal Rules of Appellate Procedure to require disclosure of all non-party financial stakes directly tied to the proceedings.
Both of these suggested amendments would further the Judicial Conference’s goal of promoting a greater “culture of compliance” in the federal judiciary. The various local disclosure rules are inadequate, and LCJ’s proposals will help judges avoid conflicts of interest and better manage litigation.
LCJ also continues to advocate for a uniform rule requiring disclosure of third-party funding interests at the outset of litigation through Rule 26(a)(1)(A) as the most effective way to inform courts and parties about TPLF interests.
Amend FRCP 16(c)(2) to Prompt Judges to Inquire about Third-Party Funding Interests
Many federal judges are presiding over civil lawsuits in which a non-party investor has a direct, contingent financial interest in the proceeds produced by any lawsuit judgment or settlement. Yet, most district court judges have no idea whether interests created by TPLF are at play in litigation they are overseeing. This is because the Federal Rules of Civil Procedure do not require disclosure as a matter of course and because local rules are largely ignored.
Although a uniform TPLF disclosure rule applicable to all civil cases would be the most effective way to inform courts and parties about TPLF and the financial interests it creates, an amendment to Federal Rule of Civil Procedure 16(c)(2) making TPLF a topic for discussion in pre-trial conferences would help alert judges to such interests and facilitate discussion (and potential disclosure) of non-party stakes in litigation outcomes. This amendment would help mitigate potential conflicts of interest and help judges identify who may be needed during settlement conferences.
To read the Rules Suggestion to the Advisory Committee on Civil Rules, please click here.
Amend FRAP 26.1 to Require Disclosure of Non-Party Financial Interests
LCJ urges the adoption of an amendment to Federal Rule of Appellate Procedure 26.1 to require disclosure of non-party outcome-contingent rights to settlement or judgment proceeds tied to the outcome of cases, specifically interests arising from litigation investment contracts. Direct, yet undisclosed non-party financial stakes in appellate outcomes are pervasive in federal circuit courts. Local rules are inadequate—although six of twelve circuits have disclosure rules broad enough to include such rights—because those rules do not specifically mention TPLF, and third-party funders take the position that the rules do not apply to their financial stakes. Closing this disclosure gap is consistent with the Chief Justice’s recent call for “greater attention to promoting a culture of compliance in the federal judiciary.”
Amending Rule 26.1 to provide an explicit, uniform disclosure standard for non-party outcome-contingent financial entitlements – and specifically mentioning rights to settlement or judgment proceeds that stem from litigation investment arrangements – is necessary for judges to determine whether third-party rights pose a conflict of interest in their appellate cases.
To read the Rules Suggestion to the Advisory Committee on Appellate Rules, please click here.
Amend FRCP 26(a)(1)(A) to Require TPLF Disclosure at the Outset of a Lawsuit
LCJ continues to advocate for an amendment to Rule 26(a)(1)(A) that would require uniform disclosure of third-party investments in litigation (“TPLF”) at the outset of a lawsuit. LCJ is partnering with the U.S. Chamber Institute for Legal Reform to urge a new rule requiring disclosure of TPLF at the outset of litigation in all civil cases.
For more details, please take a look at this letter signed jointly with ILR and others urging the Advisory Committee on Civil Rules to develop an FRCP amendment requiring disclosure of TPLF as part of parties’ initial disclosures.
Orders, Rules, and Actions Requiring TPLF Disclosure
While federal rule makers continue to consider TPLF disclosure amendments, federal district courts and individual judges are acting. In 2022, the District of New Jersey adopted a local rule requiring disclosure of TPLF-related information within 30 days of a filing of a case. Also, the Chief Judge of the District of Delaware has a standing order requiring disclosure of non-party investor interests in litigation before him.
In 2018, the judge overseeing the opioid MDL issued this order requiring disclosure of all third party funding in that matter.
The Northern District of California has a standing order for all judges that requires disclosure of TPLF in class actions. The order, in effect since 2017, requires that “in any proposed class, collective, or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.” You may view the order here.
States have also been active in providing transparency about TPLF activity. Wisconsin state courts mandate disclosure of third-party financing agreements without a discovery request following adoption of Wisconsin Act 235 in 2018. View an in-depth analysis of the statue by LCJ member firm Bowman and Brooke here. West Virginia regulates “litigation financiers” through its West Virginia Consumer Credit and Protection Act, adopted in 2019. The provision, found in West Virginia Code sections 46A-6N-1 through 8 (“Article 6N”), amends a key statute governing consumer transactions in the state. Other states have also taken steps to regulate TPLF focusing primarily on consumer protection issues.
TPLF – A Growing Industry Impacting US Litigation
Due to the secretive nature of third-party litigation funding, there are widely varying estimates of the size of the litigation funding industry. One survey estimates that there are $11 billion worth of non-party financial rights in litigation outcomes in the United States today. The TPLF industry has experienced explosive growth over the last decade, and funding exists at all stages of litigation. A recent report issued by Swiss Re projects that global third-party litigation investment could reach $31 billion by 2028.
TPLF occurs when a person or entity with no other connection to a lawsuit acquires a right to an outcome-contingent payment from any proceeds produced by the case. Typically, the TPLF investor obtains that right by paying money to the plaintiff (or plaintiff’s counsel). In many instances, that money is used to finance prosecution of the case (e.g., discovery costs, attorneys’ fees, expert witness expenses), but the funds can also be used more like an advance on an expected payday. Among the concerns of observers of TPLF trends is that the funders could direct litigation decisions, exert influence over possible settlement decisions, or, in some cases, get involved with the medical decisions of plaintiffs in order to maximize their investment returns.
Many federal judges are presiding over civil lawsuits in which a non-party investor has a direct, contingent financial interest in the proceeds produced by any lawsuit judgment or settlement. Yet, most district court judges have no idea whether interests created by TPLF are at play in litigation they are overseeing. This is because the Federal Rules of Civil Procedure do not require disclosure as a matter of course and because local rules are largely ignored.
Although a uniform TPLF disclosure rule applicable to all civil cases would be the most effective way to inform courts and parties about TPLF and the financial interests it creates, an amendment to Federal Rule of Civil Procedure 16(c)(2) making TPLF a topic for discussion in pre-trial conferences would help alert judges to such interests and facilitate discussion (and potential disclosure) of non-party stakes in litigation outcomes. This amendment would help mitigate potential conflicts of interest and help judges identify who may be needed during settlement conferences.
To read the Rules Suggestion to the Advisory Committee on Civil Rules, please click here.
Amend FRAP 26.1 to Require Disclosure of Non-Party Financial Interests
LCJ urges the adoption of an amendment to Federal Rule of Appellate Procedure 26.1 to require disclosure of non-party outcome-contingent rights to settlement or judgment proceeds tied to the outcome of cases, specifically interests arising from litigation investment contracts. Direct, yet undisclosed non-party financial stakes in appellate outcomes are pervasive in federal circuit courts. Local rules are inadequate—although six of twelve circuits have disclosure rules broad enough to include such rights—because those rules do not specifically mention TPLF, and third-party funders take the position that the rules do not apply to their financial stakes. Closing this disclosure gap is consistent with the Chief Justice’s recent call for “greater attention to promoting a culture of compliance in the federal judiciary.”
Amending Rule 26.1 to provide an explicit, uniform disclosure standard for non-party outcome-contingent financial entitlements – and specifically mentioning rights to settlement or judgment proceeds that stem from litigation investment arrangements – is necessary for judges to determine whether third-party rights pose a conflict of interest in their appellate cases.
To read the Rules Suggestion to the Advisory Committee on Appellate Rules, please click here.
Amend FRCP 26(a)(1)(A) to Require TPLF Disclosure at the Outset of a Lawsuit
LCJ continues to advocate for an amendment to Rule 26(a)(1)(A) that would require uniform disclosure of third-party investments in litigation (“TPLF”) at the outset of a lawsuit. LCJ is partnering with the U.S. Chamber Institute for Legal Reform to urge a new rule requiring disclosure of TPLF at the outset of litigation in all civil cases.
For more details, please take a look at this letter signed jointly with ILR and others urging the Advisory Committee on Civil Rules to develop an FRCP amendment requiring disclosure of TPLF as part of parties’ initial disclosures.
Orders, Rules, and Actions Requiring TPLF Disclosure
While federal rule makers continue to consider TPLF disclosure amendments, federal district courts and individual judges are acting. In 2022, the District of New Jersey adopted a local rule requiring disclosure of TPLF-related information within 30 days of a filing of a case. Also, the Chief Judge of the District of Delaware has a standing order requiring disclosure of non-party investor interests in litigation before him.
In 2018, the judge overseeing the opioid MDL issued this order requiring disclosure of all third party funding in that matter.
The Northern District of California has a standing order for all judges that requires disclosure of TPLF in class actions. The order, in effect since 2017, requires that “in any proposed class, collective, or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.” You may view the order here.
States have also been active in providing transparency about TPLF activity. Wisconsin state courts mandate disclosure of third-party financing agreements without a discovery request following adoption of Wisconsin Act 235 in 2018. View an in-depth analysis of the statue by LCJ member firm Bowman and Brooke here. West Virginia regulates “litigation financiers” through its West Virginia Consumer Credit and Protection Act, adopted in 2019. The provision, found in West Virginia Code sections 46A-6N-1 through 8 (“Article 6N”), amends a key statute governing consumer transactions in the state. Other states have also taken steps to regulate TPLF focusing primarily on consumer protection issues.
TPLF – A Growing Industry Impacting US Litigation
Due to the secretive nature of third-party litigation funding, there are widely varying estimates of the size of the litigation funding industry. One survey estimates that there are $11 billion worth of non-party financial rights in litigation outcomes in the United States today. The TPLF industry has experienced explosive growth over the last decade, and funding exists at all stages of litigation. A recent report issued by Swiss Re projects that global third-party litigation investment could reach $31 billion by 2028.
TPLF occurs when a person or entity with no other connection to a lawsuit acquires a right to an outcome-contingent payment from any proceeds produced by the case. Typically, the TPLF investor obtains that right by paying money to the plaintiff (or plaintiff’s counsel). In many instances, that money is used to finance prosecution of the case (e.g., discovery costs, attorneys’ fees, expert witness expenses), but the funds can also be used more like an advance on an expected payday. Among the concerns of observers of TPLF trends is that the funders could direct litigation decisions, exert influence over possible settlement decisions, or, in some cases, get involved with the medical decisions of plaintiffs in order to maximize their investment returns.
MEDIA AND PRESS RELEASES
RESOURCES
For more information about this topic, please click below:
Third Party Litigation Funding Letter to Advisory Committee, March 26, 2019
Third Party Litigation Funding Resources
Institute for Legal Reform Resources
For more information about this topic, please click below:
Third Party Litigation Funding Letter to Advisory Committee, March 26, 2019
Third Party Litigation Funding Resources
Institute for Legal Reform Resources
