Behrens Discusses Disclosure of Third-Party Litigation Funding

Shook, Hardy & Bacon Public Policy Co-Chair Mark Behrens and U.S. Chamber Institute for Legal Reform President Lisa Rickard have authored articles in the International Association of Defense Counsel's Civil Justice Response Committee NewsletterFinancier Worldwide and Law360 that call for “the disclosure of third-party litigation funding at the outset of a lawsuit.” According to the authors, “Proponents of third-party litigation funding (TPLF) assert that the practice promotes access to justice and levels the playing field by providing plaintiffs with the resources to go the distance. But the practice can fuel the filing of weak or meritless claims.”

Citing the Wall Street Journal’s claim that investors have invested more than billion dollars into commercial litigation funding, Behrens and Rickard explain that TPLF—imported from Australia—has evolved from a way to finance individual lawsuits to an investment strategy that diffuses risk across a portfolio of cases. In addition, startup companies have emerged to crowd-source financial backing for lawsuits that are too small for traditional funders, allowing individuals to contribute smaller sums to cases previously vetted by the finance firm.

“Funders are willing to speculate on such cases if the case will prove cheaper for a business to settle than to spend exorbitant sums to litigate, even if the business has valid defenses,” explain the authors. “Litigation funding can also lead to speculative, potentially high-yield cases being brought because of the trend towards funding groups of cases, even entire law firm litigation portfolios. The law firm can offload some of its risk onto a third party that can, in turn, spread that risk across a portfolio of cases and among investors, including in the mix cases that are of low merit.” 

Behrens and Rickard write that because current rules do not require parties to disclose TPLF, “courts trying to settle cases may be unaware that their efforts may be complicated by an entity that is not even in the room.” Pointing to recent examples in which courts have directed plaintiffs to disclose financial backing, the authors note that “disclosure also would help courts assess the adequacy of representation in putative class actions, where courts must examine the resources that counsel will commit to the class.”

To this end, the U.S. Chamber Institute for Legal Reform and others “have urged the Advisory Committee on Civil Rules to adopt an amendment to Rule 26(a)(1)(A) of the Federal Rules of Civil Procedure that would require disclosure of third-party litigation funding at the outset of a lawsuit.” In the meantime, the authors add, “the U.S. Chamber Institute for Legal Reform is urging federal judges in individual cases, particularly those managing multi-district litigations, to enter case management orders providing for the disclosure of third-party litigation funding. This would improve justice in those courts and give the Advisory Committee the data it needs to determine how best to bring third-party litigation funding into the open.”