March 15, 2019
By Michael German
More than five weeks have now passed since Vannin Capital first publicly advocated in favor for what we believe is a sensible, legally well-grounded, and proportionate rule regarding disclosure of funding in civil litigation in the United States.
Coincidentally, on the same day Vannin advocated for that rule, 30 lawyers from major corporations across the United States, in an action believed to have been coordinated by the U.S. Chamber of Commerce, called for a rule that would require unfettered disclosure of the terms of the agreements among litigation funders, clients, and law firms.
The landscape in this area has been anything but quiet since.
On Feb. 13, Sens. Chuck Grassley (R-Iowa), Thom Tillis (R-N.C.), John Cornyn (R-Texas), and Ben Sasse (R-Neb.) introduced a bill in the Senate Judiciary Committee known as the Litigation Funding Transparency Act of 2019. Not surprisingly, given that this bill and a similar one introduced and later abandoned in 2018 were driven by the U.S. Chamber of Commerce and its related entities, the bill calls for disclosure of the funding terms agreed among the parties to the funding agreement.
Since then, entities on both sides of the debate have argued in favor of their respective positions, with most litigation funders arguing for the status quo—no requirement for disclosure of the use of litigation funding—and the U.S. Chamber of Commerce and other anti-litigation groups arguing for the broadest possible level of disclosure, despite there being no rational basis for such a rule.
None of these stakeholders have attempted to tie their position back to the legitimate issues that have been raised relating to disclosure. Nor have they addressed the middle-ground, common sense approach suggested by Vannin.
What is that approach? Litigants, whether plaintiff or defendant, should be required to disclose at the outset that they are being funded by a litigation funder. Disclosure should be limited to two pieces of information:
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.
This proposal addresses all of the legitimate issues being raised regarding funding. 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.
It also forces the litigants on both sides of the funding arrangement to take adequate inventory of their relative strengths and weaknesses on the merits of the case.
It levels the playing field among litigants and it ensures that disputes continue to be determined based on merit instead of size or instead of resources.
It is 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.
The Litigation Funding Transparency Act of 2019 would go much further, requiring funded litigants to turn over far more information, including information that, in the hands of the opponent of the funded party, would irretrievably prejudice the funded party.
As an example, knowing the amount of money a funded party has at its disposal to litigate or the rate and timing behind which that capital gets more expensive would provide defendants an unfair advantage. It is easy to posit a scenario whereby defense counsel would leverage such data to get plaintiff to spend more than the allotted financial facility.
Alternatively, defense counsel could attempt to settle cases just before the cost of capital on funded arrangements increased, so as to benefit in the litigation from an otherwise irrelevant fact regarding the cost of supporting capital.
In each instance, and in the many others not cited, the funded party would be prejudiced by an overreaching rule with no explanation, rational or otherwise, as to why such a rule is necessary to the administration of justice.
Ultimately, Vannin thinks it is likely that either Congress or the judiciary will move to create some rule regarding disclosure of litigation funders in funded cases. Such a rule will best protect the parties to a litigation if it is a balanced approach, as opposed to both the extreme positions from the U.S. Chamber of Commerce and other litigation funding entities to not adequately represent the issues presented by litigation funding. Vannin’s limited and proportional rule would achieve these purposes.
Michael German is a managing director at Vannin Capital. He works with law firms and claimants on how third-party funding can be pursued and utilized across a broad range of high-value commercial litigation disputes.