Sensible Disclosure Concerning Litigation Finance

Lobbyists opposed to litigation finance promote the misconception that it is fundamentally unethical. They contend that unless relationships between funders and litigants are made fully “transparent” to opposing parties, the legal system will be put at risk. Little could be further from the truth. However, a modest amount of disclosure regarding commercial litigation finance would help demonstrate that it is an ethical practice that benefits both litigants and the legal system.

To understand why, it is important to first understand what commercial litigation finance is — and is not.

In the United States, there are many ways to fund litigation, including traditional contingency fee agreements. Commercial litigation finance, however, typically involves a third party (a “funder”) providing capital on a non-recourse basis, under an agreement that carefully delineates the rights and responsibilities of the funder, litigant and lawyer. In return, the funder receives a share of what the litigant obtains or retains in the dispute. Litigants can use these funds to cover everything from attorneys’ fees to operating expenses. This can have a powerful impact on the P&Ls of a legal department and a company.

Because funding is provided on a non-recourse basis, investments are only made after extensive diligence. This involves screening out litigants unlikely to prevail on the merits or whose disputes are not commercial in nature. For example, most commercial funders will not back a case based on settlement value alone or fund personal injury litigation. Funders also will not fund on a budget that is disproportionate to the amount in dispute. Funders are careful to avoid funding on terms that violate applicable laws or ethics rules, because doing so may prevent them from enforcing those terms when a dispute ends.

Ultimately, commercial litigation finance is corporate finance, not gambling on lawsuits. That is why courts and legal ethicists that have considered commercial litigation finance have generally found that it is not improper or unethical.

So why have funders resisted demands to disclose funding agreements and funder communications with lawyers and litigants? The answer should be evident to any general counsel familiar with litigation. First, the amount a party can spend litigating a dispute is a fact of enormous strategic value. Second, when evaluating the prospects of success in a litigation, one must be frank about a case’s strengths and weaknesses. As courts have consistently found, that information is of little value when resolving the issues in dispute, but its disclosure can unfairly prejudice a party’s case.

In our opinion, the best way to clear up misconceptions about funding is for courts and lawmakers to enact sensible rules regarding disclosure. These would require disclosure of the fact that an entity is providing funding on either side of a case and the identity of that entity, but prohibit any broader discovery regarding funding. That would allow funders to demonstrate how commercial litigation finance is actually being used, without exposing funded litigants to unfair and burdensome discovery.