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Disclosure of TPLF to courts and parties is necessary — and a rule is required to ensure a simple, transparent process across all federal courts — for six key reasons:
Courts and parties need to know who has control over decisions in litigation in order to understand when non-parties are directing or unduly influencing the legal process, especially at key inflection points in litigation, such as during mediation or settlement discussions.
Control by third-party funders is a complex dynamic that may not be written explicitly into TPLF contracts. Boilerplate language in contracts may even disavow the funder’s control. However, even if subtle or indirect, TPLF agreements can result in a non-party exerting substantial influence over litigation, including a veto power over settlement. In fact, even a funder with no contract-specific influence or control may still pressure the plaintiff not to accept a settlement proposal — or refuse to provide funding for future litigation — if it does not provide the funder a sufficient return on investment, even if the settlement is in plaintiffs’ best interest.
Significantly, the Federal Rules of Civil Procedure (FRCP) already require disclosure of insurance coverage which the Advisory Committee on Civil Rules explained in 1970 “will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” Courts and parties should ASK About TPLF so that all parties can make the same “realistic appraisal” of cases with this major funding.
Burford Capital, a large litigation funder, entered into a financing arrangement supporting a number of antitrust suits filed by Sysco, a food distributor. Sysco has contended that Burford obstructed their ability to accept reasonable settlements in their antitrust cases as the funder believed Sysco could obtain higher-value settlements. The contract establishing the funding explicitly provided Burford the option to effectively veto settlement agreements. Burford even went so far as to file a temporary restraining order to prevent Sysco from making settlement decisions in the company’s own litigation. As a result of these disagreements, Burford created a subsidiary and moved to replace Sysco as the plaintiff with its new subsidiary in order to directly control the litigation without the original plaintiff. A U.S. District Court ultimately ruled that Burford’s subsidiary could not replace Sysco as a plaintiff. This is a clear example of a litigation funder, which is not a party to a case, improperly exerting control over the litigation.
Plaintiff Christopher Boling entered into a series of litigation funding agreements with Prospect Funding Holdings, a litigation funder, in his personal injury suit against Blitz USA. After Boling’s suit against Blitz concluded, he filed another suit against his litigation funder claiming that the funding agreement violated Kentucky law prohibiting champerty and usury. A district court agreed and found the agreements unenforceable. The Sixth Circuit heard defendant’s appeal but upheld the lower court’s decision, noting that the contracts’ clauses ceded control over the underlying litigation to the funder. The court noted that the funder would require a full refund if the plaintiff changed attorneys and the funder had a right to examine all records related to the claim as well as relevant court documents. This demonstrates that even the formulation of contracts can provide indirect control to funders.
Courts and parties need to know who is in their courtroom with a stake in a litigation to avoid conflicts and the appearance of impropriety. Federal judges are required by statute and the Code of Conduct to recuse themselves when they know they have a financial interest that can pose a conflict. This responsibility relates to financial interests “however small” and includes even the “appearance of impropriety.” Undisclosed TPLF also can lead to disruptive or troubling conflicts between adverse parties to cases, between witnesses and non-parties, and even among parties on one side of a case as the following case studies illustrate.
Women with vaginal mesh implants — who had not experienced complications — were encouraged to undergo unnecessary surgery to remove the implants to make them more valuable potential plaintiffs in suits against the mesh’s manufacturer. Lawyers leading such cases turned to marketing firms who contacted clients and encouraged them to have their implants removed regardless of whether the women experienced complications. Litigation financers provided high-interest loans to cover this unnecessary and potentially dangerous surgery which would only have to be repaid if their clients prevailed. There are multiple conflicts of interest in this case which arose from the financial incentives that motivated litigation funders to push women into unnecessary surgeries to increase the monetary value of potential judgments at the expense of the wellbeing of the actual plaintiffs.
One of the lead lawyers in the Chinese drywall litigation owned stock in and served on the board of litigation funder Esquire Bank, which handled about $200 million in settlement funds in the case. Other attorneys contended he was conflicted as he had a personal interest in seeing the bank hold onto the settlement funding for the bank’s benefit at the expense of the parties to the case. The judge eventually ordered the money to be transferred away from Esquire into a court-administered account. This shows how conflicts of interest can arise and impede or corrupt the legal process when disclosure of third-party funding is not required.
The FRCP require courts to consider “the resources of the parties” when assessing the proportionality of discovery requests. But without disclosure of TPLF, courts are unaware of the full extent of a parties’ resources and unable to make this assessment accurately and fairly. Moreover, when courts decide cost-sharing for discovery is warranted, judges also must Ask About TPLF in order to include third-party funding in their assessment of a party’s resources and make a fair determination of who should bear certain litigation costs.
A group of plaintiffs funded by a third-party litigation partner sued LA Fitness claiming the defendant deceived plaintiffs and breached their contract when they were interested in canceling memberships. LA Fitness was ordered to produce potentially millions of documents during discovery, which involved significant costs. Plaintiffs sought further discovery in the case, which would incur additional costs. Because of the asymmetry in discovery costs — and the fact that plaintiffs were funded by a third-party, the judge in the case ruled that the cost for future discovery were to be paid by the plaintiffs in this case.
In this case, a Florida court found that plaintiffs’ litigation funders were liable for defense attorneys’ fees because the court determined that the funders were essentially a party to the litigation. The court found the funders liable for opposing counsels’ fees given that plaintiffs brought a civil suit that “lacked substantial legal support.”
Absent clear FRCP guidance on how judges should inquire about TPLF, judges may resort to ad hoc methods to make determinations regarding TPLF arrangements—or may not Ask About TPLF at all.
Some judges ask whether parties are using TPLF during initial scheduling conferences. Other judges engage in ex parte discussions with plaintiffs’ counsel in chambers, sometimes reviewing portions of a TPLF agreement in camera. Still others issue written orders requiring counsel to answer questions in writing, ex parte, about TPLF agreements without reviewing the underlying TPLF agreements. Very few judges follow up after the initial inquiry to ask whether parties have entered new TPLF agreements later in the litigation. Judges are also unlikely to notify the parties that disclosure is an ongoing obligation. This variety of approaches and inconsistent practices is creating a fragmented and incoherent procedural landscape in the federal courts.
Because there is no uniform rule requiring disclosure, judges have responded to motions seeking TPLF disclosure in a patchwork of differing ways:
The procedure for TPLF disclosure must be correct so that it is both effective and fair to all parties. When courts merely ask at a scheduling conference whether any parties are using TPLF, and don’t follow up to ascertain the key control features of TPLF agreements or establish an ongoing obligation to disclose new TPLF arrangements during the case, they are not getting the necessary information. FRCP guidance is particularly needed to eliminate reliance on ex parte conversations between judges and the party utilizing funding. Ex parte communications are not a correct mechanism for disclosure as they are both ineffective in educating courts and highly unfair to the parties who are excluded, which is why they are strongly disfavored by the Code of Conduct for U.S. Judges (Cannon 3(A)(4)).
In this multidistrict litigation, the court became aware that some attorneys involved in the litigation were relying on third-party funding. The judge ordered attorneys who were involved in funding agreements to submit a letter to the court acknowledging their agreement and “briefly describing” the financing arrangement as well as sworn affirmations from the attorney and funder verifying that the financing agreement would not create conflicts of interest, undermine counsel’s obligations to represent their client, affect their professional judgment, or provide the funder control over strategy or settlement decisions. The judge required the letters to be submitted for ex parte review in camera. This approach is insufficient because it denies the other litigants any knowledge of the TPLF agreements that could affect them and the litigation, and because it relies solely on the funders and the lawyers receiving funding to reveal if there are any problems with the terms of their agreements. The code of conduct for U.S. judges generally prohibits ex parte communications on substantive matters. The appropriate way to vet TPLF agreements and assess whether they pose any concerns to the litigation is to allow all parties to the case to review them.
Judges sometimes issue protective orders to ensure sensitive information furnished during the discovery process remains confidential, restricting access to this information. However, if third-party funding agreements require a party to share case information with a non-party funder, there could be a conflict between the party’s obligation to the court and its funder. Courts and parties must Ask About TPLF so that such potential conflicts that could affect compliance with protective orders are understood by all parties. Moreover, to inform the need for and scope of protective orders, courts and parties should know about the involvement of third-party funders so everyone is aware of non-parties with interests in the litigation and what information they may seek or access.
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