The Litigation Funding Transparency Act of 2018

May 14, 2018
puzzle-pieces

By: Matthew Harrison, Investment Manager and Legal Counsel

On May 10, 2018, Republican Senators Chuck Grassley, Thom Tillis and John Cornyn introduced a bill titled The Litigation Funding Transparency Act of 2018, which would require disclosure of litigation funding arrangements (including the funding agreements themselves) in any federal class action and any federal claim that is aggregated into a federal multi-district litigation (MDL) proceeding. One purported purpose of the bill, according to Senator Tillis, is to “keep the civil justice system honorable and fair.”  

Effectively, the bill would do exactly the opposite by imposing more barriers to entry for claimants trying to bring meritorious lawsuits against massive corporations—i.e., the major constituents of the U.S. Chamber of Commerce. Many such claimants already struggle to see their day in court due to a lack of economic means. As discussed below, this proposed bill subverts the actions of a committee already investigating the necessity for greater transparency of litigation financing arrangements and lacks sound policy rationale. 

The issue of litigation funding disclosure is already being examined by the Advisory Committee on Rules of Civil Procedure, which has resisted the Chamber’s efforts to force premature regulation or rule changes absent a careful study of the necessity for such measures. Indeed, in December 2014 and again in April 2016, the Advisory Committee rejected a proposal by the Chamber to amend Federal Rule of Civil Procedure 26 to require automatic disclosure of funding arrangements at the outset of all civil cases. The Advisory Committee noted that while questions raised by third-party financing are important and may change in the future, an attempt to craft automatic disclosure rules was premature. The Senators’ decision to introduce this bill while that comprehensive examination is ongoing usurps the Advisory Committee’s important role in considering whether such disclosures are necessary. The Senate should allow the Advisory Committee to engage in its deliberative process.  

The proposed bill also lacks policy rationale. The press release announcing the bill asserts several times that it is designed to address the “potential for conflicts of interest” created by undisclosed litigation funding arrangements. If the Chamber’s separate efforts before the Advisory Committee are any guide to interpreting that assertion, these conflicts supposedly would arise from a judge’s stake in an enterprise that is providing the litigation financing. But existing rules of conduct for judges already address this concern. For example, the Code of Conduct for United States Judges states that they “should refrain from financial and business dealings that… involve the judge in frequent transactions or continuing business relationships with lawyers or other persons likely to come before the court on which the judge serves.” Given that the judicial canons (and common sense) counsel judges away from these types of relationships, it is hard to imagine any realistic situation in which a sitting federal judge would have a business or other relationship with a litigation funder that would cause a conflict. The risk is theoretical, at best, and does not justify congressional intervention.  

If by “conflicts of interest” the Senators mean threats to counsel’s independence, candor, confidentiality and undivided loyalty, this too fails as a cogent policy reason for disclosure of litigation funding arrangements in class actions or MDLs. Lawyers are bound to follow a comprehensive set of ethical rules that address all of these issues, embodied by the ABA Model Rules of Professional Conduct and their state bar counterparts. As the ABA Commission on Ethics 20/20 found in its comprehensive 2012 Informational Report to The House of Delegates, litigation funding raises no novel professional responsibilities, since many of the same issues may arise whenever a third party has a financial interest in the outcome of the client’s litigation. Indeed, the ABA Commission reinforced that a lawyer must always exercise independent professional judgment on behalf of a client that is free from third-party interference, and avoid influence by financial or other considerations. The Advisory Committee also considered this exact concern and determined that current ethical rules governing the attorney-client relationship are sufficient to avoid such conflicts. The Senators’ bill presumes, without any evidence, that lawyers cannot be trusted to follow these existing rules absent some disclosure and judicial oversight of litigation funding arrangements. 

Of course, much like the Chamber’s broad push for disclosure of funding arrangements, the proposed bill ignores the cornerstone of disclosure and discoverability: relevance. As evidenced by Judge Polster’s recent order in the opioid MDL, in which he required the lawyers to disclose litigation financing arrangements for his in camera review, judges already have the tools to discover the existence and terms of any potential funding arrangements where they deem it necessary. After careful consideration of the Chamber’s previous proposals similar to this bill, the Advisory Committee concluded just that: “[J]udges currently have the power to obtain information about third-party funding when it is relevant in a particular case.” 

As further justification for the bill, the Senators offer nebulous statements about the potential evils of litigation funding, including distortion of the civil justice system and the risk of harming the interests of claimants themselves. This rhetoric does not stand up to scrutiny. Nowhere do the bill’s proponents explain (nor could they) how litigation funding distorts the civil justice system, let alone how automatic disclosure of such arrangements in class actions and MDL proceedings addresses the supposed problem. And while they express concerns about fairness and the potential harm to claimants, they ignore the main reason why claimants seek funding for meritorious claims: the civil justice system is inherently biased in favor of those with financial means. Litigation funding benefits claimants by allowing them to finance expensive disputes against well-heeled adversaries. It levels the playing field, and at times even greatly benefits the government itself in the form of qui tam whistleblower funding. 
 
Finally, the bill ignores the practical implications of litigation funding disclosure in the class action and MDL context. For starters, unnecessary disclosure obligations like these will surely lead to discovery sideshows designed to expose underlying confidential communications and shared information among funders, claimants and their attorneys. This, in turn, increases the burden on judges, who must resolve the inevitable discovery disputes, and results in increased discovery costs, which the Chamber has strongly advocated against and which recent Federal Rules changes have attempted to alleviate. Notably, Judge Polster’s recent order—issued under his existing powers—struck the right balance between his desire to learn about the existence of any funding arrangements for specific, narrow purposes, and the reality that the funding terms would likely be wholly irrelevant to the cases themselves. As his order mandating disclosure of financing arrangements for his in camera review concluded, “absent extraordinary circumstances, the Court will not allow discovery into [third-party contingent litigation] financing.”

In short, The Litigation Funding Transparency Act of 2018 has no rational policy purpose and suffers from a lack of transparency itself. It is nothing more than a nod to the Chamber’s aggressive lobbying efforts to incrementally chip away at a thriving industry designed to provide access to an often prohibitively expensive court system.