California: Class Litigants Must Disclose Outside Funding

In January, the Northern District of California issued a standing order that took a small step towards addressing concerns about third-party litigation financing. The litigation finance industry has been increasingly growing as outside investors provide funding to plaintiffs bringing lawsuits. The U.S. Chamber of Commerce has called third-party litigation financing a “major threat” to the integrity of the civil justice system, especially because investors have been masked since the concept’s inception.

The Federal Rules of Civil Procedure is silent on whether litigants must disclose funding agreements made with third parties. As a result, defendants who suspect that outside investors are funding opposing plaintiffs’ lawsuits have been unsuccessful in unmasking investor identities through discovery rules or other avenues. Many argue that the practice brings forth blatant ethics concerns.

The Chamber of Commerce urged the Northern District of California to adopt a broad disclosure rule that would require all civil parties to reveal any funding arrangements with outside investors, but the court didn’t go quite as far.

In its standing order, the court’s rules committee proposed a change to its Local Rule 3-15. Local Rule 3-15 provides specific examples of “interested” non-parties that litigants must disclose. The rules committee proposed an addition to the rule that would include the broad category of “litigation funders” in the list of examples.

Subsequently, the court adopted a narrower disclosure requirement. In its standing order, the court wrote that third-party litigation funders and investors would need to be disclosed, but only in class action cases.

Opponents of litigation funding call the standing order just a small victory because there is not a great deal of litigation funding of class actions. But it’s a start.

The standing order can be found here.

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