Proposed Amendment to the Federal Rules Would Require Disclosure of Third-Party Litigation Funding

On November 7, 2017, the Advisory Committee on Civil Rules established a new subcommittee that will study whether the potential ethical and judicial concerns surrounding third-party litigation funding merit the enactment of amendments to the federal rules that would require disclosure of outside investment in any action filed in federal court. The issue is scheduled for discussion during the committee’s April 10, 2018 meeting in Philadelphia.

The U.S. Chamber Institute for Legal Reform has led the charge for an amendment to the rules of civil procedure that might counteract the potential ethical issues raised by the use of third-party funding arrangements in civil actions. Last summer, Lisa Rickard, president of the Chamber’s Institute for Legal Reform, sent a letter to the Administrative Office of the U.S. Courts to the Federal Rules of Civil Procedure requesting that the rules be amended to require disclosure of all compensation agreements that are “contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”  Rickard’s letter includes a discussion of the following legal ethics concerns:

 (1) Impermissible sharing of legal fees: Model Rule 5.4(a), which bars almost all forms of sharing legal fees with non-lawyers, conflicts with some models of third-party litigation funding which involve plaintiffs’ counsel repaying the funder’s investment out of attorney’s fees;

(2) client confidentiality: the extent that funding arrangements require disclosure of client information to the funder raises confidentiality issues; and

(3) conflicts of interest: attorneys who have contracted directly with a funding company may have duties to that company that are inconsistent with the duties of loyalty to the client, including conflicts that arise when attorney’s are incentivized to recommend clients to work with favored funders.

The Institute proposed a similar amendment to the rules committee in 2014, but it did not receive much attention. The rise in third-party litigation funding in recent years has apparently enlivened opposition, as evidenced by the fact that 29 organizations joined  Rickard’s  letter that  proposes a disclosure requirement be included in Federal Rule of Civil Procedure 26.

“The industry has grown tremendously,” said Page Faulk, vice president of legal reform initiatives at the Chamber’s institute. “There have been a lot of developments since we originally submitted the petition, and we’re also hearing from other business groups about their concerns.” She added that more judges are also sharing the outlined concerns.

In fact, some courts have begun to address third-party litigation funding issues on their own, with the U.S. District Court for the Northern District of California recently adopting a policy that permits class action defendants to discover whether their opponents are receiving funding from outside investors. And in March, the U.S. House of Representatives passed a bill that would mandate the disclosure of third-party funding in class actions.

Commercial litigation funders, including industry giants Burford Capital and Bentham IMF, have opposed the proposal, arguing the rule would be invasive and unnecessary.

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