Federal Rules Committee Recommends no Immediate Action for Third-Party Funding Disclosure Rulemaking

Third-Party Litigation Funding (“TPLF” or “third-party funding”) is an emerging practice impacting insurers, attorneys, and policymakers.  In general, TPLF involves the non-recourse funding of a claim by a non-party for a share in the proceeds if the claim is successful.[1]   As more fully discussed in the author’s recent TPLF Report, third-party funding is presenting several different issues.  One such question of much interest and debate presently is: Should the Federal Civil Rules of Procedure be amended to require plaintiffs to disclose TPLF agreements to defendants?

On October 5, 2021, the Federal Advisory Committee on Civil Rules (Advisory Committee or Committee)[2] revisited this question again but did not recommend any immediate action toward formal TPLF disclosure rulemaking.[3]  In reaching this decision, the Committee raised several issues and questions which, from their view, continue to present challenges in developing TPLF rulemaking at this time.  The Committee’s decision will likely disappoint those who have been advocating for a TPLF disclosure requirement over the past several years.  

This article presents a general and non-exhaustive overview of the current TPLF disclosure issue, the Advisory Committee’s review of this matter, certain challenges noted by the Committee in developing TPLF disclosure rules, and a general survey of the current state of TPLF disclosure beyond the Federal rules debate, including a review of “local” federal court rules, recent developments at the state level, and the Litigation Funding Transparency Act reintroduced in Congress earlier this year.

Efforts to amend the Federal Civil Rules of Procedure

Currently, the Federal Rules of Civil Procedure (Federal Rules) do not contain an explicit provision requiring plaintiffs to disclose TPLF information or a copy of the TPLF agreement to the defendants.   Whether the current rules should be amended to require TPLF disclosure first appeared on the Advisory Committee’s agenda in Fall 2014[4] as part of a proposal submitted by the United States Chamber Institute for Legal Reform (the Chamber).  

The Chamber’s 2014 proposal, which was resubmitted in 2017, seeks to amend Fed. R. Civ. P. 26(a)(1)(A). This provision currently requires, in part, the production of various documents and information, including a defendant’s insurance agreement, without a specific discovery request, unless otherwise exempted under the rules, or stipulated or ordered by the court.[5]  

The Chamber is seeking to amend Rule 26 by adding a new subsection (v) to Rule 26(a)(1)(A) to require automatic disclosure in all civil cases of:

[A]ny agreement under which any person, other than attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.[6]

This proposal has engendered much discussion and debate.  In support of amending Rule 26, the Chamber outlined a myriad of factors and considerations in support of TPLF disclosure. In general, the Chamber argues that the proliferation and expansion of TPLF funding raises a number of concerns calling for transparency, including potential legal and ethical conflict of interest issues for counsel and judges; questions regarding funder control and influence over a plaintiff’s litigation and settlement decisions; promoting consistency with the federal court’s interest in safeguarding legitimate, ethical civil litigation practices; identifying potential violations of state champerty laws; and creating “parity of financial disclosure” under Rule 26.[7]   

From the other side, the American Association for Justice (AAJ) is one group challenging the Chamber’s proposal.  In January 2018, the AAJ submitted a letter to the Advisory Committee refuting what it referred to as the Chamber’s “one sided” proposal on several grounds.[8]  For example, the AAJ argued, in part, that the proposed TPLF disclosure rule would not solve the alleged conflict of interests concerns; that state ethics commissions were the “most appropriate” bodies to consider TPLF ethical concerns; and that there was no evidence that third-party funders were “dictat[ing] the litigation strategy or decisions,” or undermining attorney attorney-client privilege protections.[9] From the AAJ’s view, the Chamber’s effort to amend Rule 26 was “just an attempt to unbalance the playing field.”[10]    

The Advisory Committee has been “monitoring” TPLF developments since 2014

Since the Chamber first submitted its proposal in 2014, the Advisory Committee has basically elected to monitor and study TPLF developments to evaluate possible rulemaking in this area.  On this point, the Committee noted that when they first considered TPLF disclosure in 2014, they “concluded that the field was changing rapidly and that not enough was known about it to support adding a disclosure requirement, and also that there were other questions about the wisdom of doing so.”[11] 

Thereafter, the TPLF disclosure issue was assigned to the Committee’s Multi-District Litigation (MDL) Subcommittee with the Committee noting at that time “it appeared that [TPLF] might be of particular importance in some MDL litigation.”[12] 

However, after about two years of study, the MDL Subcommittee reported back to the Committee in conjunction with October 2019 meeting that TPLF “did not seem particularly prominent” in the MDL context and that “further work on a possible rule would be suspended, but that the evolution of TPLF would be monitored going forward, not with a primary focus on MDL proceedings but with regard to all civil litigation.”[13]  As such, the Advisory Committee decided to remove TPLF from the subcommittee’s agenda and return it back to the full Committee for continued monitoring.[14]

The Advisory Committee does not recommend “any immediate action” toward TPLF rulemaking at its October 2021 meeting

Turning our attention to the Advisory Committee’s October 2021 meeting, the TPLF disclosure issue was back on the agenda with Committee noting “it seemed timely to report back to the Committee, in part due to an inquiry in May 2021 from Senator Grassley and Representative Issa.”[15]  The referenced “inquiry” relates to a joint letter sent to the Advisory Committee’s Chairperson, The Honorable John D. Bates, by Senator Charles E. Grassley (R-IA) and Representative Darrell Issa (R-CA).[16]  In their letter, these lawmakers requested that the Advisory Committee provide a status update on the TPLF disclosure issue.[17]  In addition, they also took the opportunity to inform Judge Bates of current Congressional activity on this topic, most notably their re-introduction of the Litigation Funding Transparency Act (“LFTA”) in the House and Senate.[18]  Very generally, the LFTA would require plaintiff lawyers to disclose outside funding agreements in federal class action and MDL lawsuits.[19] 

In support of the LFTA, Senator Grassley and Representative Issa argued that adopting a federal TPLF disclosure rule was “a commonsense matter and critical to the integrity of our federal court system”[20]  noting the following:

The practice of TPLF cannot be allowed to proceed in its current form.  Under present law, virtually all TPLF activity occurs in secrecy because there is no procedural or evidentiary rule requiring disclosure of the use and terms of such funding. Moreover, to the extent defendants seek this information through ordinary discovery, plaintiffs generally object to providing it, and courts often do not compel production of the requested information. Transparency brings accountability … Our legislation would take one simple step towards bringing TPLF activity into the daylight.[21]

Taking this request into consideration, the Advisory Committee placed TPLF disclosure on their agenda for the October 2021 meeting and dedicated an entire section to TPLF as part of the meeting booklet.[22]

However, the Committee did not ultimately recommend any immediate action be taken toward formal rulemaking stating, in part, as follows:

This memorandum does not recommend any immediate action but provides an opportunity for Committee members to address these issues.  The agenda book therefore contains a rather expansive treatment of this topic to acquaint Advisory Committee members with the issues, should the Committee be interested in proceeding at this time.  If not, it is expected that the Committee will continue to monitor developments.  It is likely that further information can be brought to bear.  If the decision at present is to continue monitoring TPLF developments, there is no present need … to delve deeply into these issues. But moving forward likely will present them. (Advisory Committee on Civil Rules, October 5, 2021, at 371). [23]

Looking ahead, it is unknown if the TPLF disclosure issue will be back on the agenda as part of the Advisory Committee’s next meeting scheduled for January 4, 2022 in Miami, Florida.[24]

The Advisory Committee discusses issues and challenges in creating TPLF disclosure rules

While the Advisory Committee declined any action toward rulemaking, they did share some interesting insights on the issue which may be interpreted as showing the difficulties the Committee may see in amending Rule 26 as specifically proposed, and the issue of TPLF disclosure more generally.

For example, the Advisory Committee noted that the “[t]he effort [to establish possible TPLF disclosure rules] would require a considerable amount of work.”[25] Further, the Committee seemed to contemplate whether other rulemaking entities may be the  more appropriate forums to address the issue, commenting that “[a]s information about the multitude of issues increases, it may be that one response is to conclude that this collection of issues is too diverse to be handled by a civil rule amendment.  Another is to conclude that regulation of TPLF is best left to other entities, such as state legislatures, rather than individual federal judges.”[26]  

In addition, the Advisory Committee dedicated several pages outlining a variety of different issues and questions it noted as “bearing on the Committee’s role” in considering TPLF disclosure rules.  While a complete examination into all the points is beyond the scope of this article, the author found a few of these items particularly noteworthy outlined in general as follows:

Which cases?

The Committee noted there “would be problems of scope” if they pursued rulemaking, referencing, as examples, how the LFTA pending in Congress and the proposal to amend Rule 26 before them “have different scopes in terms of what they apply to.”[27]  As such, the Committee raised the question of whether any disclosure rule should relate to “all civil litigation or only class, MDL, and ‘representative’ litigation.”[28]  On this point, the Committee noted that “[o]ne of the most active litigation areas for [TPLF] is reportedly patent litigation, but that would not seemingly be affected by the bill in Congress.”[29]  From another angle, the Committee questioned whether including all personal injury cases in federal court “might be seen as excessive, in part depending on what is considered ‘litigation funding,’” with the Committee asking “[w]hen a relative helps the victim with living expenses, should that be covered?”[30]

What should be disclosed?

Another issue the Committee raised concerned what information should be disclosed.[31]  On this point, the Committee noted that the proposal to amend Rule 26 would require the parties’ full agreement to be disclosed, while the LFTA would similarly require full disclosure in the specific instances in which it would apply.[32]  However, the Committee suggested that “[t]here are other gradations” to consider, stating: “Disclosure could be limited to the fact of funding.  Disclosure could also require that the funder’s identity be included. (This could address recusal issues.)  Disclosure could call for a general description of the funding agreement. Disclosure could also include specific reference to any control the funder has over the conduct of the litigation.  Disclosure could also go beyond the current proposals and include all communications between the funder and the attorney or party that received the funding. (This would raise serious work product issues … .)”[33]

Should certain lines be drawn?

 The Committee also raised questions about whether certain lines should be drawn between commercial and consumer TPLF.  Here, the Committee noted commercial funding typically involves much larger funding sums that may go directly to lawyers for litigation expenses, while on the consumer side the funding amounts are smaller and tend to involve payments made directly to plaintiffs to cover living expenses.[34]  On this point, the Committee posed the question: “Would that dividing line look to the dollar amount of the funding commitment, the nature of the litigant (nature or legal entity), or the nature of the claim (e.g., personal injury or patent infringement)?”[35]

How should “portfolio” funding be handled?

As portfolio TPLF funding[36] continues to increase, the Committee noted some consideration points regarding this area.  Specifically, the Committee commented: “From the rulemaking perspective, the possibility of portfolio funding could raise issues of scope.  Is disclosure required in every case in the portfolio? Assuming the portfolio includes cases on file when the funding is advanced, what is the timing of disclosure for those pending cases?  If the portfolio funding agreement provides that all obligations to the funder are satisfied once $X is paid (and that then funding obligation no longer exists to pending cases, (does that mean that the disclosure can somehow be withdrawn?”[37]

In addition to these items, the Committee also raised questions and potential issues on several other fronts, including what the Committee described as “sources of funding covered,” “public interest” or “social interest” litigation funders, follow-on discovery, and cases on appeal.[38]  The Committee also discussed other items which could impact TPLF rulemaking including work product concerns, recent select court decisions, enforcement, defense litigation funding, federal courts as enforcers of professional responsibility rules and champerty and maintenance rules.[39] 

Taking these items into consideration, the Committee concluded that the “catalog of issues is hardly exhaustive but suggests the challenges that may lie ahead for rulemaking on this subject.  As should be apparent, a very large amount of fact-gathering would be necessary to fashion a disclosure rule addressing TPLF.”[40]

TPLF disclosure – looking beyond the Federal Rules debate

Based on the above, it seems reasonable to suggest that the Advisory Committee is not contemplating taking any steps (at least any time soon) toward amending Rule 26 or otherwise promulgating some sort of TPLF disclosure rules for federal claims. 

So, where does this leave the issue in the bigger picture?  While an exhaustive examination into this question is outside the scope of this article, the following provides a general overview of current developments on TPLF disclosure beyond the Federal rules debate which the reader may find helpful:

Some Federal courts have adopted “local rules”

While there is no explicit federal rule requiring TPLF disclosure at this time, some federal courts have promulgated their own “local” TPLF disclosure rules.[41]  On this point, a well-researched memorandum prepared for the Advisory Committee’s April 2018 meeting noted that, as of late 2017, six U.S. Courts of Appeals[42] and 24 out of the 94 federal district courts [43] had formulated local rules requiring identification of litigation funders, with these rules differing in terms of the cases to which the rules apply, the scope of information to be provided, the reasons for disclosure, as well as when and how this information must be disclosed.[44] Notably, however, none of these local rules reportedly require the production of the litigation funding agreement itself.[45]  Further, these rules have reportedly focused more on TPLF disclosure for the purposes of helping courts assess potential judicial recusal or disqualification issues,[46] rather than providing defendants with third-party funding information as part of litigation discovery.  As such, the Advisory Committee commented that “[it does not seem that these disclosure rules are focused on the main issues the current proposal before this Committee addresses.”[47]

However, the United States District Courts (U.S.D.C.) for the Northern District of California and New Jersey are examples of two courts that have promulgated local rules aimed more at providing defendants with TPLF information as part of claim litigation.  For example, in 2017 the U.S.D.C. for the Northern District of California reportedly became the first U.S. court to institute a standing order requiring disclosure of TPLF information in class actions.[48]  In general, this rule requires plaintiffs to file a “Certification of Interested Entities or Persons” disclosing certain information regarding third-party funding and imparts a continuing duty to supplement this certification during the pendency of the case.[49]

More recently, the U.S.D.C. for New Jersey issued local civil rule, N.J. Civ. Rule 7.1.1 (June 21, 2021) which the Advisory Committee noted as “seem[ing] to be focused more closely on the issues like those raised by the current submission before this Committee.”[50] 

Generally, N.J. Civ. Rule 7.1.1 states that all parties (including intervening parties) must file a “statement”  disclosing certain information where “any person or entity that is not a party and is providing funding for some or all if the attorneys’ fees and expenses for litigation on non-recourse basis in exchange for (1) a contingent financial interest based on upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan.”[51]  In this situation, the following information must be disclosed: “(1) the identity of the funder(s), including name, address, and if a legal entity, its place of formation; (2) whether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and [if so], the nature of the terms and conditions relating to that approval; and (3) a brief description of the nature of the financial interest.”[52] 

In addition, under Rule 7.1.1 parties “may seek additional discovery of the terms of any such agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.”[53]

Litigation Funding Transparency Act of 2021

As discussed above, the Litigation Funding Transparency Act of 2021 (LFTA) was introduced in the House and Senate in March of this year.[54]  Similar to previous efforts, these bills propose, in part, that the identity of the funder and a copy of the funding agreement be disclosed in federal class actions and multi-district litigation (MDL) cases.[55]  As of October, the LFTA  has been referred to the House Committee on the Judiciary and the Subcommittee on Courts, Intellectual Property, and the Internet and the Senate Committee on the Judiciary.[56]

State considerations

A complete 50 state survey of current TPLF discovery rules is beyond the scope of this article. However, it is noted that two states, Wisconsin and West Virginia, recently enacted statutes requiring disclosure of TPLF agreements. Wisconsin’s statute, codified at Wis. Stat. Ann. § 804.01(2)(bg) and West Virginia’s statute, codified at W. Va. Code Ann. § 46A-6N-6, both require production of third-party funding agreements to the defendant without a specific discovery request, unless otherwise stipulated or ordered by the court.[57] 

Given the unsettled state of TPLF discovery, disputes regarding TPLF disclosure and production have also come before the courts. While a complete survey into this complex area is beyond the scope of this article, rulings on this issue have been noted to differ based on the case facts and other factors.[58]

By Mark Popolizio

Courtesy of Verisk

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