On The Case

Business lobby calls for federal rules to require litigation funding disclosure

(Reuters) - The U.S. Chamber of Commerce and more than two dozen other business groups are hoping to turn the success of the litigation funding industry into a weapon.

In a June 1 letter to the Committee on Rules of Practice and Procedure of Administrative Office of the U.S. Courts, the business group propose amending the Federal Rules of Civil Procedure to require the disclosure of outside financing arrangements.

As the letter acknowledges, when the business lobby made the same request in 2014, the Rules Committee opted not to proceed with formal consideration. But in the ensuing three years, the new petition argues, litigation finance has rapidly expanded into a multibillion-dollar business in the U.S. The business groups contend that the increased prevalence, profitability and diversification of outside funding arrangements prove the need for a rule change to require robust disclosure.

The business groups trot out familiar tropes about litigation finance, arguing that funding arrangements may violate age-old rules about encouraging and paying for suits by other people. They also discuss some notorious litigation that involved funders, like the epic case accusing Chevron of polluting the Ecuadorian rainforest, asserting that such cases show funders exert improper control over the cases they back. But those arguments have so far failed to check the industry’s growth so I doubt they’re going to sway the Rules Committee.

I was more intrigued by the groups’ contention that it’s only fair to require plaintiffs to disclosure their resources because the rules already require defendants to disclosure insurance coverage. If insurance policy disclosures can drive settlement talks, the letter said, so too can exposing funding arrangements.

The letter points out that in January, the Northern District of California amended its local rules to require that lawyers in class, collective or representative actions reveal “any person or entity that is funding the prosecution of any claim or counterclaim.” The chief judge of the Eastern District of Texas, it said, told the Texas Lawyer his district is also considering a disclosure rule.

But Travis Lenkner of Burford Capital, the biggest litigation financier in the U.S., told me the California rule was actually a setback for the Chamber and its allies – and that the business lobby’s renewed effort to change the federal rules isn’t really about disclosure at all.

“What they’re asking for is not just disclosure,” Lenkner said. “They’re using sunshine and clean air as a cloak for what they actually want, which is to use the fact of funding to go after those who have it.” Lenkner rejected the analogy between plaintiffs disclosing funding and defendants disclosing insurance coverage, arguing that information about policy limits informs settlement talks but knowing how plaintiffs firms are capitalized does not.

It’s ironic, Lenkner said, that the U.S. Chamber, supposedly a bastion of free enterprise and entrepreneurship, is now attempting to turn the success of the nascent litigation finance industry against it. But the money raised and profits realized by industry participants, he said, remains a tiny fraction of the cost of litigation in the U.S. The business lobby’s preoccupation with litigation funding, he said, is an effort to block plaintiffs from access to resources to match those of defendants.

So far, he said, the Chamber and its allies haven't had much success. The 2014 proposal went “nowhere,” Lenkner said. Three of the then-biggest litigation funders – Burford, Gerchen Keller and Bentham IMF – teamed up in a letter to the Rules Committee in opposition to the business groups' proposed disclosure rule, but the Rules Committee didn't even formally request opposition before tabling the proposal. (Burford acquired Gerchen Keller last year.)

The business lobby pushed in the Northern District of California for the same broad disclosure it has requested of the Rules Committee, Lenkner said. In the end, however, the district opted to require disclosure only in a narrow category of cases. The funding industry, according to Lenkner, regarded that outcome as a success.

I wouldn’t be surprised if the Rules Committee gives the disclosure proposal a harder look this time than it did in 2014. Outside funding is changing the litigation system, though not in the unilateral way the Chamber and its allies contend. More and more businesses are themselves hedging litigation risk with alternative funding arrangements, sometimes even on the defense side.

For the most part – though not always – these deals remain opaque, so we don't really know how they affect cases, if at all. Until there's more transparency, litigation finance will be dogged by the very suspicions the Chamber and its allies cite in their letter to the Rules Committee.