Litigation funders howl as N.J. adopts disclosure requirement

(Reuters) - Litigants in New Jersey federal court must reveal information about third-party litigation finance agreements under a new rule, sparking a warning by a commercial legal funding trade group that the change is "likely to create far more problems than it will solve."

U.S. District Court for the District of New Jersey Chief Judge Freda Wolfson signed an order Monday amending the court's local rules to require parties in litigation to disclose information about non-parties that provide non-recourse funding for attorneys' fees and expenses.

Parties must reveal the funder's name and address, whether the funder's approval is "necessary for litigation decisions or settlement decisions," and a "brief description of the nature of the financial interest." They can also seek discovery of funding terms.

Debate over the requirement in New Jersey became part of a years-long standoff between litigation funders and business groups such as the U.S. Chamber of Commerce around funding disclosure. The International Legal Finance Association (ILFA), a group of commercial legal funders that banded together in September 2020, pushed back against the proposed rule earlier this year and quickly blasted the new requirement in an emailed statement Tuesday.

"We are disappointed that the District of New Jersey did not engage with relevant members of the industry or bar when passing new Local Rule 7.1.1 and think its passage is entirely unnecessary, inappropriate, contrary to the overwhelming majority of existing case law, and likely to create far more problems than it will solve," Shannon Campagna, executive director of the trade group, said in a statement.

"Our members will work with litigation counsel in their funded matters to fully comply. However, we sincerely hope that other judicial districts will hold more open and transparent processes that consider the input of actual stakeholders when considering proposals related to legal finance," she said.

The court invited comments on the proposed rule in April. ILFA, in comments filed on the proposal last month, noted that the court's Lawyers Advisory Committee conducted a study in crafting the proposal but didn't seek input from outside stakeholders.

Steven Richman, a lawyer at Clark Hill who chaired a subgroup of the committee, declined to comment on its deliberations but said the minutes were publicly available and the proposal was available for public comment.

Page Faulk, senior vice president for legal reform initiatives at the U.S. Chamber Institute for Legal Reform, called the disclosure rule a "victory for transparency."

"The New Jersey District Court's decision is a big deal; it will bring some much needed sunshine to the secretive litigation funding industry," Faulk said in a statement.

Maya Steinitz, a professor at the University of Iowa College of Law who has written about litigation finance, called the New Jersey rule a "pretty broad disclosure requirement," describing it as "relatively pro-defendant."

Still, the impact of the rule for New Jersey litigants may take time to come into focus. Steinitz and Anthony Sebok, a professor at Yeshiva University's Cardozo School of Law, both said some language in the rule is vague, such as requiring disclosure of the "nature of the financial interest" of the funder.

Noting disclosure has been a fraught topic, Steinitz said judges have come out in different ways in individual cases. The Northern District of California has an automatic funding disclosure requirement specific to class actions, and other federal jurisdictions have various disclosure requirements in some cases.

"Battles over these kinds of rule changes are hard fought by the various constituencies," Steinitz said. "I would be very cautious about assuming that other states are just going to follow suit. I think it's going to be fought state by state, and that we will end up with some kind of a patchwork."

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