New Jersey now has a sweeping lit funding disclosure rule. Does it matter?

The New Jersey legislative chambers are seen ahead of the 2018 “State of the State” address in Trenton
The New Jersey legislative chambers. REUTERS/Dominick Reuter

(Reuters) - There is no such thing as a casual discussion about whether courts should require some form of disclosure of commercial litigation finance agreements.

Every disclosure proposal – whether it’s in a state legislature or bar association, in Congress, in a federal rules committee or a federal district court – is tantamount to a declaration of nuclear war between commercial litigation funders and the U.S. Chamber of Commerce.

Their most recent fight, as my Reuters colleague Sara Merken reported on Tuesday, was in New Jersey federal district court. In April, the court proposed a sweeping disclosure rule to require parties in every case in the district to disclose whether a third party has a financial interest in their litigation and whether the funder has a say in litigation decisions, including settlements. The proposal did not mandate disclosure of funders’ actual contracts, instead requiring just “a brief description of the nature of the financial interest.” But it also specifically authorized additional discovery when defendants have reason to believe that financiers control the case.

Predictably, the Chamber’s Institute for Legal Reform filed a lengthy comment letter in support of the rule. The trade group for big commercial litigation funders, the International Legal Finance Association, filed an even lengthier letter opposing mandatory disclosure. Top executives from four of the biggest litigation finance shops followed up with an opinion piece calling the proposal a “radical departure from widely accepted norms” that would ultimately strain court resources.

The New Jersey court was unswayed. On Monday, it adopted the disclosure proposal as a new local rule. The Chamber told Reuters’ Merken that the new mandate was “a victory for transparency.” A spokesperson for the litigation finance industry said it would “create far more problems than it will solve.”

The ferocity of this years-long, multi-front war over the disclosure of funding agreements got me wondering whether these requirements actually have much impact.

New Jersey, after all, is not the first jurisdiction to mandate some form of disclosure. The Northern District of California imposed a standing rule in 2017 to require the disclosure of third-party funding in class, mass and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed in 2019.

Have these disclosure rules exposed any improprieties in litigation finance? Have they changed the way cases are litigated? In other words: Is the passion on both sides of the disclosure debate warranted?

I asked three lawyers who track litigation finance issues closely: ethics expert Lucian Pera of Adams and Reese, law professor Anthony Sebok of the Benjamin N. Cardozo School of Law and law professor Maya Steinitz of the Iowa College of Law. All three agreed that virtually no empirical information exists about litigation funding disclosures made to comply with the California, Wisconsin and West Virginia requirements. Nor do there seem to be reported opinions arising from disclosure requirements in those jurisdictions. In terms of case law and data, existing disclosure requirements haven’t made much of an impression.

“I’ve heard nothing at all about any effect at all from such required disclosures,” Pera told me. “I think you could count on the funders and the U.S. Chamber to have reported any ‘insights’ they’ve found in disclosures. I have heard nothing.”

To be clear, there is plenty of precedent on whether plaintiffs in particular cases must turn over litigation funding documents. The California and New Jersey disclosure rules, in fact, both appear to have been inspired by rulings in individual cases, a successful 2016 motion to compel by Chevron in a class action in San Francisco federal court and an unsuccessful 2019 motion by defendants in an MDL in Camden federal court involving the blood pressure medication valsartan. Judges have mostly sided with plaintiffs attempting to shield agreements from defendants, although the Chamber comment letter on the New Jersey disclosure rule recounts several instances in which defendants have obtained documents.

None of the cited cases – whether granting or denying discovery of litigation finance documents – stemmed from a mandatory disclosure rule.

Pera said he’s skeptical that the New Jersey rule will have much more impact than existing requirements, though he said it might prompt funders to avoid language that could be construed to grant them authority to influence litigation and settlement strategy. The new rule, he said, could even turn out to benefit the litigation funding industry if it increases awareness of funding practices.

Law professors Sebok and Steinitz said it’s too soon to know whether disclosure requirements are changing litigation tactics in cases with outside funding. Sebok predicted the New Jersey rule will prompt defendants to seek production of funding agreements, making litigation a bit more expensive for litigation financiers. The extra expense, he said, could serve the business lobby’s goal of “throwing sand in the gears of litigation funding.”

Steinitz said disclosure rules could already be having a subtle effect both on how funders structure their contracts and how defendants litigate when they know a plaintiff is backed by a funder. “These disclosure rules are very significant,” she said. “You can infer that from the passions on both sides.”

Harold Kim of the Institute for Legal Reform acknowledged that disclosure regimes in California and Wisconsin haven’t had much of a tangible impact – in part, he said, because class action plaintiffs backed by litigation funders may be avoiding the Northern District to evade disclosure. But he said New Jersey’s adoption of a disclosure rule more sweeping than the California mandate shows that judges are increasingly aware of litigation funding. (I also queried the litigation funding trade association about the impact of existing disclosure requirements, but a spokesperson declined to comment.)

Judges, Kim said, are beginning to recognize that they need to know who controls litigation, especially when they’re asked to appoint class counsel and certify class actions.

“The best way to describe the New Jersey rule,” Kim said, “is to say that it opens the door.”

Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.

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Litigation funders howl as N.J. adopts disclosure requirement

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.