Whether the transaction is recourse or non-recourse , involves a single case or a portfolio of cases , the litigation finance industry is exploding . However , as with all burgeoning fields , certain problems have arisen — namely the issue of disclosure .
Typically , for defendants , litigation financing utilized by the plaintiffs ’ side ( whether for case or personal expenses , to pay plaintiffs ’ counsel , or obtained directly by plaintiffs ’ counsel ) is a mysterious , un-welcome entrant to the case . This is because traditionally defendants could leverage their massive resources to the detriment of plaintiffs whose law firms tended to be less well financed than defense firms . Now , third party financing serves as an equalizer in the fight .
Knowing this , some defendants have sought disclosure of the third-party financier ’ s identity in lawsuits , as well the nature of the financing agreement , with an eye towards using it against the plaintiffs ’ side .
Whether the identity of a litigation funder should be disclosed is a question being addressed by both courts and legislators .
Proponents of disclosure argue that transparency is necessary to detect potential ethical violations and to determine the level of case participation by non-parties holding a financial stake in the outcome .
In contrast , third-party funders and others benefiting from the arrangements claim such financing does not create ethical concerns , nor does it influence the outcome of litigation . If anything , they argue that it facilitates a fairer and timelier settlement .
With this backdrop , the battleground is staged for legislatures and courts to grapple with this issue in the years to come .
Legislation FRCP Rule 26
In early 2017 , the U . S . Chamber of Commerce proposed that Rule 26 of the Federal Rules of Civil Procedure be amended to require disclosure of “ any agreement under which any person , other than an attorney permitted to charge a contingent fee representing a party , has a right to compensation that is contingent on , and sourced from , any proceeds of the civil action , by settlement , judgment or otherwise .”
The Advisory Committee on Civil Rules previously considered such a change to the rule in 2014 , but decided to delay action until the third-party funding market became more developed .
Even though the industry saw large growth in the three intervening years , recently the Advisory Committee once again deferred action with respect to third-party financing disclosures until there was evidence of a meaningful change in the market that would justify its further consideration .
Despite the Advisory Committee ’ s decision to postpone dealing with the issue at this time , at least one state has passed a law requiring the disclosure of third-party litigation funding in civil cases and , more recently , a bill has been introduced in the Senate that would compel disclosure of such specialty funders and their financing agreements in class actions and multidistrict litigations .
Wisconsin Act 235
On April 3 , 2018 , Wisconsin became the first state jurisdiction in the United States to mandate the disclosure of third-party litigation funding arrangements .
Under Wisconsin Act 235 , parties to a civil suit are required to provide to the other side — without a discovery request — any agreement wherein a third-party has a right to receive compensation that is contingent on , and derived from , any proceeds of the case .
While this legislation means plaintiffs ’ and plaintiffs ’ attorneys in Wisconsin must now disclose any financing they have received if the source of repayment is contingent upon and derived from the proceeds of a case , it is believed that it will not generally include the mandatory disclosure of more traditional attorney loans or lines of credit . Loans and lines of credit are generally recourse and are payable regardless of whether the case is won or lost ; in other words , repayment is not contingent upon or derived from , the receipt of case proceeds . Under these circumstances , disclosure would not likely be required even though the maturity date of the loan might coincide with the receipt of case proceeds , provided that repayment is otherwise due even if no ( or insufficient ) proceeds are received from the case .
Litigation Transparency Act of 2018
The Senate Judiciary Committee Chairman Chuck Grassley ( R-Iowa ) and Senators Thom Tillis ( R-N . C .) and John Cornyn ( R-Texas ) introduced the Litigation Funding Transparency Act of 2018 on May 10 , 2018 , which , if passed , would amend Chapter 114 and Section 1407 of title 28 of the United States Code to require disclosures related to third party litigation financing in certain large-scale disputes .
In particular , under the proposed Act , plaintiffs ’ counsel in any federal class action and any federal coordinated or consolidated proceeding ( i . e . a multidistrict litigation ) would be required to ( 1 ) disclose to courts and other named parties , in writing , the identity of any third party “ commercial enterprise … that has a right to receive payment that is contingent upon the receipt of monetary relief in the class action [ or multidistrict litigation ] by settlement , judgment , or otherwise ,” and ( 2 ) produce any agreement creating the contingent right , unless otherwise stipulated or ordered by the court .
Further , the bill provides that plaintiffs ’ counsel must make the disclosure no later than ten days after the financing agreement is executed or at the time of service of the action .
In support of the legislation , Senator Grassley stated , “ transparency brings accountability …. The courts and opposing parties should know whether there are undue pressures and secret agreements at play that could unnecessarily drag out litigation or harm the interest of claimants themselves .”