Mandatory Disclosure of Third-Party Funding Agreements for Proposed Class Action Lawsuits

by BakerHostetler
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For years, certain lenders have agreed to fund all or part of a party’s litigation costs, usually in exchange for an agreed share of any recovered proceeds, as part of a practice called “third-party litigation funding.”  This has spawned widespread debate over the propriety of such funding and the degree of transparency parties and courts should have as to the nature and amount of the funding (as well as the identity of the funders themselves).

Many types of third-party litigation funding arrangements exist, including investor-based class action funding. According to the U.S. Chamber of Commerce’s Institute of Legal Reform, third-party litigation financing from investors has been on the rise in the United States dating back to 2007.[1] Third-party funding of mass litigation and class actions is also on the rise in other countries.

Proponents of third-party litigation financing of class actions assert that it allows plaintiffs with limited resources to bring legitimate claims that otherwise might not be asserted. Opponents believe the practice unhinges litigation strategy and related considerations, including the plaintiffs’ motivations or willingness to settle. Opponents also question the adequacy of representation in the appointment of class counsel and if class counsel is motivated to protect the interest of the class, or to protect the investors bankrolling the suit.

At least one federal district court is taking steps to increase the transparency of third-party litigation funding. Effective January 17, 2017, the U.S. District Court for the Northern District of California announced changes to its Standing Order that require automatic disclosure of third-party funding agreements for proposed class action lawsuits.  The Northern District of California encompasses jurisdictions including San Francisco, Oakland, San Jose, and Eureka.

Under the Northern District of California’s amended Standing Order, third parties funding a proposed class action in the will have to disclose their involvement in the lawsuit in a joint case management statement.

The pertinent part of the Standing Order for All Judges in the Northern District of California reads:

Disclosure of Non-party Interested Entities or Persons: Whether each party has filed the “Certification of Interested Entities or Persons” required by Civil Local Rule 3-15. In addition, each party must restate in the case management statement the contents of its certification by identifying any persons, firms, partnerships, corporations (including parent corporations) or other entities known by the party to have either: (i) a financial interest in the subject matter in controversy or in a party to the proceeding; or (ii) any other kind of interest that could be substantially affected by the outcome of the proceeding. In any proposed class, collective, or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.

This change to the Standing Order is in lieu of proposed, but ultimately rejected, revisions to Civil Local Rule 3-15 that similarly would have required parties to disclose the person or entity funding the prosecution of the claims.

Notably, the Standing Order change follows the April 2016 Judicial Conference Advisory Committee on Civil Rules’ consideration of disclosure requirements of third-party litigation funding for all federal courts; however, the Committee has yet to finalize any proposals. This rule change also follows Gbarabe v. Chevron Corp., No. 14-cv-00173, 2016 WL 4154849 (N.D. Cal. Aug. 5, 2016), which centered on the plaintiffs’ class action claims alleging that the defendant was liable for damages related to an exploratory gas well explosion. During a discovery dispute, the Northern District of California compelled the named plaintiff to produce his litigation funding agreement to the defendant.

To date, the Northern District of California’s Standing Order regarding third-party litigation financing is unique. It appears that the Judicial Conference Advisory Committee on Civil Rules might begin to study litigation financing, which is expected to grow over the next decade. In the interim, class action defendants should inquire about the existence of any third-party litigation funding in discovery.

[1] See Deborah R. Hensler, The Future of Mass Litigation: Global Class Actions and Third-Party Litigation Funding, 79 Geo. Wash. L. Rev. 2, 321 (Feb. 2011).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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