What Litigation Funding Disclosure In Delaware May Look Like

EXECUTIVE SUMMARY:

• A standing order issued by Delaware's chief federal judge requires litigants to disclose whether they have received non-recourse funding from a third party.
• The disclosure requirement, which only applies to cases heard in Chief Judge Colm Connolly’s courtroom, consists of three parts: the identity of the funder; whether the funder's "approval is necessary for litigation or settlement decisions in the action"; and a "brief description of the nature of the financial interest" of the funder.
• Compared to potentially more intrusive disclosure regimes, the LexShares team believes Judge Connolly's order is unlikely to have onerous effects on litigation finance.
  

U.S. District Court for the District of Delaware Chief Judge Colm Connolly captured the attention of the litigation finance community this spring when he issued a standing order declaring that any litigant receiving non-recourse funding from a third party must disclose that fact, provided the case is heard in Judge Connolly's courtroom.[1]

At first blush, the April 18 order was unwelcome news for the litigation funding industry and parties that face a resource disadvantage in court.

Like most of our industry peers, we believe the burdens of disclosure generally outweigh the benefits. To see mandatory disclosure take root in Delaware — the default home for major American corporations — is not an ideal development.

But compared to potentially more intrusive disclosure regimes, Judge Connolly's order is unlikely to have onerous effects on litigation finance.

Learn how to ethically advise clients on funding-related matters with our ethics guide for attorneys.

Putting Disclosure Rules in Perspective

Though it is sometimes portrayed as such, disclosure of litigation funding is not a binary choice — it can take various forms.

At the least burdensome end of the spectrum, the funded party might be required to simply reveal the name of the funder in an in-camera setting. At its most intrusive, a disclosure regime could force a claimant to turn over a funding agreement to its adversary, thereby revealing the commercial terms of the arrangement and providing valuable insight into the claimant's ability to withstand a drawn-out litigation battle.

Conceivably, disclosure could include analysis of strengths and weaknesses of the case — after all, a funder's diligence of the proposed claims informs its investment decisions.

However, attorney work-product protections mitigate the risk of these worst-case scenarios. Courts have applied work-product protection to deny unduly invasive discovery requests targeting litigation funding documents, including in Delaware.[2]

Given the range of possible disclosure rules, it is important to be precise about the content of Judge Connolly's standing order. In the first instance, disclosure in his courtroom will consist of three parts: the identity of the funder; whether the funder's "approval is necessary for litigation or settlement decisions in the action," and if so, "the nature of the terms and conditions relating to that approval"; and a "brief description of the nature of the financial interest" of the funder.

Beyond this initial obligation, the standing order contemplates additional discovery upon a showing that the [funder] has authority to make material litigation decisions or settlement decisions, the interests of any funded parties or the class (if applicable) are not being promoted or protected, ... conflicts of interest exist, ... or other such good cause exists.

The standing order's use of general language such as "nature of the financial interest" and "good cause" leaves some doubt about the weight of the burden to be imposed. But broadly speaking, the order appears to contemplate disclosure somewhere in the middle of the spectrum of possibilities.

The funded party's adversary apparently will learn some basic details about the existence and nature of the funding arrangement, but there is no default requirement to produce the funding agreement. To the extent an adversary seeks more intrusive discovery, it must justify its request with an affirmative showing.

In striking this balance, Judge Connolly has followed the lead of the U.S. District Court for the District of New Jersey. That court adopted a new local rule in June 2021 that reads similarly to Judge Connolly's standing order.[3] Notably, the District of New Jersey local rule is applicable districtwide, whereas Judge Connolly's standing order applies to his courtroom only.

Are Disclosure Mandates a Double-Edged Sword?

Litigation funders have traditionally been skeptical of mandatory disclosure proposals in part due to potential ambiguity regarding the circumstances that would reasonably warrant additional discovery.

Judge Connolly's standing order refers to a funder's "authority to make material litigation decisions or settlement decisions." That concern is often raised by litigation finance critics, but it is misplaced for two reasons.

First, professional litigation funders never seek to control litigation decisions — we take care to avoid being the decision maker and place our faith in the track record of our client's legal team. Second, the degree of control or influence that a funder may have in the litigation are simply not matters that are relevant to an adverse party's defense of the case.[4]

In the dwindling number of jurisdictions that still recognize the common law doctrines of champerty and maintenance, the adverse party in the litigation cannot invoke those doctrines as a defense to the claim.[5]

A similar analysis applies to the situation in which "the interests of any funded parties or the class (if applicable) are not being promoted or protected."

Here, again, an adverse party cannot assert a defense on this basis. Admittedly, in the class action context, the logic for disclosure is somewhat stronger, given the court's independent obligation to monitor the protection of class members' interests.

The unique considerations around class actions are reflected in the standing order adopted by the U.S. District Court for the Northern District of California on third-party litigation funding disclosure, which encompasses only cases involving class certifications and other collective actions.[6]

Finally, Judge Connolly's standing order refers to potential conflicts of interest. It is hard to know what conflicts are envisioned. In theory, there is the possibility of the judge having a financial relationship with a funder, with disclosure helping to surface the need for recusal. But if this were indeed the case, in-camera submission would be sufficient, at least at the outset.

Might Disclosure Reduce Access to Justice?

From the perspective of the undercapitalized party, the central concern about mandatory disclosure is that it may create worrisome opportunities for defendants with greater resources to shift attention away from the substance of claims, opening the door to tangential wrangling over the funder's alleged role.

This has the potential to extend the duration and raise the costs of litigation, a burden that — if not shared with a third-party funder — either falls upon contingent fee law firms or, at worst, deters plaintiffs from pursuing claims with merit.

Even with the assistance of third-party funding, small businesses adverse to publicly traded companies and other well-capitalized, well-represented entities have little margin to engage in costly, unproductive discovery and motions battles.

In theory, widespread adoption of Judge Connolly's standing order could reduce access to justice. In practice, and although the sample size is relatively limited, we must concede that we are unaware of broadly negative consequences of the New Jersey rule adopted last June.

It is possible that, at the margin, meritorious cases have not been brought in New Jersey as a result of the change. The impact of both the New Jersey rule and Judge Connolly's standing order will be worth monitoring in the months and years ahead.

On balance, we would recommend that courts treat disclosure on a case-by-case basis, as remains the situation in most federal districts and state courts today. But if disclosure requirements are to be adopted more broadly, we would prefer Judge Connolly's approach to more restrictive potential alternatives.

Read more: Litigation Funding Ethics: An Attorney's Primer

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[1] Chief Judge Colm F. Connolly, Standing Order Regarding Third-Party Litigation Funding Arrangements.

[2] See Charge Injection Techs., Inc. v. E.I. Dupont De Nemours & Co., No. 07C-12-134-JRJ, 2015 Del. Super. LEXIS 166 (Super. Ct. Mar. 31, 2015) (denying a motion to compel production of an unredacted version of a funding agreement that would reveal the financial terms, on the grounds that this was protected work product created because of the litigation).

[3] United States District Court for the District of New Jersey Civ. Rule 7.1.1: Disclosure of Third-Party Litigation Funding.

[4] See, e.g., Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 724-28 (N.D. Ill. 2014).

[5] Id.

[6] Standing Order for All Judges of the Northern District of California: Contents of Joint Case Management Statement.

[7] See LexShares’ litigation finance case studies.