Microsoft Word - CCJ Mandatory Disclosure Book_FINAL

Mandatory Disclosure Rules

for Dispute Financing

Center on Civil Justice

New York University School of Law

The Center on Civil Justice at New York University School of Law is

dedicated to the study of the civil justice system in the United States

and how it can continue to fulfill its purposes. The Center draws on

the unmatched strengths of the NYU Law faculty in the fields of

procedure and complex litigation, as well as on a Board of Advisers

consisting of leading practitioners and judges, to identify the

problems that most deserve further investigation and engagement,

and to fill a void in scholarly and policy analysis.

Leadership

Director

Peter Zimroth

Faculty Co-Directors

Samuel Issacharoff

Troy McKenzie ’00

Arthur R. Miller

Geoffrey Miller

Chair of the Board of Advisers

Sheila Birnbaum ’65

Director of Research and Projects

David Siffert ’09

CENTER ON CIVIL JUSTICE

MANDATORY DISCLOSURE RULES

IN DISPUTE FINANCING

The Center on Civil Justice conducts research on dispute financing

and brings together top academics and practitioners to discuss

related issues. The Center is the host of the Dispute Financing

Library, the world's first public, neutral repository for documents

and media related to third-party litigation funding. The Library

contains statutes, case law, legislative history, agency documents,

articles, news stories, videos, and more.

One of the most significant controversies in the field of dispute

financing is whether financing agreements should be required

to be disclosed during disputes, and, if so, to whom and to what

extent. This volume collects pieces by five different authors with

different perspectives on the need for mandatory disclosure rules.

ARTICLES BY

Elayne Greenberg, William Marra, Victoria Sahani, Anthony Sebok,

and Maya Steinitz

EDITED BY

David Siffert

The Center on Civil Justice hosts the Dispute Financing Library

at www.disputefinancinglibrary.org. Visit the Center's website

at www.centeronciviljustice.org.

Table of Contents

White Paper on Mandatory Disclosure in Third-Party 5

Litigation Finance

Anthony J. Sebok

Follow the Money? A Proposed Approach for 35

Disclosure of Litigation Finance Agreements

Maya Steinitz

Originally published in UC Davis Law Review, Volume 53, Issue 2

What’s So New About Litigation Finance? 81

Disclosure and Regulation of a New Take on An Old Practice

William C. Marra

Hey, Big Spender: Ethical Guidelines for Dispute 105

Resolution Professionals when Parties Are Backed

by Third-Party Funders

Elayne E. Greenberg

First published by Arizona State Law Journal, Volume 51, Issue 1

Please Ask, Please Tell: Disclosing Third-Party 141

Funding in Mediation

Elayne E. Greenberg

Disclosure of Third-Party Funding in International Arbitration 153

Victoria Shannon Sahani

White Paper on Mandatory

Disclosure in Third-Party

Litigation Finance

Anthony J. Sebok

Benjamin N. Cardozo School of Law

and Fellow, Center on Civil Justice

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

ABSTRACT

Third-party litigation finance (TPLF), in which non-parties in litigation give

parties money in exchange for a beneficial interest in the outcome of the litigation,

has increased rapidly in the United States over the past twenty years. Different

markets have emerged involving consumer and corporate plaintiffs, and TPLF has

also been adapted for use in mass litigation (class actions and multi-district

litigation). As a result, observers and courts have proposed that TPLF be disclosed

in litigation in a submission to the court. This paper reviews the arguments for

disclosure (including the different ways in which disclosure could occur and the

costs and benefits of disclosure). This paper argues that many of the arguments for

disclosure are unproven or speculative. It argues that the costs to plaintiffs of

disclosure may be high and that the benefits are likely to be low. It concludes that

two limited types of disclosure may be justified, notwithstanding its conclusion

that broad TPLF disclosure imposes unjustified costs on the civil justice system.

I. INTRODUCTION

A. DEFINING THIRD-PARTY LITIGATION FINANCE

Third-party litigation finance (TPLF) does not have a single meaning.

Most

frequently, TPLF is used to refer to financial support of litigation by a stranger in

exchange for a share of the proceeds generated by that litigation.

TPLF under this

description is identical to the old common law practice of champerty.

However,

TPLF may also refer to practices that are related, but not identical, to champerty.

See Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 CARDOZO L.

REV. 861, 863 n.3 (2015) (discussing range of transactions included in definition of TPLF).

Third-party litigation funding is the commercial financing of an individual or portfolio of lawsuits by a

person or entity that is not a party to the litigation itself. Although contingency fees and insurance

coverage also constitute forms of funding by non-parties, we use the term TPLF in this paper to connote

funding provided by firms on a non-recourse basis, in exchange for a share of the settlement or judgment

proceeds. Jasminka Kalajdzic, Peter Cashman, Alana Longmoore, Justice for Profit: A Comparative

Analysis of Australian, Canadian and U.S. Third Party Litigation Funding, 61 AM. J. COMP. L. 93, 111-12

(2013); see also Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 718 (N.D. Ill. 2014) (TPLF is

“where money is advanced to a plaintiff, and the funder takes an agreed upon cut of the winnings. If the

plaintiff loses the case, the funder may get nothing.”).

See Lazar Emanuel, Overall View of Litigation Funding Industry, N.Y. LEGAL ETHICS REP., Feb. 1,

2011, http://www.newyorklegalethics.com/an-overall-view-of-the-litigation-funding-industry

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

Financial support of litigation by a stranger on a gratuitous basis, not in exchange

for future proceeds and not motivated by a desire for profit, is maintenance.

Maintenance, although rare, is a form of TPLF.

Some observers of the TPLF market use the term to refer to transactions

between nonlawyers and lawyers where the nonlawyer advances capital to the

lawyer in exchange for a future payment based on the lawyer’s receipt of a fee, if

and when that occurs.

This form of TPLF is neither champerty nor maintenance,

because the third-party funder is not providing support directly to a party in

litigation. Many commentators caution against treating capital advances to

lawyers as identical to third-party investment in lawsuit through direct payments

to litigants.

Although the legal and economic circumstances of capital advances

to lawyers are a non-standard form of TPLF, they will be covered in this White

Paper, although distinguished from standard TPLF, which involves a transaction

with a party, not their lawyer.

B. TPLF MARKETS

TPLF, when it is limited to champerty, is divided in the United States between the

commercial and the consumer sectors.

In the former, funding is provided to a

highly sophisticated litigant, usually a corporation, to help pay for the attorneys

and their costs in a commercial dispute.

In the latter, funding is provided directly

to individuals, most of whom have never engaged previously in litigation.

See Max Radin, Maintenance by Champerty, 24 CALIF. L. REV. 48 (1935).

See Anthony J. Sebok, The Inauthentic Claim, 64 VAND. L. REV. 61, 72 (2011).

See Lisa Rickard & Mark Behrens, Third-Party Litigation Funding In U.S. Enters Mainstream, Leading

To Calls For Reform, FINANCIER WORLDWIDE, November 2016,

https://www.financierworldwide.com/third-party-litigation-funding-in-us-enters-mainstream-leading-to-

calls-for-reform (“Third-party litigation funders front money to plaintiffs’ law firms in exchange for an

agreed-upon cut of any settlement or money judgment.”); Radek Goral, The Law of Interest Versus the

Interest of Law, or on Lending to Law Firms, 29 GEO. J. LEGAL ETHICS 253, 256 (2016) (arguing that

capital advances to law firms can be a form of TPLF).

See e.g., Nora Freeman Engstrom, Lawyer Lending: Costs and Consequences, 63 DEPAUL L. REV. 377,

383 (2014) (capital advances to lawyers are “more different than alike” other forms of TPLF); Shannon,

supra note 1 at 863 n.3.

For a complete discussion of capital advances to lawyers, see Anthony J. Sebok, Selling Unearned

Attorneys’ Fees, 2018 ILL. L. REV. 1207.

For a comprehensive review of the TPLF market, see Steven Garber, ALTERNATIVE LITIGATION

FINANCING IN THE UNITED STATES: ISSUES, KNOWNS, AND UNKNOWNS, RAND Institute for Civil Justice,

Law, Finance, and Capital Markets Program Occasional Paper (2010).

Ibid at 13.

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

Importantly, consumer TPLF allows money to flow directly to the litigant,

providing an important source of financial support during the pendency of

litigation.

Funding contracts differ in type between the two sectors. Commercial

TPLF usually pays the funder a percentage of the litigation proceeds upon

resolution of the litigation.

In contrast, in consumer TPLF, the funder receives a

payment based on monthly or semi-annual interest charges determined by the

length of time to the resolution of the litigation.

When TPLF is extended to include direct funding of lawyers, the form of the

transactions are hard to generalize, because there is very little publicly available

information about third-party funding of lawyers. The market seems to be divided

into three types of transactions. First, there are transactions between funders who

advance capital in exchange for a security interest in the unearned fee of a single

case or a small number of identifiable cases.

Second, there are transactions

between larger commercial funders and law firms in which capital advances are

Id. at 9. Wellfleet Advisors, a U.S. commercial TPLF consultancy, published a review of the market in

2019. It estimated that in 2019, “$2.3 billion was committed to commercial litigation finance transactions

with a nexus to the U.S.” Charles Agee and Gretchen Lowe, LITIG. FIN. BUYER’S GUIDE (Westfleet

Advisors 2019) (https://assets.website-files.com/5d3219df242257de8146924c/5dd813e3cd97761

c9b70e0a0_Westfleet%20Buyers%20Guide%202019-11-17.pdf)

In commercial litigation finance contract “the financier provides immediate capital to prosecute the case

in exchange for a percentage of the future recovery.” Joanna M. Shepherd & Judd E. Stone II, Economic

Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance, 47 ARIZ. ST. L.J.

919, 937 (2015). But there is no “one size fits all” commercial litigation finance contract. Commercial

funding is diverse and includes many different types of products. See, e.g. Maya Steinitz, The Litigation

Finance Contract, 54 WM. & MARY L. REV. 455 (2012) and see Shepherd & Stone, Economic

Conundrums in Search of a Solution at 941-42 (on the use of “first money out” and “waterfall” payment

structures).

See Garber, supra note 9 at 9.

The following courts have upheld the assignment of a security interest in an unearned contingent fee in

exchange for a capital advance. Hamilton Capital VII, LLC v. Khorrami, LLP, 2015 NY Slip Op

51199(U), 48 Misc. 3d 1223(A), 22 N.Y.S.3d 137 (Sup. Ct.); Lawsuit Funding, LLC v. Lessoff, 2013 WL

6409971 (NY Sup. Crt. 2013); Kelly, Grossman & Flanagan, LLP v Quick Cash, Inc., 35 Misc. 3d

1205(A) (N.Y. Sup. Ct. 2012); PNC Bank v. Berg, No. 94C-09-208-WTQ, 1997 Del. Super. LEXIS 19, at

*27 (Super. Ct. Jan. 31, 1997). In Lessoff, for example, the agreement “called for Plaintiffs to receive a

portion of the contingent legal fee that Defendants were expected to receive if five specifically named

lawsuits were adjudicated in favor of Defendants' clients.” Lessoff at *2. In addition, in Counsel F in.

Servs. v. Leibowitz, 2013 Tex. App. LEXIS 9252 (13th Dist. Ct. App.), the court recognized contract

rights in an unearned contingent fee defined by the application of an interest rate to a fixed sum.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

secured by “portfolios” of cases.

Third, there have been reports of TPLF provided

to a law firm seeking to be appointed lead counsel in a class action.

II. ARGUMENTS FOR DISCLOSURE

A. INTRODUCTION

It is crucial to distinguish at the outset the difference between proposals for

disclosure of TPLF, in their various forms, and other proposals concerning the

regulation or elimination of TPLF. Disclosure of TPLF relates to mandatory

requirements concerning information about TPLF. The range of other proposals

concerning the regulation and elimination of TPLF is vast, and beyond the scope

of this White Paper. It should be noted, in passing, that some states prohibit all

TPLF and some states have imposed limitations on only consumer TPLF, either as

a matter of judicial interpretation or legislative enactment.

Some of the same

groups that have called for disclosure have also called for other forms of regulation

(or elimination) of TPLF.

See Bentham IMF Unveils New Portfolio Model for Litigation Funding, Bentham IMF (Nov. 16, 2015),

https://www.benthamimf.com/docs/default-source/default-document-

library/portfolioannouncementclean.pdf?sfvrsn=2; Burford Capital 2017 Annual Report at 7,

http://www.burfordcapital.com/wp-content/uploads/2018/03/BUR-28711-Annual-Report-2017-web.pdf;

See Victoria Shannon Sahani, Reshaping Third-Party Funding, 91 TUL. L. REV. 405, 409-10 (2017) (on

portfolio TPLF).

See Gbarabe v. Chevron Corp., No. 14-cv-00173, 2016 WL 4154849 (N.D. Cal. Aug. 5, 2016).

See Prospect Funding Partners, LLC v. Williams, No. 27-CV-13-8745, 2014 Minn. Dist. LEXIS 2 (Dist.

Ct. Hennepin County, Minn., May 5, 2014) (noting Minnesota’s long-standing prohibition on TPLF).

Oasis Legal Fin. Grp., LLC v. Coffman, 361 P.3d 400 (Colo. 2015) (placing consumer TPLF contracts

under state consumer credit law). Four states have passed legislative limits on the cost of consumer TPLF:

Ark. SB 882 (2015) (to be codified at Ark. Code § 4-57-109(a)(2)) (effective Apr. 1, 2015) (maximum

rate of 17% per annum); Ind. Code 24-4.5-3-202 (effective July 1, 2016) (maximum rate of 36%); Tenn.

Code Ann. § 47-51-101 et seq. (effective July 1, 2015) (maximum rate of 36% per year for a maximum of

three years); and W. Va. Code §§ 46A-6N-9(a) (maximum rate of 18% per year) (effective June 5, 2019).

U.S. CHAMBER INST. FOR LEGAL REFORM, SELLING LAWSUITS, BUYING TROUBLE: THIRD-PARTY

LITIGATION FUNDING IN THE UNITED STATES (2009), http://www.instituteforlegal

reform.com/research/selling-lawsuits-buying-trouble-the-emerging-world-of-third-party-litigation-

financing-in-the-united-states

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

B. ARGUMENTS FOR DISCLOSURE IN COMMERCIAL TPLF

Arguments for disclosure of TPLF have arisen in two waves. In the first wave,

defendants have attempted to obtain documents related to TPLF from adverse

parties in litigation.

Typical of such a request was that of the defendant in Miller

UK Ltd. v. Caterpillar, Inc., who asked for “the actual contract with Miller’s [the

plaintiff] funder and those documents provided by Miller to it and any other third-

party lender from which Miller sought funding for this case.”

The reasons for

requesting the documents were that they would be relevant to helping the

defendant determine whether it had a defense of champerty under state law, who

was the real party in interest under Rule 17(a) of the Federal Rules of Civil

Procedure (“FRCP”), and that the documents contained material relevant to the

underlying issue of liability and damages.

Most courts that have been asked to

enforce discovery motions to disclose TPLF-related documents have rejected the

requests on the ground that the documents contain attorney work product, and

the conditions for waiver of work product have not been satisfied per FRCP Rule

26(b)(3)(B).

On a number of occasions, courts have rejected discovery of TPLF-

related documents on the ground that the requested documents were not relevant

to the underlying litigation.

See Grace M. Giesel, Alternative Litigation Finance and the Work-Product Doctrine, 47 WAKE FOREST

L. REV. 1083 (2012); Grace M. Giesel, Alternative Litigation Finance and The Attorney-Client Privilege,

92 DENV. U.L. REV. 95 (2014).

17 F. Supp. 3d 711, 713 (N.D. Ill. 2014).

Ibid. at 719 and 739–40.

Id. at 736 (“Because the work-product doctrine serves to protect an attorney's work product from falling

into the hands of an adversary, a disclosure to a third party does not automatically waive work-product

protection.”); and see Ala. Aircraft Indus. v. Boeing Co., No. 2:16-mc-01216-RDP (N.D. Ala., Feb. 9,

2018); Lambeth Magnetic Structures, LLC v. Seagate Tech. (US) Holdings, Inc., 2017 U.S. Dist. LEXIS

215773 (W.D. Pa. Dec. 19, 2017); Viamedia, Inc. v. Comcast Corp., 2017 U.S. Dist. LEXIS 101852 (N.D.

Ill. June 30, 2017); Odyssey Wireless, Inc. v. Samsung Electronics Co., Ltd, 2016 U.S. Dist. LEXIS

188611, (S.D. Cal. Sept. 20, 2016); United States v. Homeward Residential, Inc.,2016 U.S. Dist. LEXIS

(E.D. Tex. Mar. 15, 2016); United States v. Ocwen Loan Serv., LLC, 2016 U.S. Dist. LEXIS 32967, (E.D.

Tex. Mar. 15, 2016); In re: Int’l Oil Trading Co., LLC, 548 B.R. 825, 832 (Bankr. S.D. Fla. 2016; Charge

Injection Techs., Inc. v. E.I. Dupont De Nemours & Co., 2015 Del. Super. LEXIS 166 (Super. Ct. Mar.

31, 2015); Carlyle Inv. Mgmt. L.L.C. v. Moonmouth Co. S.A., 2015 Del. Ch. LEXIS 42 (Feb. 24, 2015);

Devon IT, Inc. v. IBM Corp., 2012 U.S. Dist. LEXIS 166749 (E.D. Pa. Sep. 27, 2012); Mondis Tech., Ltd.

v. LG Elecs., Inc., 2011 U.S. Dist. LEXIS 47807 (E.D. Tex. May 4, 2011); but see Acceleration Bay LLC

v. Activision Blizzard, Inc., 2018 U.S. Dist. LEXIS 21506 (D. Del. Feb. 9, 2018) (rejecting the argument

that TPLF documents were protected under the work product doctrine).

See Benitez v. Lopez, 2019 U.S. Dist. LEXIS 64532, at *2-3 (E.D.N.Y. Mar. 14, 2019) (“In this case,

the financial backing of a litigation funder is as irrelevant to credibility as the Plaintiff's personal financial

wealth, credit history, or indebtedness. That a person has received litigation funding does not assist the

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

The second wave has come in the form of proposals to amend state and federal

law. Typical of these proposals is the following, which was proposed by the U.S.

Chamber Institute for Legal Reform to FRCP 26(a)(1)(A) in 2017:

a party must, without awaiting a discovery request, provide to

the other parties . . . for inspection and copying as under Rule 34,

any agreement under which any person, other than an attorney

permitted to charge a contingent fee representing a party, has a

right to receive compensation that is contingent on, and sourced

from, any proceeds of the civil action, by settlement, judgment

or otherwise.

This proposal is identical to one which the U.S. Chamber proposed in 2014 and

2016.

A nearly identical proposal was recently passed in Wisconsin:

Third-party agreements. Except as otherwise stipulated or ordered by the

court, a party shall, without awaiting a discovery request, provide to the other

parties any agreement under which any person, other than an attorney permitted

to charge a contingent fee representing a party, has a right to receive

compensation that is contingent on and sourced from any proceeds of the civil

action, by settlement, judgment, or otherwise.

factfinder in determining whether or not the witness is telling the truth.”); In re Valsartan N-

Nitrosodimethylamine (NDMA) Contamination Prods. Liab. Litig., 2019 U.S. Dist. LEXIS 160051, at *29

(D.N.J. Sep. 18, 2019) (“The Court finds that litigation funding is irrelevant to the claims and defenses in

the case and, therefore, plaintiffs' litigation funding is not discoverable.”); MLC Intellectual Property LLC

v. Micron Technology, Inc, 2019 U.S. Dist. LEXIS 2745 at *2 (N.D. Ca. Jan. 7, 2019) (“The Court

concludes that [defendant] is not entitled to the discovery it seeks because it is not relevant.”); Yousefi v.

Delta Electric Motors, Inc, 2015 U.S. Dist. LEXIS 180843, at *2 (W.D. Wash. May 11, 2015) (“Whether

plaintiff is funding this litigation through savings, insurance proceeds, a kickstarter campaign, or

contributions from [a] union is not relevant to any claim or defense at issue.”). and see Miller, 17 F. Supp.

3d at 723.

See Letter from U.S. Chamber Institute for Legal Reform et al. to Rebecca A. Womeldorf, Secretary of

the Committee on Rules of Practice and Procedure of the Administrative Office of the United States

Courts, June 1, 2017, Appendix B, http://www.uscourts.gov/sites/

default/files/17-cv-o- suggestion_ilr_et_al_0.pdf (“Chamber Letter”).

See Report to the Standing Committee of the Advisory Committee on Civil Rules, Dec. 6, 2017 at 247

(“Standing Committee Report”).

2017 Assembly Bill 773 (“SECTION 12. 804.01 (2) (bg) is created to read”). The bill was signed into

law on Apr. 2, 2018.

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

The proposal to amend Rule 26 has been explained in materials from various

tort reform organizations which are publicly available. The letters from the U.S.

Chamber and the Request for Rulemaking to the Advisory Committee on Civil

Rules from Lawyers for Civil Justice raise multiple concerns about TPLF.

These

sources suggest that disclosure would protect “the integrity of the adversarial

process”

in the following ways:

1. Expose violations of laws against champerty, where they exist

;

2. Expose violations of the prohibition against fee-splitting between lawyers

and non-lawyers

;

3. Expose agreements which create impermissible conflicts of interest between

lawyers, funders and clients

;

4. Expose conflicts of interests between judges and funders

;

5. Expose efforts by funders to control litigation

;

6. Expose contract terms that might “undermine” settlement

;

7. Allow judges to weigh the resources available to parties to determine

discovery

;

8. Allow judges to know who the real party in interest is, if sanctions are

imposed

;

See Chamber Letter and Request for Rulemaking to the Advisory Committee On Civil Rules, Aug. 10,

2017, from Lawyers for Civil Justice, http://www.lfcj.com/uploads/1/1/2/0/

112061707/lcj_request_for_rulemaking_concerning_mdl_cases_8-10-17.pdf (“Request for Rulemaking).

See Chamber Letter at 11.

Ibid.

Id. at 13.

Id. at 14.

Id. at 15.

Id. at 16.

Id. at 18.

Id. at 19. This is the “proportionality” test under FRCP Rule 26. See Hon. Elizabeth D. Laporte &

Jonathan M. Redgrave, A Practical Guide to Achieving Proportionality Under New Federal Rule of Civil

Procedure 26, 2015 FED. CTS. L. REV. 19 (2015). The irony of defendants raising this argument will be

explored below at text accompanying n.85.

Id. at 19.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

9. Allow judges to know whether a third party in addition to plaintiffs are

interested in the result of a class or mass action

;

10. Allow “parity of financial disclosure” similar to Rule 26’s requirement that

parties (usually defendants) disclose the existence and terms of liability

insurance

;

11. Allow the public to know whether a third party with a non-economic, social

or political motive is using a party in litigation; in other words, to make it harder

for someone like Peter Thiel to fund a lawsuit against a defendant like Gawker

Media.

As the Standing Committee of the Advisory Committee on Civil Rules noted in

a report, some of the putative justifications for disclosure are moot if the problem

that they are supposed to cure does not exist in practice, such as the problem that

TPLF allows funders to control litigation (something funders deny) or undermine

settlement (again, something funders deny).

Other justifications may be

possible, such as conflict of interests between judges and funders where a judge

owns shares in a commercial funder, or the risk that a TPLF contract is in violation

of state law, but then there is a question of costs versus benefits — whether a rule

that requires compulsory disclosure is worth the costs that it would impose.

C. ARGUMENTS FOR DISCLOSURE IN CONSUMER TPLF

The arguments reviewed above for disclosure have been raised primarily by critics

of commercial TPLF and have received responses from primarily commercial

funders such as Burford and Bentham. Consumer TPLF would be affected by the

disclosure rules proposed for Rule 26, and will be affected by the new disclosure

rule adopted in Wisconsin, but the consumer TPLF companies have not expressed

much of an opinion about disclosure. This may be for a number of reasons, the

Id. at 20.

Id. at 22. Many of these points are repeated in the Request for Rulemaking at 9–10.

See Andrew Ross Sorkin, Peter Thiel Is Said to Bankroll Hulk Hogan’s Suit Against Gawker, N.Y.

TIMES, May 25, 2016 at B3. According to sources present at the debate of the Wisconsin bill, the “Peter

Thiel” problem was raised by proponents of the bill to convince some skeptics.

Standing Committee Report at 248 (“Third-party funders meet [some of] these arguments by direct

denial. None of them . . . are true.”).

Ibid at 250.

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

most significant that consumer TPLF firms are much more concerned with other

changes to the law of TPLF that are separate from proposals concerning disclosure.

Consumer TPLF companies are concerned with changes to the law that would

treat TPLF contracts with consumers as loans or as advances subject to limits

similar to those imposed by usury law or other consumer credit laws.

The

automatic disclosure requirement adopted by Wisconsin will apply to a $2,500

consumer TPLF contract as well as a $2 million commercial TPLF contract, but it

seems that this extra burden was not of great concern to the consumer TPLF

companies. Their main concern was to remove from the bill language which would

have defined TPLF as “lending,” which might have brought their contracts within

Wisconsin’s usury law.

They were successful.

In West Virginia, the 2019 law

that caps the price of consumer TPLF at 18% per annum also requires a mandatory

disclosure; again, it appears that it is the price cap, not the mandatory disclosure,

that led the consumer TPLF companies to oppose the legislation.

One reason that

consumer TPLF firms may not be concerned with disclosure proposals is that the

existence of TPLF may be of little or no interest to the adverse party, since TPLF

contracts are based on templates and their terms reveal nothing about the

underlying case or any lawyer’s work product.

Disclosure in the context of consumer TPLF can mean more than allowing

adverse parties to know about the existence of a funding agreement and the

content of that agreement. It can mean regulatory requirements that funders

See, e.g., Jenna Wims Hashway, Litigation Loansharks: A History of Litigation Lending and a Proposal

to Bring Litigation Advances Within the Protection of Usury Laws, 17 ROGER WILLIAMS U. L. REV. 750

(2012). The adoption of usury-type regulation has caused consumer TPLF firms to leave Colorado and

Tennessee, states where they were once active. See, e.g., Andrew G. Simpson, Litigation Financing Firm

Exits Tennessee As New Law Goes Into Effect, INS. J., July 3, 2014,

http://www.insurancejournal.com/news/southeast/2014/07/03/333772.htm

John Breslin, Judiciary Committee Approves Amended Legal Reform Bill In Wisconsin, LEGALNEWS-

LINE, Feb. 21, 2018, https://legalnewsline.com/stories/511348497-judiciary-committee-approves-

amended-legal-reform-bill-in-wisconsin

Civil Justice Reform Passes Assembly, Held Up in the Senate, WIS. MANUFACTURERS & COM., Mar. 1,

2018, https://www.wmc.org/uncategorized/civil-justice-reform-passes-assembly-held-up-in-the-senate/

W.VA. CODE §46A-6N-6 (Third-party agreements) (“Except as otherwise stipulated or ordered by the

court, a party shall, without awaiting a discovery request, provide to the other parties any agreement under

which any litigation financier, other than an attorney permitted to charge a contingent fee representing a

party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil

action, by settlement, judgment, or otherwise.”).

Further, given that consumer TPLF concerns cases that rarely go to trial (or even progress into

significant discovery), it may be that, to the extent that funders are concerned that judges may respond to

the existence of funding, the risk of judicial notice of consumer TPLF is extremely low.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

provide information to the consumer. It can also mean regulatory requirements

that funders provide information to a public agency (either state or federal).

On February 17, 2005, the Attorney General of the State of New York and nine

New York-based consumer TPLF firms entered into an “Assurance of

Discontinuance” agreement that resulted from negotiations between the Attorney

General and the LFCs.

The main purpose of the N.Y. Agreement was to put into

place certain disclosure requirements that TPLF firms would have to provide to

consumers in the State of New York. The N.Y. Agreement imposed nine

requirements, modeled after standardized credit card and mortgage applications.

The key requirements were a clear statement of the financial terms of the

agreement, including a statement of (a) the total amount being advanced; (b) an

itemization of one-time fees broken out item by item (e.g., application, processing,

attorney review, broker, etc.); (c) the annual percentage interest rate charged and

how often interest compounds; and (d) the total amount the borrower will repay

broken out by six-month intervals and carried forward to thirty-six months,

including all fees and the minimum payment amount, as well as a five-business-

day period to cancel the contract without suffering a penalty. It does not impose

an upper limit on how much the funder can charge in interest, fees, or other costs.

Since 2005, the two major consumer TPLF trade organizations have adopted

voluntarily codes of conduct that parallel the N.Y. Agreement.

Five states, Maine,

Nebraska, Ohio, Oklahoma, and Vermont, have adopted disclosure laws that, with

some variation, endeavor to provide consumers protection through forcing TPLF

firms to provide information similar to that disclosed under the N.Y. Agreement.

Indiana has adopted a law with disclosure requirements similar to those of the

N.Y. Agreement, but since it also has a cap on the price of consumer TPLF, the

BUREAU OF CONSUMER FRAUDS AND PROTECTION, ATTORNEY GEN. OF THE STATE OF N.Y.,

ASSURANCE OF DISCONTINUANCE PURSUANT TO EXECUTIVE LAW § 63(15) 4-7 (2005) (“N.Y.

Agreement”), available at https://www.mighty.com/blog/nyattorneygeneralplaintifffundingagreement

See The ALFA Code of Conduct, AM. LEGAL FIN. ASS’N, https://americanlegalfin.com/alfa-code-of-

conduct/ and Industry Best Practices, ALLIANCE FOR RESPONSIBLE CONSUMER LEGAL FUNDING,

http://arclegalfunding.org/industry-best-practices/

See ME. REV. STAT. ANN. tit. 9-A, § 12-101 (effective Jan. 1, 2008); NEB. REV. STAT. § 25-3302(1), (4)

(effective Apr. 13, 2010); OHIO REV. CODE ANN. § 1349.55(A)(1) (effective Aug. 27, 2008); OKLA. STAT.

tit. § 14A-3-801(6) (effective May 29, 2013) and 8 VT. STAT. ANN. tit.§§ 2251–2260 (effective July 1,

2016). Some of these legislative schemes also protect the consumer by forbidding certain substantive

contract terms, such as prohibiting compounding interest monthly (e.g., Maine and Nebraska) or

prohibiting mandatory arbitration (Vermont).

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legislation is not seen primarily as a disclosure law, and it was only grudgingly

endorsed by one of the two TPLF trade organizations.

In addition to forcing a clear statement of existing contract terms, which is

what the N.Y. Agreement does, disclosure could also include additional

information not contained in the contract, and it could include disclosure to third

parties other than the consumer or the defendant, such as a state or federal agency

tasked with collecting information. Up to now, proposals under the heading of

“disclosure,” which have been promoted mostly by consumer TPLF trade groups,

have focused on making existing contract terms as clear as possible. For example,

the proposed legislation currently favored by ALFA in New York would require “an

itemization of one-time charges; the maximum total amount to be assigned by the

consumer to the company, including the funded amount and all charges; and a

payment schedule to include the funded amount and charges, listing all dates and

the amount due” at the end of six-month periods.

Recent empirical research into the behavior of the consumer TPLF suggests

that, while the price of consumer TPLF is not as high as its critics have suggested,

the market is extremely opaque and consumer may not be receiving the same final

price for the sale of their asset.

Disclosure of whether consumer TPLF companies

have adjusted the final price charged to the consumer after the resolution of the

consumer’s lawsuit, and the actual average price charged to consumers, is

something that consumers and regulators may benefit from knowing. Mandatory

disclosure of this data is another form of disclosure, different from either the

disclosure to adverse parties urged in the context of commercial TPLF and

IND. CODE 24-4.5-3-202 (effective July 1, 2016) (maximum rate of 36%) and see Victor Li, Indiana and

Vermont Regulate Consumer Litigation Funding, ABA JOURNAL, July 7, 2016,

http://www.abajournal.com/news/article/indiana_and_vermont_regulate_consumer_litigation_funding (on

ARC’s views of Indiana TPLF law)

See Consumer Litigation Funding Act, S.B. S3651, 2019 Leg., Reg. Sess. (N.Y. 2019), introduced by

Sens. Comrie and Ranzenhofer, February 11, 2019 at §899-GGG (“Disclosures”). The proposed

legislation would also require consumer TPLF firms to report the “number of consumer litigation

fundings” by each firm; a “summation of funded amounts”; the “annual percentage charged to each

consumer where repayment was made” and these figures would be made available to the public. Ibid at

899-LLL (“Reporting”).

See Ronen Avraham & Anthony J. Sebok, An Empirical Investigation of Third Party Consumer

Litigation Funding, 104 CORNELL L. REV. 1133 (2018) and Ronen Avraham & Anthony J. Sebok,

Americans Should Have The Proper Protections When Bringing Lawsuits, THE HILL, Mar. 29, 2018,

http://thehill.com/opinion/judiciary/380891-americans-should-have-the-proper-protections-when-

bringing-lawsuits

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

disclosure of contract terms which has been the primary focus of consumer TPLF

trade groups.

D. ARGUMENTS FOR DISCLOSURE OF LAW FIRM FINANCING

As noted above, proponents of disclosure of commercial TPLF argue that it would

help enforce ethical prohibitions on fee-splitting.

This justification for disclosure

has been challenged by some academic experts in legal ethics, who argue that it is

highly unusual for the federal rules of procedure to be used to promote the

enforcement of rules of professional responsibility, which are clearly the province

of the states and (as in the case of so-called fee-splitting) may not mean the same

thing in all states.

Proponents of disclosure have additional arguments that do not depend on

using federal rules of civil procedure to support or reinforce state law. They argue

that in the context of mass and class federal actions, disclosure of third-party

funding of law firms promotes the ends of the federal rules under which the

lawyers operate.

In the context of class action, proponents of disclosure have argued that the

existence of TPLF is necessary for a court to evaluate the adequacy of class counsel

under FRCP 23(a)(4)’s adequacy-of-representation prerequisite.

The argument

has found support in Gbarabe v. Chevron Corp., where a lawyer seeking

appointment as lead counsel was required to disclose the terms of a commercial

TPLF agreement.

Furthermore, the same federal district court in which Gbarabe

was decided has adopted a local rule requiring the disclosure of TPLF in cases

See, e.g. Chamber Letter at 13.

See Letter to the Standing Committee, Sept. 26, 2017 from Professors W. Bradley Wendel and Anthony

J. Sebok on Proposed Amendment to Rule 26. The New York City Bar Association’s Working Group on

Litigation Funding has issued a report which includes, among other recommendations, two competing

recommendations about amendments to N.Y.R.P.C. 5.4(a) to allow law firm financing. See Report to the

President by the New York City Bar Association Working Group On Litigation Funding, (February 28,

2020),

http://documents.nycbar.org/files/Report_to_the_President_by_Litigation_Funding_Working_Group.pdf

One (“Proposal A”) would require the client’s informed consent to the financing, and therefore disclosure.

Whether lawyer-directed TPLF should be disclosed to the client, either to enable informed consent or for

some other purpose, is outside the scope of this essay.

See, e.g., Chamber Letter at 21.

2016 U.S. Dist. LEXIS 103594 (N.D. Cal. Aug. 5, 2016).

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brought under FRCP Rule 23.

At least one other federal district court is

considering a similar step.

The motivation behind the disclosure rule adopted by

the Northern District of California is not public, and there is reason to believe that

the judges who adopted the rule were motivated by concerns beyond law firm

finance in class actions, or only law firm finance.

In 2019, a bill was introduced

in the United States Senate which would amend the portion of the United States

Code pertaining to class actions to require disclosure of TPLF.

The bill’s

disclosure requirements are similar to those required by the Northern District of

California. In a press release, the senators sponsoring the bill said that TPLF in

class actions may create a risk of “conflicts of interest” which could be addressed

by disclosure.

Finally, some reformers have focused on disclosure in litigation connected to

multi-district litigation, or MDLs.

The policy concern behind disclosure in

connection with MDLs is — according to its proponents — the risk that TPLF

companies are financing so-called “lead generators” or “aggregators.”

The facts

behind this concern are hard to evaluate, since the practices lumped under the

terms “lead generator” or “aggregator” are vague and involve activities that may

See Standing Order for all Judges of the Northern District of California, Contents of Joint Case

Management Statement, § 19 (Jan. 2017), requiring that “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.”

See Ben Hancock, Bentham Hires Yetter Coleman Partner as It Expands to Texas, TEXAS LAWYER,

Feb. 21, 2017, https://www.law.com/texaslawyer/almID/1202779591965/Bentham-Hires-Yetter-

Coleman-Partner-as-It-Expands-to-Texas/ (“Ron Clark, chief judge of the Eastern District of Texas, told

TEXAS LAWYER that jurists in his division may follow the Northern District of California’s lead and

consider similar measures.”).

See Ben Hancock, Northern District, First in Nation, Mandates Disclosure of Third-Party Funding in

Class Actions, THE RECORDER, Jan. 23, 2018,

https://www.law.com/therecorder/almID/1202777487488/Northern-District-First-in-Nation-Mandates-

Disclosure-of-ThirdParty-Funding-in-Class-Actions (“The court’s Civil Rules Committee, chaired by

Judge Richard Seeborg, had proposed a broader rule that would have required the automatic disclosure of

funding agreements in any matter before the court” but it was narrowed.).

The Litigation Funding Transparency Act of 2019, section 2 (introduced by Sens. Grassley (sponsor),

Cornyn, Sasse and Tillis on Feb. 13, 2019).

Grassley Leads Lawmakers in Introducing Bill to Improve Transparency of Third Party Financing in

Civil Litigation, Feb. 13, 2019, https://www.grassley.senate.gov/news/news-releases/grassley-leads-

lawmakers-introducing-bill-improve-transparency-third-party

See Rules for Rulemaking at 10 - 11.

Ibid.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

be performed by lawyers and nonlawyers.

In general, these third parties help

lawyers seeking to participate in MDLs of other mass actions find clients.

Unlike

class actions, which may provide for more transparency (in theory) because of the

fiduciary-type power of a federal judge under FRCP 23, MDLs are relatively

opaque.

The connection between TPLF and disclosure is that if defendants and

courts in MDLs can learn about the interest third parties have in lead generation,

the risk of frivolous and fraudulent claiming will be reduced.

For this reason, the

Lawyers for Civil Justice have, in addition to supporting the amendment to FRCP

26 proposed by the Institute for Legal Reform, proposed amending Rule 26 so that

“any third-party claim aggregator, lead generator, or related business or

individual, who assisted in any way in identifying any potential plaintiff(s)” would

be disclosed.

The one fact that is missing from the policy arguments for

See Paul M. Barrett, Need Victims for Your Mass Lawsuit? Call Jesse Levine, BLOOMBERG

BUSINESSWEEK (Dec. 12, 2013), http://www.bloomberg.com/bw/articles/2013-12-12/mass-tort-lawsuit-

lead-generator-jesse-levine-has-victims-for-sale (examining the mass tort lead generation business).

See Jason Rathod & Sandeep Vaheesan, The Arc and Architecture of Private Enforcement Regimes in

the United States and Europe: A View Across the Atlantic, 14 U.N.H. L. REV. 303, 360 (2016)

(“[A]ttorneys litigating these cases assemble large inventories, usually with the assistance of a cottage

industry of lead generation and referral firms.”).

See Elizabeth Chamblee Burch and Margaret S. Williams, Judicial Adjuncts in Multidistrict Litigation,

Colum. L. Rev. (forthcoming 2021), University of Georgia School of Law Legal Studies Research Paper

No. 2020-22, Available at SSRN: https://ssrn.com/abstract=3610197 and Francesca Mari, The Lawyer

Whose Clients Didn’t Exist, THE ATLANTIC (May 2020).

See Rule for Rulemaking at 11–12. At least one MDL court has allowed (limited) discovery of TPLF-

related materials (although not necessarily the TPLF contracts themselves). See In re Am. Med. Sys., 2016

U.S. Dist. LEXIS 84838 (S.D. W. Va. May 31, 2016) at *15:

[M]uch of the information sought by AMS’s subpoenas is relevant . . . AMS

reasonably seeks to understand the motivation behind the plaintiffs’ decisions to

undergo corrective surgeries and how those surgeries were funded. A rational place

to start is with the beginning of the money trail — the first entity interacting with

the plaintiffs before the decision to have a corrective surgery is made.

See ibid at 12:

In order to provide transparency to courts and parties, the Committee should amend

Rule 26(a)(1)(A)(i) to include the following required disclosure:

The name and, if known, the address and telephone number

of each individual likely to have discoverable

information…and if relevant, a disclosure of any third-party

claim aggregator, lead generator, or related business or

individual, who assisted in any way in identifying any

potential plaintiff(s), and if relevant, the identification of any

plaintiff that was recommended, referred, or otherwise

directed to plaintiff’s counsel based on a recommendation,

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disclosure of TPLF financing in connection with lead generation in MDLs (or any

litigation, for that matter) is the degree to which commercial or consumer TPLF

firms finance companies (or lawyers) that specialize in identifying plaintiffs for

mass tort cases — the question of whether (and how) to respond to the recent

emergence of MDLs in the mass tort space should not be conflated with the

question of whether TPLF is a casue of the former.

Despite the very tenuous connection between MDL lead generation and TPLF

firms, the Advisory Committee on Civil Rules chose to continue to consider

amendments to FRCP 26 in the context of MDLs.

Rather than endorse the

disclosure recommendation urged by groups like the Institute for Civil Justice, the

committee asked the Subcommittee on MDLs to gather more information about

TPLF.

It is not clear why the question of disclosure of TPLF was given to the

Subcommittee on MDLs.

It is also not clear that the committee views itself as

limited in future discussions over FRPC 26 to disclosure relating only to MDLs (or

class actions).

The only thing that is clear is that the Subcommittee on MDLs is

referral, or other information gathered from such a third party

claim aggregator, lead generator, or related business or

individual.

See Amanda Bronstad, Federal Rules Advisory Panel to Eye Litigation Financing—Sort Of, NAT’L

L.J., Nov. 8, 2017, https://www.law.com/nationallawjournal/sites/

nationallawjournal/2017/11/08/federal-judicial-panel-to-consider-litigation-financing-sort-of/ (“A federal

judicial body plans to look into rules changes concerning disclosure of third-party financing of litigation—

a move praised by the U.S. Chamber of Commerce—but the breadth of that probe could be limited.”).

See March 2018 Report of the Standing Committee to the Chief Justice:

The advisory committee has received a suggestion to add a new Rule 26(a)(1)(A)(v)

that would require automatic 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 receive compensation that is contingent on, and sourced from, any

proceeds of the civil action, by settlement, judgment or otherwise. . . . The

committee referred the issue to the MDL subcommittee, since one of the MDL

proposals discussed above explicitly calls for disclosure of third party financing

agreements. Additionally, such funding agreements are often used in MDL

proceedings. The subcommittee will study the issue in an effort to determine

whether it is something that should be pursued.

At least one member of the Advisory Committee held the view that TPLF is overrepresented in MDLs.

See Draft Minutes, Civil Rules Committee, November 7, 2017 in Civil Rules Advisory Committee

Agenda Book (Apr. 2018) at lines 692–93 (“A judge suggested that third-party funding seems to be an

issue primarily in patent litigation and in MDL proceedings.”).

See Standing Committee Report at 250 (emphasis added):

The Committee concluded that these questions can be delegated, at least initially, to

the Subcommittee appointed to develop information about the MDL proposals. One

of the MDL proposals explicitly incorporates the proposal for disclosure of third-

party financing agreements. There is reason to believe that MDL litigation is one of

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

currently the institutional focal point of any future efforts to adopt new disclosure

requirements on TPLF in the federal rules.

The Litigation Funding Transparency Act of 2019, discussed above, would also

require automatic disclosure of any agreement which provides for payment to a

commercial third party contingent upon proceeds being generated in a case

within the jurisdiction of 28 U.S. Code § 1407, the federal law governing

multidistrict litigation.

The policy justification for extending the scope of

disclosure beyond class actions to MDLs in the Act is not clearly stated by its

sponsors, but supporters of the Act have suggested that TPLF in MDLs “allows

hedge funds to . . . charge sky-interest rates — sometimes up to 200 percent — and

leave plaintiffs [in MDLs] with settlements of just pennies on the dollar.”

This is

not an argument for disclosure in MDLs per se, as opposed to disclosure in any

federal case (which is what the proponents of changes in Rule 26 have

recommended) and it is not clear how disclosure would address the evil of high

costs of litigation financing to individual plaintiffs, since a federal judge has no

authority to determine compensation for individuals in an MDL, although they

can monitor the allocation of common benefit fees where there is an agreement by

all parties to settle while a court retains jurisdiction under 28 U.S. Code § 1407.

III. COST AND BENEFITS OF DISCLOSURE

A. INTRODUCTION

Before discussing the costs and benefits of disclosure of TPLF, it must be noted

that there is little empirical data upon which to base an evaluation. As mentioned

above, the only law or court rules specifically intended to require disclosure of

the prominent occasions for third-party funding. This Subcommittee’s work will

prepare the way for a determination whether third-party financing disclosure should

be pursued.

See The Litigation Funding Transparency Act of 2019, section 3.

See Lisa A. Rickard, Who’s Behind The Curtain? Congress Needs To Require Third-Party Litigation

Disclosure, DES MOINES REGISTER, June 4, 2018.

See Morris A. Ratner, Achieving Procedural Goals Through Indirection: The Use of Ethics Doctrine To

Justify Contingency Fee Caps in MDL Aggregate Settlements, 26 GEO. J. LEGAL ETHICS 59, 59 - 60

(2013).

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TPLF to the court and an adverse party are the recently enacted Wisconsin law and

the local rule adopted by the Northern District of California.

Other local rules that require the disclosure of a party interested in the outcome

of litigation, such as Federal Rule of Appellate Procedure 26.1 and Federal Civil

Rule 7.1, which concerns corporate disclosure statements, have always existed, but

the idea that they cover TPLF is new, paralleling the recent rise of TPLF in the

market. The Advisory Committee reviewed existing local rules of federal circuit

and district courts and concluded that some of these courts have versions of Rules

26.1 and 7.1 which require disclosure of funding, although none of them were

drafted explicitly with that purpose and it is not clear whether these rules have

been interpreted until now to require disclosure of TPLF.

The committee

concluded that six federal appellate courts had local rules that extended Rule 26.1

in some way that might require disclosure of the existence of TPLF, such as the

local rule in the Eleventh Circuit, which would require disclosure of must contain

a complete list of all “persons, associations of persons, firms, partnerships, or

corporations that have an interest in the outcome of the particular case or

appeal.”

The same memorandum also noted that, while no other district court

“has (yet) followed the Northern District of California’s lead to identify expressly

class action lawsuits as a civil action in which the disclosure of litigation funders

is required. . . 23 other district courts require that parties identify litigation funders

in any civil action under local rules related to Federal Rule of Civil Procedure 7.1.”

These district courts, like the circuit courts, have local rules that extend Rule 7.1

and require disclosure of any person or entity (other than the parties to the case)

that has a “financial interest in the outcome of the proceeding.”

According to the

memorandum, the “plain language of these local rules encompasses litigation

See Memorandum from Patrick A. Tighe, Rules Law Clerk: Survey of Federal and State Disclosure

Rules Regarding Litigation Funding, February 7, 2018 (hereafter “Survey of Disclosure Rules”).

Appellate Rule 26.1 provides that “[a]ny nongovernmental party to a proceeding in a court of appeals

must file a statement that identifies any parent corporation and any publicly held corporation that owns

10% or more of its stock or states that there is no such corporation.”

11th Cir. L. R. 26.1-2(a) and see Andrew Strickler, 3rd-Party Funders Must Be Disclosed In 6 Fed.

Appeals Courts, LAW360, Mar. 27, 2018, https://www.law360.com/legalethics/

articles/1026646/3rd-party-funders-must-be-disclosed-in-6-fed-appeals-courts

See Survey of Disclosure Rules at 4, supra note 76. FRCP 7.1 provides in relevant part that any

“nongovernmental corporate party must file 2 copies of a disclosure statement that: (1) identifies any

parent corporation and any publicly held corporation owning 10% or more of its stock; or states that there

is no such corporation.”

Survey of Disclosure Rules at 4.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

funders because a litigation funder will receive proceeds from the settlement or

judgment if the contracting party prevails,” but although some might require a

description of the “nature of litigation funder’s financial interest,” none require

disclosure of the litigation finance agreement itself, something the proposed

amendment to Rule 26 would require.

As the memorandum notes, the stated justification for the disclosure

requirements in the circuit courts “is to help judges assess recusal and

disqualification.”

The disclosure requirements in the local rules in the district

courts, similarly, are intended “to assist judges with assessing possible recusal or

disqualification.”

The memorandum notes that commercial TPLF companies

have not, up to now, considered the disclosure rules discussed in the

memorandum to require disclosure of TPLF, and the memorandum cites only one

recent episode where TPLF was revealed as a result of court-ordered compliance

with a version of Rule 7.1.

Further, although it would have been outside of the

scope, the memorandum does not discuss how likely disclosure under the rules it

reviewed would lead to recusal, since the memorandum does not purport to

speculate about the likelihood that judges have relations with TPLF companies

that would require recusal under current standards of judicial conduct.

While it is possible that the recent explosion of proposals for disclosure targeted

at TPLF is intended to address a dramatic increase in the risk of conflict of interest

that existing rules of court are inadequate to prevent, it is likely that the

proponents of the new proposals have other ends in mind. As the next section will

illustrate, the cost of complying with the proposed disclosure rules may increase,

depending on their application by the courts. The possibility cannot be ignored

that for many of the proponents of the new disclosure rules, uncertainty and

excess costs of compliance is a feature, not a bug in the system they wish to create.

That is, it may be the case that the goal is to adopt rules whose stated benefits are

admittedly rarely realized, but whose real benefit is that they make every TPLF

transaction more costly.

Id.

Id. at 2.

Id. at 5.

Id. at 5–6 (“compliance with these local rules is difficult to ascertain”), and see Notice of Interested

Parties, Realtime Adaptive Streaming LLC v. Hulu, LLC, No. 2:17-cv-07611-SJO-FFM, Dkt. No. 18 (C.D.

Cal. Oct. 24, 2017).

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B. COSTS OF DISCLOSURE

The costs of disclosure can be discussed in only the most general and speculative

terms. Obviously, to the extent that some disclosure of TPLF is already required

by existing law, it might be observed that the costs seem to be law and manageable,

since TPLF is growing and, except for a few disputes over waiver of privilege, the

costs of enforcing the current disclosure regime seem relatively low. But the

relevant question is whether proposals for additional disclosure, either through

the amendment of federal and state laws and local rules, will impose additional

costs, and what those costs will be.

1. Direct Economic Costs

It is likely that mandatory disclosure rules will add economic costs to the parties

in litigation. Parties receiving TPLF will have to take steps to comply with

mandatory rules. It is possible that the direct financial costs will be low for

consumer TPLF. For example, it may be that one reason consumer TPLF trade

groups did not oppose the recent Wisconsin disclosure law in its final form is that

they thought that it would be easy for lawyers to comply with the mandatory

disclosure requirement by creating a standard document which would be

triggered by a simple review of a client’s file, automatically filled out by software,

and filed electronically.

The direct financial costs in the context of commercial TPLF may be greater.

The proposed changes to Rule 26 will create a rule which, at least initially, requires

human judgment in its application. Needless to say, courts in multiple federal

circuits and districts will have to interpret the rule, and that will take time to

resolve contradictory judicial interpretations. There is no settled understanding

of what sort of beneficial interest falls under the phrase “any person . . . [who] has

a right to receive compensation contingent on, and sourced from, any proceeds of

[a] civil action.”

The divergent interpretations confronting a party is already

indicated in the diversity of requirements adopted by federal district courts

attempting to expand disclosure requirements under Rule 7.1.

Furthermore, as

This is taken from the amendment to Rule 26 proposed by the Institute for Legal Reform, supra note 24.

[D]istrict courts vary in the type of financial interest that parties must disclose. Some require

identifying any entity with “a financial interest” whereas others require disclosing only those entities with

a “direct financial interest” or a “substantial financial interest.

Survey of Disclosure Rules at 6.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

noted by some courts in the course of weighing relevancy, the speculative quality

of defendants’ rationales for discovery of documents connected with TPLF weigh

against burdening the parties who hold the material, given FRCP Rule 26’s stated

concern that discovery be proportional.

If the proposed disclosure rules are given their broadest possible application,

then the financial consequences of reporting may be borne by parties who are not

TPLF firms, and are far outside the scope of the policy concerns reviewed above

that have motivated the proposed changes. To take a very real example, the

recently adopted Wisconsin legislation, on its face, would require a plaintiff to

disclose the identity and interest of any person with a contingent right to

proceeds, including an insurance subrogree, or a claimant who took a bank loan

with the litigation claim as security, or a personal loan among family members, or

even a deferred healthcare fee to be paid with the proceeds of a personal injury

lawsuit. While the direct cost of disclosure will be borne by the plaintiff (or, more

likely, their attorney), collateral costs related to the exchange of information and

the monitoring of the disclosure will be borne by the third parties.

2. Indirect Economic Costs

The indirect of economic costs of adding new disclosure requirements are very

hard to measure. Any added cost to litigation reduces access to justice; this is a

well-understood principle that motivates advocates and opponents of so-called

tort reform, which is designed, in part, to make it more expensive for parties and

their lawyers to bring lawsuits.

The direct costs of disclosure were canvassed in

the previous section. The indirect costs include (a) increases in the cost of capital,

for both parties and plaintiff’s attorneys (if they have to substitute TPLF with

advances) and (b) additional litigation expenses generated by pre-trial motion

practice — specifically additional discovery requests — prompted by disclosure.

See, e.g., In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prods. Liab. Litig, 2019

U.S. Dist. LEXIS 160051, at *32 (“Even if plaintiffs’ litigation funding is marginally relevant, which is

not the case, defendants’ requested discovery would be denied because it is not ‘proportional to the needs

of the case.’”) (citing Space Data Corp. v. Google LLC, 2018 U.S. Dist. LEXIS 228050 (N.D. Cal. June

11, 2018) at *1).

See, e.g., STEPHEN DANIELS & JOANNE MARTIN, TORT REFORM, PLAINTIFFS’ LAWYERS, AND ACCESS

TO JUSTICE (2015).

Additional discovery costs are one reason that commercial TPLF firms opposed the Wisconsin

disclosure legislation. See Ben Hancock, Litigation Funding Deals Must Be Disclosed Under

Groundbreaking Wisconsin Law, NAT’L L.J., Apr. 04, 2018, https://www.law.com/2018/04/04/wisconsin-

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As Professor Maria Glover has put it, “disclosure of the fact of funding, or anything

relating to funding in relation to the court, is a bit of a tax on a funded party, and

not something that we would require were there not funding available.”

Finally, it is possible that the true motivation behind many disclosure

proposals is not only to increase direct and indirect costs of litigation, but to affect

public opinion about the value and desirability of TPLF. One consequence of

disclosure is the possibility of public access to the details of TPLF agreements.

There may be a hope that, although most TPLF agreements might be of no interest

to the press or the public at large, some agreements might contain terms or reflect

motivations that might cast the whole TPLF sector in a bad light.

3. Comparison With Other Disclosure Rules

It is very difficult to draw any conclusions about the direct economic costs of

expanding disclosure of TPLF by comparing it to other disclosure laws and rules

unconnected to TPLF. As mentioned above, the disclosure regime imposed by

Federal Rule of Appellate Procedure 26.1 and Federal Civil Rule 7.1, which have,

until now, been intended to help courts avoid conflicts of interest with the parties

before them, seems to offer little useful guidance. The only other disclosure rule

that might have relevance concerns the mandatory initial disclosure of liability

insurance coverage under Rule 26(a)(1)(A)(iv). In 1970, the Committee amended

Rule 26(b)(2) to require disclosure of a defendant’s insurance coverage because it

felt that “[d]isclosure of insurance coverage will enable counsel for both sides to

make the same realistic appraisal of the case, so that settlement and litigation

strategy are based on knowledge and not speculation.”

Amendments to Rule 26

were adopted in order to help parties to make choices about conducting litigation

litigation-funding (“‘This provision in the amended statute will, in all likelihood, increase the number of

discovery disputes and thus the cost of litigation for both plaintiffs and defendants,’ Allison Chock, the

chief investment officer for Bentham IMF, said in an email.”).

See Panel 4: Litigation Funding and the Federal Rules of Civil Procedure, 12 N.Y.U. J.L. & BUS. 603,

630 (2016).

While TPLF may be legal, it may also offend public opinion when used for certain ends. This may

explain why, for example, Peter Thiel took every effort to conceal his TPLF arrangement in the litigation

against Gawker by “Hulk” Hogan. See Ryan Mac, Behind Peter Thiel's Plan To Destroy Gawker, FORBES,

June 7, 2016, https://www.forbes.com/sites/ryanmac/2016/06/07/behind-peter-thiel-plan-to-destroy-

gawker/#5876242f30f4

Fed. R. Civ. P. 26(b)(2) advisory committee’s note to 1970 amendment.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

and to allow both sides to have (as much as possible) the same information about

resources available for settlement.

Leaving aside whether the same policy goals would be served by changing Rule

26 to require disclosure of TPLF as are served by requiring disclosure of liability

insurance, a separate question can be asked about the burden imposed by the two

disclosure regimes. The mandatory disclosure requirement of liability insurance

in Rule 26 is much narrower in scope than the proposal to require mandatory

disclosure of TPLF under discussion. As the Advisory Committee on Civil Rules

noted:

[D]isclosure is carefully limited to an agreement with “an

insurance business.” Other forms of indemnification agreements

are not covered. Nor is discovery generally allowed into a

defendant’s financial position, even though both

indemnification agreements and overall resources may have

impacts similar to, or even exceeding, the impact of liability

insurance.

The proposed amendment to Rule 26 would extend to “any agreement under

which any person, other than an attorney permitted to charge a contingent fee

representing a party, has a right to receive compensation that is contingent on,

and sourced from, any proceeds of the civil action, by settlement, judgment or

otherwise,” and thus would extend to a far larger universe of materials.

The significance of the more limited obligation in Rule 26’s liability insurance

disclosure requirement can be seen in the court’s rejection of efforts by parties to

go beyond the strict disclosure requirements of the rule to obtain documents

related to the amount of a party’s right to coverage. Courts have refused plaintiffs

access under Rule 26 to an insurer’s reservation of rights letter connected to a

liability policy or an accounting of how much of the policy limits in a policy had

been used for legal fees before an insured had assumed the cost of its own

Standing Committee Report at 248.

Id.

This is true about the Wisconsin law as well.

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

representation and secured new counsel.

The plain meaning of the Chamber’s

proposal — to require mandatory disclosure of “any agreement” involving

litigation finance— would allow a defendant to obtain information about a

plaintiff’s litigation posture that courts prohibit plaintiffs from securing under the

insurance disclosure requirements supporters of expanded disclosure for TPLF.

Regardless of whether the additional burden is worth it, it must be admitted that

the scope of the obligation will be greater for plaintiffs than defendants.

4. Costs to Lawyers

In addition to the direct and indirect costs of compliance detailed above, which

assume that legal resources will have to be dedicated toward complying with, and

interpreting, the obligations that TPLF disclosure rules would impose, there is an

additional cost that is borne only by lawyers. Compliance assumes competent

legal advice, which, of course, is the basic obligation of all lawyers.

Unless a

lawyer chooses to limit her scope of representation and explicitly refuse to advise

a client on compliance with new TPLF disclosure requirements, she will have to

advise a client on compliance, and probably assist the client as well, by gathering

materials and filing the relevant forms. None of this represents unusual legal work

(as is evidenced by the fact that certain statements relating to liability insurance

coverage is presumably compiled by lawyers under FRCP Rule 26(a)(1)(A)(iv) for

defendants), but it represents an expansion of a lawyer’s exposure to both

discipline and malpractice liability. Failure by a lawyer to reasonably advise a

client on new mandatory disclosure requirements may result in injury to the

client, and therefore civil liability.

Failure by a lawyer to disclose any documents

within the scope of a mandatory TPLF disclosure rule (or to amend after the fact a

failure of a client to disclose) would open the lawyer up to discipline under Rule

3.3(a)(1).

Lawyers have already been sued (albeit unsuccessfully) by clients who

See, e.g., Native American Arts, Inc. v. Bundy-Howard, Inc., No. 01 C 1618, 2003 WL 1524649 (N.D.

Ill. Mar. 20, 2003) and Excelsior College v. Frye, 233 F.R.D. 583 (S.D. Cal. 2006).

See Model Rules of Professional Conduct (“MRPC”), Rule 1.1 (Competence).

Since no current proposal for expanded TPLF disclosure includes any preservation of privilege, it must

be presumed that parties are waiving privilege with regard to the documents disclosed. By definition, then,

a lawyer will have to provide adequate counsel to secure from her client informed consent for disclosure if

it would lead to the waiver of evidentiary privileges or the release of confidential information protected

under MRPC 1.6.

MRPC Rule 3.3: Candor Toward The Tribunal

(a) A lawyer shall not knowingly:

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

have been unhappy with their advice with regard to a TPLF contract.

Clearly, by

expanding the exposure of lawyers to liability and discipline, additional costs (of

care, self-insurance, and malpractice insurance) will be imposed on lawyers who

have clients who seek TPLF.

B. BENEFITS OF DISCLOSURE

Like the costs of disclosure, the benefits are also speculative and hard to predict

(or measure). The most commonly cited benefit is that by requiring TPLF to be

disclosed at an early stage in litigation, judges will be able to recognize conflicts

and recuse themselves.

100

This argument has found some traction in parallel

debates that have occurred in international arbitration.

101

The parallel with

international arbitration is not very useful, however, since international

arbitration employs neutral decision-makers who are often drawn from practice,

and who may have direct professional relations with TPLF firms. Judges in the

United States, on the other hand, while sometimes connected to practice through

previous employment, more often face recusal based on financial interests such

as ownership of shares in a corporation whose interests will be affected by the

outcome of a case before the judge.

102

Given the very small size of the TPLF market,

and the even smaller number of publicly traded TPLF firms, the risk of financial

interest through shareholding or other forms of investment among judges seems

extremely low, and as yet, no one has produced any data to suggest that it is a

problem of such scale that special amendments to existing law are required to

address it.

A second benefit that has been cited is the specific role that disclosure of TPLF

may play in insuring that a court may evaluate a lead counsel with complete

information about its financial resources. This argument was the reason that the

(1) make a false statement of fact or law to a tribunal or fail to correct a false

statement of material fact or law previously made to the tribunal by the lawyer.

See, e.g., Francis v. Mirman, Markovits & Landau PC, N.Y. Sup. Ct. Kings Cty., No. 29993/10 (Jan. 3,

2013).

100

See Standing Committee Report at 249.

101

See Maria Choi, Third-Party Funders in International Arbitration: A Case for Protecting

Communication Made in Order to Finance Arbitration, 29 GEO. J. LEGAL ETHICS 883, 889 (2016) (“In

response to the rising concerns about conflicts of interest, the IBA Guidelines on Conflicts of Interest were

revised in October 2014 to include reference to third-party funders.”).

102

See Ziona Hochbaum, Note, Taking Stock: The Need to Amend 28 U.S.C. § 455 to Achieve Clarity and

Sensibility in Disqualification Rules for Judges' Financial Holdings, 71 FORDHAM L. REV. 1669 (2003).

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

Northern District of California changed its local rules in connection with class

action. It is hard to know whether class members will truly benefit from the new

rule. Obviously, it is in no one’s interest for a class to have inadequately capitalized

counsel appointed, and to the extent that the rule causes a court to appoint a

different lead counsel who would secure a better result for the class, the benefit,

even if marginal, may exist. To the extent that the rule is used tactically by

defendants to defeat the appointment of class counsel where none takes its place,

it is not clear that the rule does work to the advantage of potential class members.

The remaining benefits seem to be directed toward using disclosure as a vehicle

for the deterrence of conduct which is prohibited already under existing law. The

argument that TPLF disclosure will expose violations of the prohibition of

champerty in those states in which it is prohibited does not rely on the claim that

disclosure will help improve the integrity of proceeding in which the disclosure

occurs, but that it will help prevent wrongdoing that should never have been

connected with the proceeding anyway. The same point can be made about the

putative benefit of disclosure with regard to violations of the rules of professional

responsibility by lawyers who allow third parties to interfere with their

independent professional judgment in violation of MRPC 5.4(c).

103

TPLF can be

provided without a lawyer violating her obligation of independent professional

judgment to her client, and it is not clear why the exiting law — including the

existing mechanisms for the discipline of lawyers who violate their obligations to

the bar — are not sufficient to address violations of Rule 5.4(c), to the extent that

they arise in the context of TPLF.

104

103

MRCP Rule 5.4: Professional Independence Of A Lawyer

lawyer to render legal services for another to direct or regulate the lawyer’s

professional judgment in rendering such legal services.

104

It should be observed that violations of Rule 5.4(c) have been documented in the context of liability

insurance contracts. See Douglas R. Richmond, Walking a Tightrope: The Tripartite Relationship Between

Insurer, Insured, and Insurance Defense Counsel, 73 NEB. L. REV. 265, 283 (1994). Despite the well-

documented risk of a lawyer violating her obligation to provide the client with independent professional

judgment, Rule 26 was not amended to deal with that issue — just the issue of conflicts of interest and

recusal.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

IV. CONCLUSION AND RECOMMENDATIONS

Argument for most disclosure rules in TPLF faces two challenges. First, the

problems the proposed rules aim to solve are not ones that seem important or

pressing. For example, the risk that judicial conflict of interest due to stock

ownership by judges in TPLF companies seems, at this point, mostly in the

imagination of the proponents of the disclosure rules. Second, the costs of

compliance with the disclosure rules may be large, depending on how the rules are

framed and interpreted. As a result, the best course of action is caution, both in

supporting disclosure and in designing disclosure rules. This paper will conclude

by making two recommendations.

1. MAKE DISCLOSURE WORK FOR CONSUMERS

The most serious criticism of consumer TPLF is that consumers are not getting as

much from their transactions with TPLF firms as they could. Proposals to set a

price for how much a consumer TPLF firm must pay for a contingent portion of a

consumer’s litigation outcome are a form of price control, and price controls are

often the last resort for those seeking to protect consumers. (Usury law is a form of

price control.) There is no reason to believe — at this point — that markets cannot

operate to set prices in this part of consumers’ lives as they do in other parts of

their lives. However, for markets to work, there must be transparency and

information, and the current consumer TPLF sector lacks both.

Most consumer TPLF contracts are not transparent, since they include many

contract terms that are difficult for consumers to understand and compare in

order to shop around for the best deal for their lawsuit.

105

Simple pricing — without

additional terms such as application fees which are paid only if the consumer’s

application is accepted by the funder and the lawsuit is eventually successful —

would help consumers know how much the transaction will earn them, so that

they can, if they wish, comparison shop. While some disclosure reforms supported

by the TPLF industry call for disclosure, disclosure rules could go further by

105

See Avraham & Sebok, An Empirical Investigation of Third Party Consumer Litigation Funding, supra

note 51. For a very preliminary exploration of the role of consumer protection in consumer legal finance

from one of the authors, see Ronen Avraham, Lynn A. Baker, and Anthony J. Sebok, The Anatomy of

Consumer Legal Funding (August 10, 2020). Cardozo Legal Studies Research Paper No. 618, U of Texas

Law, Public Law Research Paper Forthcoming, U of Texas Law, Law and Econ Research Paper

Forthcoming, Available at SSRN: https://ssrn.com/abstract=3670825

WHITE PAPER ON MANDATORY DISCLOSURE IN THIRD-PARTY LITIGATION FINANCE

prohibiting certain pricing devices that could be replaced by simpler pricing

mechanisms.

2. DISCLOSURE TO THE COURT SHOULD BE LIMITED AND IN CAMERA

To the extent that disclosure in commercial TPLF and TPLF in class actions and

MDLs is valuable, it should be limited to the audience who needs to be informed:

the court. None of the arguments presented by advocates for broad disclosure

justify disclosure of funding documents to adverse parties. The cost of such

disclosure has been reviewed above, and, while that cost can be contained, there

seems to be no reason for the typical plaintiff to bear that cost at all. A simpler

solution is to allow the court — and only the court — to examine the facts of the

funding relevant to the court’s needs and to determine, based on that preliminary

inquiry, whether broader disclosure is warranted.

A good example of targeted disclosure is the order issued on May 7, 2018, in In

Re: National Prescription Opiate Litigation.

106

Judge Dan Aaron Polster ordered

any attorney who has obtained litigation financing to submit, ex parte and in

camera, the identity of the financer and to affirm that the financing does not

create any conflict of interests, undermine counsel’s obligation of vigorous

advocacy, affect counsel’s independent judgment, give the lender any control over

litigation strategy or settlement decisions, and affect party control of any

settlement.

107

The order left open the possibility that discovery by adverse parties

into TPLF agreements could occur under “extraordinary circumstances”.

108

Judge Polster’s order is a good model for future legislation, but it also lays bare

the weakness of the argument for law reform addressing disclosure of TPLF. At the

most, legislation implementing Judge Polster’s order would provide judges with

another tool to monitor conflicts of interest. The meaning of “extraordinary

circumstances” in Judge Polster’s order is not clear, and although future opinions

may illuminate it, it is unlikely that the judge intended this caveat to take up much

106

MDL Docket No. 2804, No. 17-md-2804 (N.D. Ohio, Eastern Div.).

107

Ibid. The order also held that the work product doctrine could preserve privilege over certain

communications between the plaintiffs and third-party funders. Ibid at 2, citing Lambeth Magnetic

Structures, LLC v. Seagate Tech. (US) Holdings, Inc. Judge Polster’s approach was adopted in In re

Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prods. Liab. Litig, 2019 U.S. Dist. LEXIS

160051 at *40.

108

Id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

of the court’s time or produce significant benefits for the parties. In other words,

Judge Polster’s additional disclosure requirements are modest in both ambition

and significance. They deserve support, but they are not intended to achieve more

than a marginal increase in protection for the integrity of the judicial process. This

is not a criticism of Judge Polster’s order, but a recognition that an objective study

of the issues raised by TPLF in MDLs entails the conclusion that there is little need

for more than minor reform with regard to disclosure of TPLF.

Follow the Money? A Proposed

Approach for Disclosure

of Litigation Finance Agreements

Maya Steinitz

Originally published in UC Davis Law Review, Volume 53, Issue 2

the University of Iowa College of Law. I would like to thank Victoria Sahani, Alan Morrison,

Ed Cooper, Anthony Sebok, and Nathan Miller for their comments on a draft of this Essay. I

also thank Carly Thelen and Madison Scaggs for their dedicated research assistance. The

author has served as expert witness, counsel, and consultant to law firms, corporate

plaintiffs, litigation finance firms, and institutional investors investing in litigation

finance.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

Litigation finance is the new and fast-growing practice by which a nonparty funds

a plaintiff’s litigation either for profit or for some other motivation. Some

estimates placed the size of the litigation finance market at $50-$100 billion. Both

proponents and opponents of this newly emergent phenomenon agree that it is

the most important civil justice development of this era. Litigation finance is

already transforming civil litigation at the level of the single case as well as,

incrementally, at the level of the civil justice system as a whole. It is also beginning

to transform the way law firms are doing business and it will increasingly shape

the careers of civil litigators at firms small and large. Consequently, Congress,

state legislatures, state and federal courts, bar associations, international

arbitration institutions, foreign legislatures, and foreign courts are concurrently

grappling with how to regulate litigation finance and what, if any, disclosure

requirements to impose on such financing.

This Essay aims to turn the debate inside out by proposing to abandon the quest

for a bright line rule and to instead adopt a flexible, discretionary standard: a

balancing test. The Essay culminates in a specific proposal for the contours ¾ the

interests and factors ¾ which judges and arbitrators should be empowered and

required to weigh when deciding whether and what form of disclosure to require.

More specifically, the Essay details and rationalizes the specific public and private

interests and factors to consider, including the profile of the plaintiffs and their

motive for seeking funding, the funder’s profile and motivation, the case type and

the forum, the subject matter of the litigation, the potential effect on the

development of the law, the structure of the financing, the purpose of the

contemplated disclosure, and the procedural posture of the case.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

INTRODUCTION

Both critics and proponents of the newly emergent phenomenon of litigation

finance agree that the practice is likely the most important development in civil

justice of our time.

109

Litigation finance is transforming civil litigation at the case

level as well as, incrementally, at the level of the civil justice system as a whole. It

is beginning to transform the way law firms are doing business and will

increasingly shape the careers of civil litigators at firms small and large. It is

unsurprising, therefore, that litigation finance is of interest to legislatures and the

courts. At the state and federal level, in the judiciary, the legislatures, and at bar

associations, the question of the day is whether and how to regulate litigation

finance. That debate, and this Essay, focuses, specifically, on regulation through

disclosure of the financing.

In summary, litigation finance is the practice by which a nonparty funds a

plaintiff’s litigation either for profit or for some other motivation.

110

Last year,

some estimates placed the size of the litigation finance market at $50-$100

billion.

111

This market in legal claims has attracted specialist firms, private equity,

hedge funds, wealthy individuals, the public (through crowdfunding platforms),

and sovereign wealth funds, among others, who are looking for high-risk high-

reward investments or for a cause célèbre. The high-profile funding of Hulk

Hogan’s lawsuit against Gawker has created a firestorm of public and regulatory

interest. The funding of the concussion litigation, #MeToo cases, and Stormy

Daniels’ lawsuit—to name but a few recent examples—have dominated headlines

and conferences.

This Essay argues that the quest for a bright line rule by which to regulate

disclosure of litigation funding is fundamentally misguided because it fails to

account for the near-infinite variability of funding scenarios, which implicate

widely different interests, pose different risks, and affect different constituencies

in varying degrees. In other words, rules are a legal technology that simply cannot

capture nor address the nuance, variability, and context-specificity that litigation

109

See infra Part II.

110

For a fuller explanation of the myriad forms litigation finance takes, see infra Part III.

111

See Brian Baker, In Low-Yield Environment, Litigation Finance Booms,

MARKETWATCH (Aug. 21, 2018, 10:59 AM), https://www.marketwatch.com/story/in-low-

yield-environment-litigation-finance-booms-2018-08-17 [https://perma.cc/FL5P-4HMD].

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

finance implicates. Instead of a bright line rule, this Essay proposes that

legislatures and courts shift to a standard-based approach and adopt, specifically,

a balancing test. A specific balancing test, including factors and interests to be

weighed by courts on an ad hoc basis, is then offered.

The Essay progresses as follows. Part I contains a description of pending and

recent legislation and regulations.

112

Part II explains what’s at stake as litigation

finance expands and is poised to reshape civil litigation, civil justice, and the legal

profession.

113

Part III explains the reasons why finding a uniform approach to

whether or not to mandate disclosure of litigation finance and if so in what form

has proved so controversial and elusive.

114

In a nutshell, the problem is the high

variability of funding scenarios. The variables are described and unpacked. Part

IV explains the invisible common thread in the otherwise-divergent current

regulatory and scholarly approaches: when not punting, they assume a rules-

based approach.

115

It then suggests moving away from a search for a rule to the

embrace of a standard.

116

Part V then suggests such a standard or, more

specifically, a balancing test, spelling out interests and factors to weigh.

117

I. THE FLURRY OF LEGISLATIVE AND REGULATORY ACTIVITY AIMED AT

A DISCLOSURE REGIME

Overlapping, but incohesive and under-theorized, discourses on whether and in

what way to require disclosure of litigation finance are taking place at the federal,

state and international levels. This Part describes these processes, and the

proposals on the table, in that order.

A. At the Federal Level

At the federal level, two battlegrounds over regulation of litigation funding are

currently waged and they revolve around legislation that would target complex

(class and mass) litigation, at one level, and a possible change to the Federal Rules

112

See infra Part I.

113

See infra Part II.

114

See infra Part III.

115

See infra Part IV.

116

See infra Part IV.

117

See infra Part V.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

of Civil Procedure (“FRCP”), on the other. With respect to the former, in May 2018,

Senator Chuck Grassley, Chairman of the Senate Judiciary Committee, introduced

the Litigation Funding Transparency Act of 2018 (“LFTA”), which aims “to

increase transparency and oversight of third-party litigation funding in certain

actions, and for other purposes.”

118

The bill, reintroduced on February 13, 2019,

119

is a narrow, disclosure-only scheme that follows an earlier attempt to include

litigation funding disclosure requirements as part of a broader push to restrict

class actions—the unsuccessful Fairness in Class Action Litigation Act of 2017

(“FCALA”).

120

If adopted, LFTA would require disclosure of litigation funding arrangements

in class actions and multidistrict litigation in federal courts to the court and to all

parties.

121

LFTA’s stated goal is to improve transparency and oversight of the

litigation finance industry, so that the court and other parties are able to identify

conflicts of interest and “know whether there are undue pressures and secret

agreements at play that could unnecessarily drag out litigation or harm the

interest of the claimants themselves.”

122

Critics of the bill, often large litigation funders, argue that the proposed

legislation unjustifiably “mandat[es] broad disclosure to the defendant.”

123

Instead, they suggest that disclosure should be limited to the court, to avoid

“handing defendants an unfair advantage by getting a free look at plaintiffs’

financial affairs.”

124

Critics also argue that the bill would impose even greater

difficulties to plaintiffs of limited economic means “by imposing more barriers to

118

S. 2815, 115th Cong. (2018).

119

See Ross Todd, Republican Senators Reintroduce Bill Pushing for Disclosure of

Litigation Funding, NAT’L L.J. (Feb. 13, 2019, 6:40 PM), https://www.law.com/

nationallawjournal/2019/02/13/republican-senators-reintroduce-bill-pushing-for-

disclosure-of-litigation-funding.

120

See H.R. 985, 115th Cong. (2017).

121

See S. 2815 §§ 2-3.

122

See Press Release, Comm. on the Judiciary, Grassley, Tillis, Cornyn Introduce Bill to

Shine Light on Third Party Litigation Financing Agreements (May 10, 2018),

https://www.judiciary.senate.gov/press/rep/releases/grassley-tillis-cornyn-introduce-bill-

to-shine-light-on-third-party-litigation-financing-agreements.

123

Burford Capital Comments on The Litigation Funding Transparency Act of 2018,

BURFORD CAPITAL: BLOG (May 10, 2018), http://www.burfordcapital.com/blog/litigation-

funding-transparency-act-2018 [https://perma.cc/63XX-VMXT].

124

See id.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

entry for claimants trying to bring meritorious lawsuits against massive

corporations.”

125

With respect to amendments to the FRCP, as of this writing, the Advisory

Committee on Civil Rules (“Advisory Committee”) finds itself amidst dueling

lobbying efforts by proponents and opponents of litigation finance, with the latter

lobbying for a revision of the Federal Rules of Civil Procedure mandating

disclosure while the former endorsing retention of the status quo.

126

The U.S.

Chamber of Commerce, the nation’s leading business lobby, which has for years

led the battle to eliminate or at least restrict litigation funding,

127

recently

renewed for the third time its call that federal courts require parties to disclose all

litigation funding agreements—including the identity of the funder and the terms

of the funding—at the outset of any case in federal court. It proposed a broad

amendment to FRCP Rule 26 that would 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 receive compensation that is contingent on,

and sourced from, any proceeds of the civil action, by settlement, judgment or

otherwise.”

128

Scholars have also trained their sights on the question of disclosure in litigation

finance. For example, one scholar proposes that procedural rules be revised or

reinterpreted to require any party supported by a third-party funder to disclose

the identity of the funder to the judge in camera so the judge may determine if

there is a financial conflict of interest.

129

Another suggestion is that a class relying

125

See Matthew Harrison, The Litigation Funding Transparency Act of 2018, BENTHAM

IMF: BLOG (May 14, 2018), https://www.benthamimf.com/blog/blog-full-post/bentham-imf-

blog/2018/05/14/the-litigation-funding-transparency-act-of-2018.

126

See ADVISORY COMM. ON CIVIL RULES, AGENDA BOOK 345-460 (Nov. 2017),

http://www.uscourts.gov/sites/default/files/2017-11-CivilRulesAgendaBook_0.pdf

[hereinafter AGENDA NOVEMBER 2017].

127

See, e.g., JOHN H. BEISNER & GARY A. RUBIN, U.S. CHAMBER INST. FOR LEGAL REFORM,

STOPPING THE SALE ON LAWSUITS: A PROPOSAL TO REGULATE THIRD-PARTY INVESTMENTS IN

LITIGATION 2, 10, 14 (2012), https://www.instituteforlegalreform.com/uploads/sites/

1/TPLF_Solutions.pdf; Harold Kim, The Time for Litigation Funding Transparency Is Now,

U.S. CHAMBER INST. FOR LEGAL REFORM (Nov. 7, 2017), https://www.

instituteforlegalreform.com/resource/the-time-for-litigation-funding-transparency-is-now

[https://perma.cc/D3VT-KTHA].

128

ADVISORY COMM. ON CIVIL RULES, AGENDA NOVEMBER 2017, supra note 126, at 345.

129

See Victoria Shannon Sahani, Judging Third-Party Funding, 63 UCLA L. REV. 388,

424-27 (2016). Sahani also argues that the current disclosure rules can be interpreted as

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

on third-party funding should be required to disclose the arrangement to the court

for in camera review, and the decision-maker be provided at least the name of the

funder.

130

The Advisory Committee declined to take up a similar suggestion in 2014, but it

left the door open for future regulation, with members noting that “[w]e do not yet

know enough about the many kinds of financing arrangements to be able to make

rules”

131

and that “third-party financing practices are in a formative stage. They

are being examined by others. They have ethical overtones. We should not act

now.”

132

But more recently, in response to the latest advocacy for rule change, the

Advisory Committee created a subcommittee tasked with considering the

possibility of initial disclosure of third-party funders in multidistrict litigation.

133

The subcommittee recently reported that it “continues to gather information and

has not yet attempted to develop recommendations about whether to consider

possible rule amendments, or what amendments, if any, should be given serious

study.”

134

Finally, federal courts, in typical common law fashion, have been weighing in

on disclosure in litigation finance as various fact patterns increasingly come

before them.

135

And while Congress is taking its time, district and appellate courts

relating to third party funding specifically, that the term “resources” in FRCP 26(b)(2)(C)(iii)

should be construed to include third-party funding and that language referencing third-

party funding should be added to the lists under Rule 16(b)(3)(B) and Rule 16(c)(2) such that

information about funding be disclosed as part of the rules-mandated pretrial conferences.

Additionally, she suggests adding a new Rule 7.2. In the context of disclosure of third-party

funding agreements for a claim for attorney’s fees, she suggests enforcing disclosure under

Rule 54(d)(2)(B)(iv) or revising it to include third-party funding. See id. at 416-34.

130

See Aaseesh P. Polavarapu, Discovering Third-Party Funding in Class Actions: A

Proposal for In Camera Review, 165 U. PA. L. REV. ONLINE 215, 233-34 (2017) (suggesting an

affirmative duty on parties to disclose third-party funding agreements for in camera

review); see also Sahani, supra note 129, at 424.

131

ADVISORY COMM. ON CIVIL RULES, MEETING MINUTES 13 (2014),

http://www.uscourts.gov/sites/default/files/fr_import/CV10-2014-min.pdf.

132

Id. at 14.

133

See ADVISORY COMM. ON CIVIL RULES, AGENDA BOOK 139 (Nov. 2018),

https://www.uscourts.gov/sites/default/files/2018-11_civil_rules_agenda_book_0.pdf.

134

Id. at 140.

135

See, e.g., Lambeth Magnetic Structures, LLC v. Seagate Tech. (US) Holdings, Inc.,

Nos. 16-538, 16-541, 2018 WL 466045, at *6 (W.D. Pa. Jan. 18, 2018); United States ex rel.

Fisher v. Ocwen Loan Servicing, LLC, No. 4:12-CV-543, 2016 WL 1031157, at *6-7 (E.D. Tex.

Mar. 15, 2016).

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

are enacting rules to deal with disclosure. As of this writing, twenty-four out of

ninety-four district courts require some sort of disclosure of the identity of

litigation funders in a civil case. Some of the district courts require a party to

disclose the nature of a litigation funder’s interest in the case. District courts

impose these enhanced disclosure requirements in a number of ways, with

fourteen promulgating local rules mandating broader disclosure than what is

required under FRCP Rule 7.1,

136

two using standing orders, and ten using local

forms which require disclosure of litigation financiers.

137

In the case of appellate

courts, six U.S. circuit courts of appeal have local rules requiring expanded

disclosure of litigation funders beyond the requirements of Federal Rule of

Appellate Procedure 26.1.

138

These circuit courts generally require a party to

disclose any person or organization with a financial interest in the litigation.

Beyond this, though, the rules of circuit courts vary in details, with different

circuits having different rules regarding whether amici curiae must disclose

litigation financing, whether disclosures are limited to certain types of appeals,

and other such issues.

139

The stated purpose of these regulations is to assist judges

with evaluating possible issues of recusal and disqualification and none require

automatic disclosure in every civil case.

140

B. At the State Level

State legislatures and courts have also, increasingly, taken up the issue of litigation

finance regulation in recent years. Unlike federal regulation, which tends to come

up in the context of commercial litigation funding or focus on class and mass

136

The rule requires that “[a] nongovernmental corporate party must file two copies of a

disclosure statement that: (1) identifies any parent corporation and any publicly held

corporation owning 10% or more of its stock; or (2) states that there is no such corporation.”

FED. R. CIV. P. 7.1(a).

137

See ADVISORY COMM. ON CIVIL RULES, AGENDA BOOK 210-11 (Apr. 2018),

https://www.uscourts.gov/sites/default/files/2018-04-civil-rules-agenda-book.pdf

[hereinafter AGENDA APRIL 2018].

138

The rule requires that “[a]ny nongovernmental corporate party to a proceeding in a

court of appeals must file a statement that identifies any parent corporation and any

publicly held corporation that owns 10% or more of its stock or states that there is no such

corporation.” FED. R. APP. P. 26.1(a).

139

See ADVISORY COMM. ON CIVIL RULES, AGENDA APRIL 2018, supra note 137, at 209-10.

140

See id. at 210.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

litigation, the focus at the state level is on consumer litigation funding.

141

Therefore, these regulatory efforts often focus on ensuring that agreements are in

writing and contain terms with “common, everyday meanings to enable the

average consumer who makes a reasonable effort under ordinary circumstances

to read and understand the terms of the contract without having to obtain the

assistance of a professional.”

142

Because the regulation of consumer funding is concerned with avoiding

predatory lending-like practices, most of the state regulation is less germane to the

current discussion, other than to demonstrate the prominence of the regulatory

flurry around a phenomenon that is already altering the quantity, nature, and

outcome of civil litigation and is poised to further do so in coming years. But some

state-level developments are nonetheless worth noting in the current context.

Specifically, in April 2018, Wisconsin enacted “a first-of-its-kind state law

requiring litigants to disclose their outside legal funding arrangements.”

143

The

rule requires a party, “without awaiting a discovery request, [to] provide to the

other parties any agreement under which any person, other than an attorney

permitted to charge a contingent fee representing a party, has a right to receive

compensation that is contingent on and sourced from any proceeds of the civil

141

See Maya Steinitz, The Litigation Finance Contract, 54 WM. & MARY L. REV. 455, 460-

61 (2012) [hereinafter The Litigation Finance Contract] (explaining the common distinction

between consumer litigation funding, which focuses on the funding of small personal

claims for individual clients, and commercial litigation funding, which focuses on the

funding of larger, higher value claims brought by more sophisticated parties, these parties

often being business entities); see also Nora Freeman Engstrom, Lawyer Lending: Costs and

Consequences, 63 DEPAUL L. REV. 377, 382-83 (2014) (noting three main types of litigation

financing: consumer litigation financing, commercial litigation financing, and lawyer

lending); Anthony J. Sebok, Litigation Investment and Legal Ethics: What Are the Real

Issues?, 55 CANADIAN BUS. L.J. 111, 114-15 (2014) [hereinafter Litigation Investment and Legal

Ethics] (describing the differences between consumer and commercial litigation

investment); Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation,

36 CARDOZO L. REV. 861, 864-65 (2015) (noting the different regulatory regimes imposed on

commercial and consumer litigation financing).

142

VT. STAT. ANN. tit. 8, § 2253(a) (2015); see, e.g., ARK. CODE ANN. § 4-57-109 (2015); ME.

REV. STAT. ANN. tit. 9-A, § 12-104 (2008); NEB. REV. STAT. ANN. § 25-3303 (2010); OHIO REV.

CODE ANN. § 1349.55 (2008); OKLA. STAT. ANN. tit. 14A, § 3-805 (2013); TENN. CODE ANN. § 47-

16-104 (2014); see also ADVISORY COMM. ON CIVIL RULES, AGENDA APRIL 2018, supra note 137, at

216-17 (discussing state legislation and regulations for regulating litigation funding through

registration models and caps on rates and fees).

143

Andrew Strickler, Wis. Gov. Signs Legal Funder Transparency Rule, LAW360 (Apr. 3,

2018, 9:26 PM), https://www.law360.com/legalethics/articles/1029480/wis-gov-signs-legal-

funder-transparency-rule.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

action, by settlement, judgment, or otherwise.”

144

This is the first state regulation

which imposes a broad mandatory disclosure requirement for litigants funded by

third parties.

145

Finally, like their federal counterparts, state courts have also been called upon

to decide whether and how litigation funding should be disclosed.

146

C. International and Foreign Regulatory Developments

The development of litigation finance in the United States represents an

expansion of an industry that first took hold in domestic litigation in Australia and

the United Kingdom, and then expanded in international arbitration.

147

In the

realm of international arbitration, the most important development is the creation

of “soft law” in the form of a Report by the International Council for Commercial

Arbitration (“ICCA”)-Queen Mary Task Force on Third-Party Funding in

International Arbitration, which was finalized, after a very long and public

deliberative process, in April 2018. It restates the general norm emerging in

international arbitration of requiring disclosure of the existence and identity of

funders for the purpose of arbitrators’ conflicts check and confirms the emergent

144

WIS. STAT. ANN. § 804.01 (2019).

145

See Strickler, supra note 143.

146

See, e.g., Carlyle Inv. Mgmt. v. Moonmouth Co., C.A. No. 7841-VCP, 2015 WL 778846,

at *8-9 (Del. Ch. Feb. 24, 2015) (litigation funding documents serve a dual litigation and

business purpose, but should still be subject to work product confidentiality protections);

Charge Injection Techs., Inc. v. E.I. DuPont De Nemours & Co., No. 07C-12-134-JRJ, 2015 WL

1540520, at *4 (Del. Super. Ct. Mar. 31, 2015) (since the payment terms in a litigation finance

agreement were prepared in anticipation of litigation, and involved attorney mental

impressions and litigation strategies, these terms should be subject to work product

protection); Conlon v. Rosa, Nos. 295907, 295932, 2004 WL 1627337, at *2 (Mass. Land Ct.

July 21, 2004) (the need to evaluate bias and credibility of the plaintiff weighs against

holding litigation finance documents confidential).

147

See Leslie Perrin, England and Wales, in THE THIRD PARTY LITIGATION FUNDING LAW

REVIEW 48, 48-58 (Leslie Perrin ed., 2d ed. 2018) (reviewing litigation financing in England

and Wales); Nicholas Dietsch, Note, Litigation Financing in the U.S., the U.K., and

Australia: How the Industry Has Evolved in Three Countries, 38 N. KY. L. REV. 687, 698-705

(2011); Jasminka Kalajdzic et al., Justice for Profit: A Comparative Analysis of Australian,

Canadian and U.S. Third Party Litigation Funding, 61 AM. J. COMP. L. 93, 96-113 (2013); Maya

Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 MINN. L. REV.

1268, 1275-86 (2011) [hereinafter Whose Claim Is This Anyway?]). See generally LISA BENCH

NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN INTERNATIONAL

ARBITRATION (2d. ed. 2017) (detailing third-party litigation funding in several countries and

discussing the problems that may arise with litigation funding in international arbitration).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

consensus that arbitrators have the authority to order such disclosure. But, likely

due to the controversial nature of disclosure, the report refrains from “provid[ing]

any new standards for assessing conflicts, but instead refers such issues to existing

law, rules, and guidelines.”

148

Arbitrators, thus, are left to decide on their own

whether, to what extent, and under what conditions, further disclosure may be

warranted.

In Australia, the first jurisdiction to legalize (indeed—actively foster) litigation

finance, the existence of a litigation finance agreement needs to be disclosed, but

the details of the agreement are likely privileged.

149

And in the United Kingdom,

the existence of a litigation finance agreement and the identity of the litigation

funder are not considered privileged information but the details of a litigation

finance agreement generally are.

150

* * *

What pending proposals generally have in common is that, when they do not

simply punt on the issue, they seek or assume bright-line rules on disclosure. The

rest of the Essay questions this approach.

II. THE STAKES: WHY LITIGATION FINANCE IS UNDERSTOOD TO

BE THE MOST IMPORTANT DEVELOPMENT IN CONTEMPORARY

CIVIL LITIGATION

Critics and proponents alike agree that the rise of litigation finance in recent years

is the single most important development in civil justice.

151

The following

148

See INT’L COUNCIL FOR COMMERCIAL ARBITRATION, REPORT OF THE ICCA-QUEEN MARY

TASK FORCE ON THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION 12 (2018),

https://www.arbitration-icca.org/media/10/40280243154551/icca_reports_4_tpf_final_

for_print_5_april.pdf.

149

See Jason Geisker & Jenny Tallis, Australia, in THE THIRD PARTY LITIGATION FUNDING

LAW REVIEW, supra note 147, at 1-11.

150

See Perrin, supra note 147, at 53.

151

See, e.g., GEOFFREY MCGOVERN ET AL., THIRD PARTY LITIGATION FUNDING AND CLAIM

TRANSFER 1 (2010) (ebook). More generally, “[w]e find ourselves in the second stage of a

revolution in the financing of civil litigation . . . [c]ompared with the situation seventy-five

years ago, the plaintiffs’ bar is today better financed, both absolutely and relative to the

defense bar.” Stephen C. Yeazell, Re-Financing Civil Litigation, 51 DEPAUL L. REV. 183, 183

(2011). Critics include the U.S. Chamber of Commerce, through its publications. See, e.g.,

JOHN BEISNER ET AL., U.S. CHAMBER INST. FOR LEGAL REFORM, SELLING LAWSUITS, BUYING

TROUBLE: THIRD-PARTY LITIGATION FUNDING IN THE UNITED STATES (2009),

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

paragraphs explain the main reasons the practice is so profoundly important and

why it has generated so much interest among academics, lawyers, legislatures, the

judiciary, the media, and the investment community.

A. Litigation Finance Implicates Foundational Questions of Civil Justice

The primary import of the industry is its propensity to increase the number of

cases brought. This is either a positive or a negative depending on whether one

focuses on the potential to increase access to justice for deserving but under-

resourced plaintiffs, or on the potential to increase non-meritorious litigation.

152

https://www.instituteforlegalreform.com/uploads/sites/1/thirdparty

litigationfinancing.pdf; BEISNER & RUBIN, supra note 127, at 1 (labeling litigation finance “a

clear and present danger to the impartial and efficient administration of civil justice in the

United States”); Third Party Litigation Funding, U.S. CHAMBER INST. FOR LEGAL REFORM,

https://instituteforlegalreform.com/issues/third-party-litigation-funding (last visited Sept.

8, 2019) [hereinafter Third Party Litigation Funding]. Other critics include Jeremy Kidd, To

Fund or Not to Fund: The Need for Second-Best Solutions to the Litigation Finance Dilemma,

8 J.L. ECON. & POL’Y 613 (2012) and Joanna M. Shepherd, Ideal Versus Reality in Third-Party

Litigation Financing, 8 J.L. ECON. & POL’Y 593 (2012). Proponents include ABA Comm. on

Ethics & Prof’l Responsibility, see Formal Opinion 484 (Nov. 27, 2018), N.Y. State Bar Ass’n

Comm. on Prof’l Ethics, see Ethics Opinion 1104 (Nov. 15, 2016), and scores of scholars, see,

e.g., Susan Lorde Martin, Litigation Financing: Another Subprime Industry That Has a Place

in the United States Market, 53 VILL. L. REV. 83 (2008); Susan Lorde Martin, The Litigation

Financing Industry: The Wild West of Finance Should Be Tamed Not Outlawed, 10 FORDHAM

J. CORP. & FIN. L. 55 (2004); Julia H. McLaughlin, Litigation Funding: Charting a Legal and

Ethical Course, 31 VT. L. REV. 615 (2007); Jonathan T. Molot, Litigation Finance: A Market

Solution to a Procedural Problem, 99 GEO. L.J. 65 (2010); Richard W. Painter, Litigating on a

Contingency: A Monopoly of Champions or a Market for Champerty?, 71 CHI.-KENT L. REV.

625 (1995); Sebok, Litigation Investment and Legal Ethics, supra note 141, at 111.

152

For arguments that litigation finance is likely to increase non-meritorious litigation,

see, for example, Jeremy Kidd, Modeling the Likely Effects of Litigation Financing, 47 LOY.

U. CHI. L.J. 1239, 1258-60 (2016); Thomas J. Donohue, Stopping the Litigation Machine, U.S.

CHAMBER OF COMM. (Oct. 31, 2016, 9:00 AM), https://www.uschamber.com/series/your-

corner/stopping-the-litigation-machine; and Third Party Litigation Funding, supra note

151. For arguments that litigation is unlikely to increase non-meritorious litigation, see, for

example, Molot, supra note 151, at 106-07; Shannon, supra note 141, at 874-75. More

generally, for literature on the socially desirable level of litigation, see, for example,

Richard L. Abel, The Real Tort Crisis — Too Few Claims, 48 OHIO ST. L.J. 443 (1987) and Nora

Freeman Engstrom, ISO the Missing Plaintiff, JOTWELL (Apr. 12, 2017),

https://torts.jotwell.com/iso-the-missing-plaintiff/ (book review) (“Using a number of

methodologies, these researchers have, again and again, confirmed Abel’s basic empirical

premise. In most areas of the tort law ecosystem, only a small fraction of Americans seek

compensation, even following negligently inflicted injury.”). For a classic law and

economics analysis of the suboptimal levels of litigation, see Steven Shavell, The

Fundamental Divergence Between the Private and the Social Motive to Use the Legal System,

26 J. LEGAL STUD. 575 (1997); Nora Freeman Engstrom, Re-Re-Financing Civil Litigation:

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

An associated concern, relating to systemic effects on the courts, is what affects

the availability of funding and liquidity of legal claims might have on how quickly

cases settle.

153

But peel away this level of the debate and other, possibly even more

profound, implications arise.

B. Constitutional, Human Rights, and Civil Rights Implications

The ability to bring a suit—an expensive enterprise under the best of

circumstances—implicates constitutional, human, and civil rights. Access to

justice is a human right, “guaranteed as a legal right in virtually all universal and

regional human rights instruments, since the 1948 Universal Declaration, as well

as in many national constitutions.”

154

In the United States, the right to bring a suit

is often further described as a form of free speech and participation in certain

types of cases is understood to be an aspect of democratic participation.

155

How Lawyer Lending Might Remake the American Litigation Landscape, Again, 61 UCLA L.

REV. DISCOURSE 110 (2013) (describing the evolution of funding available to plaintiff-side

personal injury firms and identifying the ways in which third party funders in this space

may alter the American litigation landscape).

153

See Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1305-07. For empirical

data on the subject, see Ronen Avraham & Anthony Sebok, An Empirical Investigation of

Third Party Consumer-Litigant Funding 13 (Cardozo Legal Studies Research Paper No. 539,

2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3137247 (using a dataset of

funding requests to find that in cases where the plaintiff was funded and the lawsuit was

settled, 417 days was the median amount of time between the initial payment to the funder

and settlement of the case and the funder being fully paid); David S. Abrams & Daniel L.

Chen, A Market for Justice: A First Empirical Look at Third Party Litigation Funding, 15 U.

PA. J. BUS. L. 1075, 1080-81, 1107 (2013) (finding that although data on settlements cannot be

obtained, “that once defendants recognize the increased likelihood of litigation and the

greater resources held by plaintiffs, they would be more likely to settle in equilibrium.

While transitioning to that new equilibrium, there is another potential benefit from

litigation funding: earlier resolution of the law.”); Ronen Avraham & Abraham Wickelgren,

Third-Party Litigation Funding — A Signaling Model, 63 DEPAUL L. REV. 233, 235 (2014)

(arguing that third-party litigation funding gives plaintiff(s) more time to come to a better

settlement); Daniel L. Chen, Can Markets Stimulate Rights? On the Alienability of Legal

Claims, 46 RAND J. ECON. 23, 49 (2015) (“[I]ncreased settlement may arise if litigation

funding reduces the uncertainty of case outcomes. . . . Although settlement is not directly

measured . . . the number of cases filed and the number of finalizations are positively

associated with litigation funding, whereas the number of times parties are required to

appear before court per case is negatively associated with litigation funding . . . .”).

154

Francesco Francioni, The Rights of Access to Justice Under Customary International

Law, in ACCESS TO JUSTICE AS A HUMAN RIGHT 1, 2 (Francesco Francioni ed., 2007).

155

See, e.g., Alexandra D. Lahav, Bellwether Trials, 76 GEO. WASH. L. REV. 576, 577-79

(2008) (arguing that trials further certain social and democratic aims such as giving a voice

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

Tellingly, the last time a vigorous debate erupted around “champerty” and

“maintenance”—the traditional doctrines that barred, with some exceptions, the

funding of a suit by a nonparty—was when civil rights organizations took on civil

rights cases, including school integration cases, pro bono.

156

And for defendants, the questions of who funds the plaintiffs’ case, the

motivation behind the funding, and whether or not the defendants get to request

discovery from the funders or, even, join them as parties, are often framed as

questions of defendants’ due process rights.

C. Implication for the Organizational Structure of Law Firms and the

Competition for Legal Services

Litigation finance, especially with the very recent advent of “portfolio funding”—

funding tied to the performance of a portfolio of cases, rather than that of a single

case, and provided directly to law firms

157

—is changing the competitive

landscape of law firms and is poised to change the organization, governance, and

finance of law firms.

158

For example, start-up and boutique firms are now able to

effectively compete with so-called BigLaw and with established plaintiffs’ firms

for high-end work, including work that may require investment by the firm (e.g.,

contingency and qui tam cases). The availability of outside financing also vitiates

the traditional workaround, developed when law firms had a monopoly over

litigation finance, whereby law firms created consortia of firms, where only one or

some provides lawyering, and the others were brought on board solely to provide

to litigants to express their claims and providing a platform for the publication of wrongs

that may have been incurred).

156

See The South’s Amended Barratry Laws: An Attempt to End Group Pressure Through

the Courts, 72 YALE L.J. 1613, 1613 (1963).

157

See As the Funding Industry Evolves, Portfolio Financing Grows in Popularity,

BENTHAM IMF: BLOG (May 10, 2018), https://www.benthamimf.com/blog/blog-full-post/

bentham-imf-blog/2018/05/10/as-the-funding-industry-evolves-portfolio-financing-

grows-in-popularity [https://perma.cc/53U7-CHB4]; Press Release, Burford, Burford Capital

Announces Innovative Insolvency Portfolio Financing with Grant Thornton (May 4, 2016),

http://www.burfordcapital.com/newsroom/burford-capital-announces-innovative-

insolvency-portfolio-financing-grant-thornton; Portfolio Litigation Funding, WOODSFORD

LITIG. FUNDING, https://woodsfordlitigationfunding.com/litigation-finance/portfolio-

litigation-funding (last visited Feb. 18, 2018) [https://perma.cc/E3YK-YN53].

158

For an in-depth discussion of these effects, see Maya Steinitz, The Partnership

Mystique: Law Firm Finance and Governance in the 21st Century (forthcoming manuscript)

(on file with author).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

financing.

159

These changes will have cascading effects on how law firms finance

and govern themselves.

D. Spillover Effects to Criminal Defense Finance

The financing of civil litigation, especially the modalities it takes, appears to have

inspired modes of criminal defense funding. For example, following the

development of the crowdfunding of litigation funding,

160

criminal defendants

have followed suit with similar crowdfunding efforts.

161

And one may surmise

that through sensitizing the public to litigation funding, with its attendant host of

conflicts and other ethical challenges, in the civil justice arena, conflicts-ridden

modes of funding in the criminal defense realm may become more palatable than

they otherwise would have been.

162

* * *

159

See Marc Galanter, Anyone Can Fall Down a Manhole: The Contingency Fee and Its

Discontents, 47 DEPAUL L. REV. 457, 475-76 (1998); Marc Galanter, Case Congregations and

Their Careers, 24 LAW & SOC’Y REV. 371, 387 (1990).

160

See infra note 230.

161

Prominent current examples include Michael Cohen, Benjamin Netanyahu, and Rick

Gates. See Michael Cohen Truth Fund, GOFUNDME (Aug. 21, 2018),

https://www.gofundme.com/hqjupj-michael-cohen-truth-fund; Netanyahu Rejects Decision

Banning Tycoons from Funding His Legal Defense, TIMES OF ISRAEL (Feb. 24, 2019, 9:16 PM),

https://www.timesofisrael.com/netanyahu-rejects-decision-banning-tycoons-from-

funding-his-legal-defense (“Legal representatives for Prime Minister Benjamin Netanyahu

declared Sunday that the premier does not intend to accept a decision banning funding

from wealthy associates of his legal defense in the three corruption cases he is facing.”);

Kathryn Watson, Judge Chastises Rick Gates for Legal Defense Fundraiser Video, CBS NEWS

(Dec. 22, 2017, 1:01 PM), https://www.cbsnews.com/news/judge-chastises-rick-gates-for-

legal-defense-fundraiser.

162

For examples of such controversial, potentially conflicts-ridden, forms of criminal

defense finance by President Trump with respect to the legal bills of his family members

and former and current staffers, see Summer Meza, Trump’s New Conflict of Interest Could

Involve Paying Off Officials to Not Talk About Russia, NEWSWEEK (Nov. 18, 2017, 9:33 AM),

https://www.newsweek.com/trump-legal-fees-staffers-conflict-interest-715995 (“[R]ather

than using campaign donations or charging the Republican National Committee,

[President Trump] has created a fund to finance the legal bills of his former and current

staffers — which could violate ethics laws if there’s a chance it could influence their

testimonies. . . . The RNC paid more than $230,000 for two of Trump’s personal attorneys

. . . . The Republican Party has shelled out even more for Donald Trump Jr., paying more

than $500,000 in legal fees as he faces allegations of collusion . . . .”).

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

The urgency of all of these questions is amplified when one considers the

explosive growth of the industry in recent years, both nationally and globally, and

the projections of further future growth as well as expansion into new areas.

Third-party funding, which until the beginning of this century was considered

near-universally as a crime, a tort, or at least an ethical violation, has erupted into

the mainstream and some estimates of the size of this global industry now place

its market capitalization at $50-$100 billion.

163

Given the growing awareness of

litigation finance, the fact that many areas of litigation, such as class and mass

actions in the United States, have not yet been unlocked as “asset sub-classes,” and

the fact that various jurisdictions have only recently or not yet legalized the

practice—by all estimates, litigation finance is poised to continue seeing robust

growth in coming years.

164

This brings us to our next topic: the variability of

litigation finance scenarios.

III. THE VARIABILITY OF LITIGATION FINANCE SCENARIOS

When assessing the suitability of the approaches currently contemplated, as

outlined in Part I, it is important to understand the wide array of practices that fall

under the rubric of “litigation finance” and the colorful cast of characters that are

involved. Ultimately, the variability of litigation finance scenarios militates

against a bright-line rule approach.

In 2016, litigation finance exploded into the public consciousness when

billionaire Peter Thiel’s funding of Hulk Hogan’s lawsuit against Gawker became

163

See Baker, supra note 111. Of course, since almost all funders are privately-held, and

since substantial numbers of financings are provided by ad hoc funders, not dedicated

litigation financiers, definitive numbers are unavailable.

164

See, e.g., MAYA STEINITZ, THE CASE FOR AN INTERNATIONAL COURT OF CIVIL JUSTICE 127-130

(2019) (discussing the rise of litigation finance and its growing prominence); Cassandra Burke

Robertson, The Impact of Third-Party Financing on Transnational Litigation, 44 CASE W. RES. J.

INT’L L. 159, 164-68 (2011) (discussing the growing global scale of litigation finance in jurisdictions

such as Australia and England, and how countries such as Spain and Brazil offer untapped

markets for third-party funding); Christopher P. Bogart, What’s Ahead in Litigation Finance?,

BURFORD: BLOG (July 17, 2017), http://www.burfordcapital.com/blog/future-litigation-finance-

trends [https://perma.cc/3P8Q-RPD3] (arguing that litigation finance will experience robust

growth in the coming years); Litigation Finance Forecast: Six Trends to Watch in 2019, BENTHAM

IMF: BLOG (Jan. 2, 2019), https://www.benthamimf.com/blog/blog-full-post/bentham-imf-

blog/2019/01/02/litigation-finance-forecast-six-trends-to-watch-in-2019

[https://perma.cc/2KPG-BAA5] (predicting a surge in portfolio financing to fund more large-

scale litigation).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

public. Mr. Hogan (whose legal name is Terry Bollea), a retired professional

wrestler, sued Gawker for, inter alia, invasion of privacy for publishing a video

showing him having sex with a friend’s wife.

165

In May 2016, reports surfaced that

Mr. Thiel, a Silicon Valley mogul, funded the case. Reporting suggested,

specifically, that he did so in order to satisfy a personal vendetta: Gawker had

“outed” him as gay a decade earlier.

166

Bankrolling Hogan’s claim was, according

to news reports, his “revenge.”

167

Revenge is indeed a dish best served cold: careful

canvassing for a “good” plaintiff ultimately yielded a $140 million judgment in

favor of Mr. Hogan. The large judgment pushed Gawker into bankruptcy.

168

Because the funding in this case felled a news outlet, journalistic interest was

heightened and the case generated significant coverage in the press which, in turn,

led to increased calls to regulate the nascent but fast-growing litigation finance

industry.

169

Specifically, the case drew attention to the issue of whether the

165

See Bollea v. Gawker Media, LLC, No. 8:12-cv-02348-T-27TBM, 2012 WL 5509624, at *2

(M.D. Fla. Nov. 14, 2012).

166

See Eugene Kontorovich, Peter Thiel’s Funding of Hulk Hogan-Gawker Litigation

Should Not Raise Concerns, WASH. POST: THE VOLOKH CONSPIRACY (May 26, 2016, 5:19 AM),

https://www.washingtonpost.com/news/volokh-conspiracy/wp/2016/05/26/peter-thiels-

funding-of-hulk-hogan-gawker-litigation-should-not-raise-concerns/; Andrew Ross

Sorkin, Peter Thiel, Tech Billionaire, Reveals Secret War with Gawker, N.Y. TIMES (May 25,

2016),https://www.nytimes.com/2016/05/26/business/dealbook/peter-thiel-tech-

billionaire-reveals-secret-war-with-gawker.html.

167

Manuel Roig-Franzia, What Happens When Billionaires Battle Gossipmongers? Prepare

for Explosions, WASH. POST (Feb. 9, 2019, 4:00 AM), https://www.washingtonpost.

com/lifestyle/style/what-happens-when-billionaires-battle-gossipmongers-prepare-for-

explosions/2019/02/08/bb475576-2be8-11e9-b011-d8500644dc98_story.html. Thiel told the New

York Times, “It’s less about revenge and more about specific deterrence . . . . I saw Gawker

pioneer a unique and incredibly damaging way of getting attention by bullying people even

when there was no connection with the public interest.” Sorkin, supra note 166.

168

Gawker filed for bankruptcy on June 10, 2016. See In re Gawker Media LLC, 571 B.R.

612, 617 (Bankr. S.D.N.Y. 2017); see also Matt Drange, Peter Thiel’s War on Gawker: A

Timeline, FORBES (June 21, 2016, 1:22 PM),

http://www.forbes.com/sites/mattdrange/2016/06/21/peter-thiels-war-on-gawker-a-

timeline/#181ed4b17e80.

169

See, e.g., Michelle Castillo, Gawker to Pay Hulk Hogan at Least $31 Million to Settle

Case, CNBC (Nov. 8, 2016, 2:42 PM), https://www.cnbc.com/2016/11/02/gawker-settling-

litigation-with-peter-thiel-hulk-hogan-for-undisclosed-amount.html (noting the founder

of Gawker’s thoughts on the legacy of the Gawker-Hogan litigation and the potential

danger of “dark money” in litigation finance); Sorkin, supra note 166 (discussing the

increased journalistic interest in third party funding); Martha C. White, Peter Thiel vs.

Gawker: Case Highlights World of ‘Litigation Funding’, NBC NEWS (May 29, 2016, 7:37 AM),

https://www.nbcnews.com/business/business-news/peter-thiel-vs-gawker-case-highlights-

world-litigation-funding-n581726 (discussing the growing practice of litigation finance).

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

existence of funding agreements, the terms of any agreement, and/or the identity

of any funders should be public information.

170

To add complexity and intrigue to this example, according to Forbes magazine,

Gawker executives “agree[d] to sell a minority stake in the company to Russian

billionaire Viktor Vekselberg and his company . . . . [T]he money was used, in part,

to defend itself from ongoing litigation.”

171

In other words, litigation finance was

utilized on both sides of the ‘v.’ with questionable funding sources and

motivations on both cases.

Other ripped-from-the-headlines examples of funded litigations include

Stormy Daniels’ crowdfunded litigation;

172

the NFL concussion cases;

173

and

#MeToo cases.

174

Predatory lending practices on the consumer litigation finance

part of the industry, often deployed when individuals of limited means have

suffered a bodily injury and are seeking to finance personal injury cases, have also

been in the news.

175

In the international and transnational realm, attention

grabbers include funding in the bet-the-company and bet-the-region mass torts

litigation between thousands of Ecuadorian residents of the Amazon and the oil

170

This statement is based on more than a dozen calls from journalists received by the

author in connection with the disclosure of the Thiel financing of the Hulk’s case against

Gawker.

171

Drange, supra note 168; see Tom Winter & Robert Windrem, Who Is Viktor Vekselberg,

the Russian Oligarch Linked to Trump Lawyer Michael Cohen?, NBC NEWS (May 10, 2018,

6:22 AM), https://www.nbcnews.com/politics/donald-trump/meet-nice-russian-oligarch-

linked-trump-lawyer-michael-cohen-n872716 (explaining that Vekselberg is possibly linked to

money that has moved through companies he is associated with to Michael Cohen,

President Trump’s former personal lawyer and a convicted felon, and potentially paid to

Stormy Daniels).

172

See Stephanie Clifford, Clifford (aka Daniels) v. Trump et al., CROWDJUSTICE (Apr. 24,

2018), https://www.crowdjustice.com/case/stormy.

173

See Steven M. Sellers, Troubled NFL Concussion Deal May Roil NHL Cases,

BLOOMBERG LAW (May 25, 2018, 4:06 AM), https://news.bloomberglaw.com/product-

liability-and-toxics-law/troubled-nfl-concussion-deal-may-roil-nhl-cases.

174

See Matthew Goldstein & Jessica Silver-Greenberg, How the Finance Industry Is

Trying to Cash In on #MeToo, N.Y. TIMES (Jan. 28, 2018), https://www.nytimes.com/

2018/01/28/business/metoo-finance-lawsuits-harassment.html; Philippe A. Lebel, Could a

Litigation Finance Initiative Capitalize on #MeToo?, NAT’L L. REV. (Nov. 14, 2017),

https://www.natlawreview.com/article/could-litigation-finance-initiative-capitalize-metoo.

175

See, e.g., Matthew Goldstein, Judge Dismisses Federal Suit Accusing Firm of

Defrauding 9/11 Responders, N.Y. TIMES (Sept. 12, 2018),

https://www.nytimes.com/2018/09/12/ business/september-11-attacks-nfl-concussion-

settlements.html (discussing the practice of extending cash advances to people with

pending cases such as 9/11 responders).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

giant Chevron,

176

and the atypical, nonprofit funding by the Anti-Tobacco Trade

Litigation Fund, created by Bloomberg Philanthropies and the Bill and Melinda

Gates Foundation, which funded low- and middle-income countries that were

defendants in the international investment arbitration against tobacco companies

that claimed that regulations requiring plain packaging of tobacco products

violated their rights under investment treaties.

177

A domestic corollary can be

seen in the funding by Iowa agricultural groups of the defense of three state

counties against pollution charges, through the following non-transparent

structure:

In March of 2016, documents revealed . . . that agricultural groups—

including the Iowa Farm Bureau Federation, the Iowa Soybean

Association, the Iowa Corn Growers Association (ICGA) and the Iowa

Drainage District Association—secretly funded the defense of the Iowa

lawsuit through a 501(c)3 nonprofit, the Agricultural Legal Defense Fund.

According to Internal Revenue Service documents . . . fertilizer and other

agricultural company officials make up the bulk of the nonprofit’s officers

and directors, including representatives from Smith Fertilizer, Monsanto

Co., Growmark, Cargill, Koch Agronomics, DuPont Pioneer and the

United Services Association.

178

The list goes on and on, but these examples are sufficient to illustrate the key

point upon which this Part will elaborate: the range of funding scenarios is vast

and its vastness and variability is, arguably, the main reason those drafting

proposed disclosure rules find it hard to settle on a noncontroversial formula. For

176

See Chevron Corp. v. Donziger, 833 F.3d 74, 134 (2d Cir. 2016); Steinitz, The Litigation

Finance Contract, supra note 141, at 465-79.

177

See Philip Morris Brands Sàrl v. Oriental Republic of Uru., ICSID Case No. ARB/10/7,

Award, ¶¶ 12, 22 (July 8, 2016). For an explanation of third-party funding in that case as well

as other forms of third-party funding of investment arbitration, see Victoria Shannon

Sahani, Revealing Not-for-Profit Third-Party Funders in Investment Arbitration, OXFORD U.

PRESS (Mar. 1, 2017), http://oxia.ouplaw.com/page/third-party-funders [https://perma.cc/

LFF9-ML4K].

178

Llewellyn Hinkes-Jones, Open Records Request Exposes Rare Litigation Finance

Document, BLOOMBERG LAW (Feb. 23, 2017), https://www.bloomberglaw.com/product/

blaw/document/X2CUA2PO000000 [https://web.archive.org/web/20170223223237/

https://www.bna.com/iowa-pollution-suit-n57982084227/]. The report goes on to quote

Michael Reck, an attorney with Belin McCormick P.C. in Des Moines, Iowa, one of the law

firms representing the counties, as stating that such finance agreements are “not

uncommon.” Id.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

example, our legal system arguably should treat providing access to justice very

differently than it does using the courts as a vehicle for revenge. Similarly, as

already acknowledged, average Joes and Janes should receive more protection

(which may require disclosure to courts) than do sophisticated funded parties.

And foreign governments and their agents acting as financiers may require a

different level of scrutiny than a commercial entity, especially if the cases they

invest in have national security or foreign relations implications.

Similarly, companies funding cases against their competitors should be treated

differently than professional funding firms funding similar cases for a monetary

profit. Politically-motivated funding, while distasteful to many, should be

considered in light of First Amendment concerns not necessarily present in other

types of cases. The consideration for disclosure in arbitration—generally a

confidential forum but also one where the decision-makers are selected ad hoc by

parties (i.e., do not have life tenure)—are different from courts which, in rule of

law societies, are transparent and wherein judges are not jostling for their next

appointment. And it appears as though the public may regard a news outlet as

different from other types of defendants, especially if the litigation threatens to

drive it out of business.

In other words, variables such as the motivation and likely effects of the

funding, type of funder, type of funded party, type of defendant, subject matter of

the case, and forum all matter. Further, simply classifying the funding by type

does not dispose of the inquiry as to what type of and how much disclosure, if any,

is appropriate. For example, arbitrators, who usually have a private practice and

serve clients when they’re not serving on a tribunal, may be more likely to have a

conflict of interest than are judges, pointing in the direction of more disclosure in

arbitration. However, arbitrators, unlike judges, are not empowered to protect the

general public and are not expected or empowered to consider policy implications

to the same extent as judges are, pointing in the direction of less disclosure.

And here is another example of the context-specificity needed. Even in

international arbitration, one size does not fit all: the funding of a commercial

claim brought by a commercial party does not, on its face, suggest transparency of

funding is warranted. But the funding of an international arbitration involving,

say, a boundary dispute or exploration rights does call for transparency as to who

is pulling the purse strings because of the public interest involved in such matters.

Finally, and again an example from international arbitration, at the beginning of

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

the process disclosure of the identity of the funder aimed only at the tribunal may

be all that is needed for conflicts check purposes. Conversely, at the end of a case

when a panel needs to decide whether and to what extent to shift the cost of the

proceeding to the losing party, disclosure of the funding terms to both the tribunal

and opposing party may be warranted.

179

The dizzying array of variables and variations suggests that: (i) judges and

arbitrators should be empowered to inquire into funding and; (ii) the extent and

form of this important inquiry should be left to the discretion of the individual

decision-maker so she can engage in a thoughtful weighing of the intricate

considerations as they pertain to the facts before her. The next Part brings the

analysis full circle with a proposed balancing test.

IV. THE PROPOSAL: A BALANCING TEST

To properly account for the role of litigation finance in proceedings before them,

judges and arbitrators should be given broad discretion to undertake a contextual

analysis and should not be hamstrung by the kinds of all-or-nothing or otherwise

bright-line rules currently contemplated. Nor, however, should they be left totally

without guidance, even though, at present, it is understood that decision-makers

such as judges or arbitrators have the authority to order disclosure. In short, the

proper approach to the question of whether and what to disclose is a balancing

test.

To simplify a vast debate in legal philosophy,

180

the distinction between rules

and standards is as follows. “Rules” are rigid and constraining: “Once a rule has

been interpreted and the facts have been found, then the application of the rule to

179

See INT’L COUNCIL FOR COMMERCIAL ARBITRATION, supra note 148, at 159.

180

For jurisprudential classics on the rules/standards distinction and its implications,

see, for example, H.L.A. HART, THE CONCEPT OF LAW 126-31 (1961); ROSCOE POUND, AN

INTRODUCTION TO THE PHILOSOPHY OF LAW 115-23 (1922); FREDERICK SCHAUER, PLAYING BY THE

RULES: A PHILOSOPHICAL EXAMINATION OF RULE-BASED DECISION-MAKING IN LAW AND IN LIFE

10-12 (1991); Ronald M. Dworkin, The Model of Rules, 35 U. CHI. L. REV. 14, 22-29 (1967);

Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L. REV. 1685,

1687-1701 (1976). For examples of treatment of the distinction and its consequences from

the law and economic tradition, see, for example, Colin S. Diver, The Optimal Precision of

Administrative Rules, 93 YALE L.J. 65 (1983); Isaac Ehrlich & Richard A. Posner, An

Economic Analysis of Legal Rulemaking, 3 J. LEGAL STUD. 257 (1974); Louis Kaplow, Rules

Versus Standards: An Economic Analysis, 42 DUKE L.J. 557 (1992).

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

the facts decides the issue to which it is relevant.”

181

Conversely, standards

provide discretion. They seek to guide rather than dictate an outcome. To

illustrate:

Oliver Wendell Holmes and Benjamin Cardozo find themselves on

opposite sides of a railroad crossing dispute. They disagree about what

standard of conduct should define the obligations of a driver who comes

to an unguarded railroad crossing. Holmes offers a rule: The driver must

stop and look. Cardozo rejects the rule and instead offers a standard: The

driver must act with reasonable caution.

182

There are tradeoffs when choosing one approach over the other, but a standard

is ultimately preferable to a rule in this context. The main advantage of rules is

their predictability. The main advantage of standards is fairness through context-

specificity. This is so because rules give law content ex ante whereas standards do

so ex post.

183

Further, “[r]ules typically are more costly than standards to create,

whereas standards tend to be more costly for individuals to interpret when

deciding how to act and for an adjudicator to apply to past conduct . . . . [W]hen

individuals can determine the application of rules to their contemplated acts more

cheaply, conduct is more likely to reflect the content of previously promulgated

rules than of standards that will be given content only after individuals act.”

184

standard, therefore, will provide less guidance to litigation financiers, attorneys,

and parties than a rule would and, in that sense, could create costly uncertainty.

The lack of a rule could even allow for undesirable behavior as actors explore,

through trial (no pun intended) and error, what is and is not permissible.

Notwithstanding the costs of uncertainty and potentially undesirable behavior,

a standard is the right approach to litigation finance disclosure because the sector

and its best practices are still evolving and, more importantly, because no single

181

Lawrence Solum, Legal Theory Lexicon: Rules, Standards, and Principles, LEGAL

THEORY BLOG (Sept. 6, 2009, 9:40 AM), http://lsolum.typepad.com/legaltheory/2009/09/

legal-theory-lexicon-rules-standards-and-principles.html [https://perma.cc/8EF4-SXLV].

Solum, like others, distinguishes between standards and principles but, for simplicity, I will

follow Dworkin and limit the distinction to rules and standards. See Dworkin, supra note

180, at 22-29.

182

Pierre Schlag, Rules and Standards, 33 UCLA L. REV. 379, 379 (1985) (footnotes

omitted).

183

See Kaplow, supra note 180, at 559-60.

184

Id. at 557.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

rule would be able to encompass the vast array of scenarios falling under the

increasingly stretched definition of litigation finance. What rule, for instance,

could adequately account for the difference between a corporate plaintiff whose

legal costs are partially covered by a sophisticated investor who has arranged with

the corporation’s law firm to fund a portfolio of cases, on the one hand, and, on the

other, a fired factory worker whose civil rights case is funded by a small startup

focused on algorithm-driven investments in claims worth under one million

dollars? And yet both of those are examples of litigation funding.

In the following Section I argue, more specifically, for a particular kind of

standard: the balancing test. The reason for this recommendation is that “[i]n

almost all conflicts . . . there is something to be said in favor of two or more

outcomes. Whatever result is chosen, someone will be advantaged and someone

will be disadvantaged; some policy will be promoted at the expense of some

other.”

185

A balancing test thus recognizes that, normatively speaking, litigation

funding is, ex ante, neither “good” nor “bad” nor is its regulation (here, in the form

of disclosure) “good” or “bad.” It is context specific. This pragmatism, inherent to

the judicial activity of balancing, is the reason why, while this legal technique has

its detractors,

186

“[b]alancing tests are ubiquitous in American law. From the Due

Process Clause to the Freedom of Speech and from the federal joinder rules to

personal jurisdiction, U.S. law makes the outcome of legal disputes dependent on

the balancing of various interests and factors.”

187

185

Arthur Allen Leff, The Leff Dictionary of Law: A Fragment, 94 Yale L.J. 1855, 2123

(1985). For an in-depth discussion of the benefits and perils of balancing tests, see, for

example, T. Alexander Aleinikoff, Constitutional Law in the Age of Balancing, 96 YALE L.J.

943, 943-44, 965-66 (1987) (discussing these modes of judicial decision making in the

context of constitutional law). Litigation finance, inter alia, intertwines with the

constitutional values of the right to have one’s day in court and of due process.

186

See Patrick M. McFadden, The Balancing Test, 29 B.C. L. REV. 585, 636-49 (1988). See

generally Aleinikoff, supra note 185 (discussing the rise in use of balancing tests and giving

various critiques of balancing).

187

Lawrence Solum, Legal Theory Lexicon: Balancing Tests, LEGAL THEORY BLOG (Dec.

10, 2017, 5:37 PM) (emphasis added), http://lsolum.typepad.com/legaltheory/2017/12/

legal-theory-lexicon-balancing-tests.html [https://perma.cc/8AGY-WUQW].

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

A. The Proposed Balancing Test

In this Section, I will first outline the important interests of the public and of the

parties at stake in litigation finance. Then, I will map those interests onto a series

of concrete factors that judges and arbitrators should consider when deciding on

disclosure.

188

1. Interests

Whether and how a litigation is funded implicates public and private interests.

189

Specifically, the public has an interest in such matters as access to justice, the

development of the law, the cost of civil justice, the level of litigation in society,

whether systemically the “Haves” come out ahead in litigation, the length of time

litigation takes, the extent of discovery the parties can afford/inflict, and the

purposes for which the public good that is the justice system is being used (e.g.,

justice, compensation, third party profits, revenge, politics, policy, and so

forth).

190

A special subset of public interest is the interests of the forum itself

(usually, judicial economy). However, because the manner in which effects on the

courts often feature in policy debates surrounding litigation finance, and due to

the prevalence of arbitration which raises a separate set of concerns, I treat forum

interests as a separate category. Finally, the private litigants, both the funded

plaintiffs and the defendants who face them, have private interests which must be

weighed. Some of those overlap with the public interests mentioned above—

plaintiffs, for instance, have a stake in improved access to justice and plaintiffs

and defendants both have an interest in efficient proceedings—but others exist

188

This is an expansion and an application of a taxonomy I first offered in a previous

article. See Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1302-03.

189

Balancing tests often take the meta structure of balancing public versus private

interests with different private and public interests falling under each category depending

on the interests. A couple of examples include the balancing test for granting preliminary

injunctions and the one for granting dismissal based on forum non conveniens. See 11A

CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2948.2 (3d

ed. 2019); 14D CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND

PROCEDURE § 3828 (4th ed. 2019).

190

For a discussion of how repeat players such as funders can affect whether the

“Haves” or “Have-nots” come out ahead in litigation, see Steinitz, Whose Claim Is This

Anyway?, supra note 147, at 1299-1302. For a similarly canonical explanation of why there is

both too little and too much litigation due to the divergence of private and social incentives

to sue, see Shavell, supra note 152, at 575-81.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

independently. Any test relating to a component of litigation—its finance—

should weigh all of these categories of interests.

I will first lay out those interests in more detail, and in the next Section, I will

turn to a discussion of how those interests manifest in specific aspects of a

litigation (or arbitration) that could be the subject of a decision-maker’s attention

when contemplating disclosure.

a. Public Interests

That the extremely high cost of litigation puts justice out of reach for most average

Joes and Janes is the starting point for many a course in first year civil procedure.

The public has an interest in reducing barriers to accessing the courts. Indeed, the

global litigation finance industry first took hold in Australia and the United

Kingdom when each jurisdiction legalized the practice as part of national access

to justice reforms.

191

Disclosure requirements that are too cumbersome may

depress the level of available funding, or raise its costs, or both, diminishing the

benefits litigation finance contributes to access to justice.

192

The expense of litigation imposes an additional cost—by increasing the

homogeneity of parties it also increases the homogeneity of the issues presented

to the courts. This means that some areas of the law get more judicial attention

than others and consequently benefit from more iterative and nuanced

development. The public has an interest in access to justice generally, but also an

independent interest in the development of areas of law that may be less keenly

pursued by the deep-pocketed litigants who can best afford to go to court.

Litigation finance has the potential to add significant diversity to the pool of those

able to afford to litigate, and therefore to increase the diversity of issues before the

courts. But it holds the potential to do more than that. In terms of contribution to

the development of the law and the question of who gets to affect judicial law-

making, namely is it only the “Haves,” or do the “Have-nots” get a chance to do so

as well?:

191

Michael Napier et al., CIVIL JUSTICE COUNCIL, IMPROVED ACCESS TO JUSTICE — FUNDING

OPTIONS AND PROPORTIONATE COSTS 54 (2007); RUPERT JACKSON, REVIEW OF CIVIL LITIGATION

COSTS: FINAL REPORT 40 (2009), https://www.judiciary.uk/wp-content/uploads/JCO/

Documents/Reports/jackson-final-report-140110.pdf.

192

See Avraham & Sebok, supra note 153, at 5-6, 30.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

By aligning structurally weak social players who make infrequent use of

the courts (one-shotters) with powerful funders who make repeated use

of the court system (repeat players), litigation funding may alter the

bargaining dynamics between the litigating parties in favor of

disempowered parties. It may thereby enable the litigation process to

serve as a redistributive tool by society’s have-nots as opposed to an

(unwitting, perhaps) guardian of the status quo in favor of society’s haves.

In other words, it may allow these traditionally disempowered parties to

“play for rules,” i.e., to affect the content of legal rules determined by the

courts.

193

In addition to the general barrier to access to justice imposed by excessively

expensive litigation, the high cost of particular parts of the process, especially

discovery, opens the door to gamesmanship. The party with more resources has

considerable leeway to decide whether, for instance, to “bury” the opposing party

with document production or to overwhelm it with discovery requests. Over time,

this has contributed to the assessment that the better-resourced party has an

undeservedly higher chance of prevailing in any given case. This undermines the

strong public interest in having courts that offer a level playing field. Litigation

finance can redress that imbalance by equalizing the resources of parties thus

making gamesmanship around costs a less effective strategy.

Not all public interests go the way of litigation finance, however. For instance,

courts should be a place for the resolution of disputes and not a source of business

profit. This is not to say that plaintiffs with legitimate claims should not be able to

secure financial settlements or damages awards just because they need to pay

financing costs in order to so do. (In this sense, financing litigation is the same as

financing education, health care, and so forth through various forms of financing

that carry fees). But it does mean that if in any single case, “portfolio” of cases, or

category of cases, ultimately most of the recovery goes to the financiers (be they

lawyers or third-party funders), rather than to compensate injured parties, deter

bad behavior, or otherwise promote the traditional goals of the public good that is

the civil justice system, judges can and should be able to take such factors into

consideration as they already do, e.g., when supervising class action settlement.

And this, in turn, may mean looking into the funding arrangements, including the

193

Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1271-72.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

financial terms, and if need be, determining who is the real party in interest in the

case.

194

In the same vein, litigation finance may, in any given case, stretch the already

lengthy timeline of litigation. The efficiency of the justice system is of

considerable public interest. If financed parties use the resources available to

them to draw out a case that might otherwise have been withdrawn or settled, in

order to extract more profit, especially when a finance agreement allows a funder

to “vote” against settlement, the system risks becoming more inefficient and

expensive for everyone. In other countries, especially those with civil law systems,

judges have much more discretion than do American judges, constrained as they

are by the Seventh Amendment, to throw out a case at almost any stage of the

proceedings.

195

The lesser discretion enjoyed in that regard by U.S. judges

increases the danger that funded parties and those backing them could impose

inefficiencies on the process in their quest for profits.

196

194

In this vein, I have argued elsewhere that consumer litigation funding regulation should

ensure that plaintiffs are guaranteed a minimum of 50% recovery of tort claims. See Lawsuit

Lending: Hearing Before the N.Y. State S. Standing Comm. on Consumer Prot., (N.Y. 2018)

(statement of Maya Steinitz, Visiting Professor of Law at Harvard Law School, Professor of Law at

University of Iowa School of Law), https://www.nysenate.gov/transcripts/public-hearing-05-16-

18-nys-senate-hearing-consumer-protection-finaltxt. See generally Maya Steinitz, Letter to the

Hon. Sen. Orrt (NYS Senate) Regarding Litigation Finance (Lawsuit Lending) (2018) (Univ. of

Iowa Legal Studies Research Paper No. 18-15, 2018), https://papers.ssrn.com/sol3/

papers.cfm?abstract_id=3238148 (arguing for a 50% minimum recovery requirement by

addressing both the economics of the requirement and the normative arguments for it).

195

See generally JAMES G. APPLE & ROBERT P. DEYLING, A PRIMER ON THE CIVIL-LAW SYSTEM

26-27 (1995) (outlining differences in the legal process between civil-law judges and American

judges).

196

For an example of a litigation finance agreement that grants control over settlement

of consumer cases (low value cases brought on a volume basis), see Mize v. Kai, Inc., No. 17-

CV-00915-NYW, 2018 WL 1035084, at *5 (D. Colo. Feb. 23, 2018) and Carton v. Carroll

Ventures, Inc., No. CV 17-0037 KG/SCY, 2017 WL 8941281, at *4 (D.N.M. July 10, 2017). Both

cases discuss a funding scheme by a funding entity which funded discrimination cases

brought under the Americans with Disabilities Act. Under the scheme, the funding

agreement purported to limit the plaintiffs’ ability to discontinue the litigation or settle

without the funder’s prior consent as well as to require plaintiffs to settle if so directed by

the funder. The funding agreement also had the effect of awarding plaintiffs $50 per case

with all other proceeds going to the funder and attorney. For an example of a litigation

finance agreement that grants control over settlement of a mass tort case to the funder, see

the discussion of the funding in the Chevron-Ecuador environmental mass tort litigation in

Steinitz, The Litigation Finance Contract, supra note 141, at 465-79.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

Another, less obvious, element of this analysis is the public interest in data

about this brand new, game-changing practice.

197

In the early days of the

contingency fee, in the 1920s, the New York City bar and bench grew increasingly

worried about contingency fee practices. In 1928, the bar associations for New York

City, Manhattan, and the Bronx requested the Appellate Division of the First

Judicial Department of the New York Supreme Court to investigate the matter.

The Appellate Division entrusted Justice Wasservogel with the task and

commissioned a report.

The findings of this report led to a recommendation that

attorneys be required to file a copy of the retainer agreements between the

contingency lawyers and their clients, and an affidavit explaining how the retainer

was obtained and affirming that the case had not been solicited by the attorney.

198

The First Judicial Department implemented some of the report’s

recommendations, amongst them a requirement that plaintiffs’ lawyers file so-

called retainer statements that set out the terms of the attorney’s compensation.

Fast forward to 1955, and Justice Wasservogel was once again commissioned to

produce a report on contingent fee practices and consider capping such fees.

This

second report was based on the retainer statements mandated by the 1929

regulations which were mined and resulted in a finding that 60% of retainers

specified that 50% of any recovery went to the lawyers. The ultimate policy

outcomes of this second, data-based report were that the First Judicial

Department issued regulations that capped contingency fees in actions for

personal injury or wrongful death at one-third.

199

The new regulations further

required “that lawyers file with the court a ‘closing statement’ within fifteen days

of receiving any money on behalf of a client, whether in judgment or settlement.

The closing statement records ‘[t]he gross amount of the recovery, . . . [t]he taxable

costs and disbursements, . . . [t]he net amount of the recovery actually received by

197

See Eric Helland et al., Contingent Fee Litigation in New York City, 70 VAND. L. REV.

1971, 1973-76 (2017) (describing the evolution of the requirement that lawyers in tort cases

filed in New York file a copy of their retainer and a closing statement with pertinent

information and how the data comprised of such disclosure affected the legislative cap on

contingency fees in the state).

198

See id. at 1972-74.

199

See id. at 1974-75. Or a regulatory sliding scale. See id. at 1975.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

the client, . . . [t]he amount of the compensation actually received or retained by

the attorney’ . . . .”

200

In other words, what is now a core tenet of contingency fee practice in personal

injury cases (at least in New York), namely a cap on attorney’s fees, was a direct

outcome of data-gathering and data-based policy-making.

201

The need for data in

the context of litigation funding is particularly acute because of a feature of the

commercial litigation funding industry universally overlooked in the disclosure

debate: funding agreements almost always contain arbitration clauses.

202

This

means that the public—be it consumers or legislatures—has no way to understand

the reality of the practice and engage in fact-based consumerism, negotiation, and

regulation.

203

With this non-exhaustive list of public interests in place, let us turn to look at

some of the private interests at play. Here, too, the discussing is not meant to be

exhaustive.

b. Private Interests

The private parties to consider are the litigating parties—including individual

plaintiffs, classes, and defendants—and the funders. (As a side note, another

potential category of possible private parties whose interest should be weighed,

but are beyond the scope of this Essay, are the investors who invest in litigation

200

Id. at 1975 (quoting the report) (internal quotation marks omitted). These closing

statements, in turn, yielded Helland et al.’s article which contains invaluable findings

including that “very few cases are resolved by dispositive motions; that litigated cases and

settled cases have almost exactly the same average recovery; that median litigation

expenses, other than attorney’s fees, are 3% of gross recovery; that claims are

disproportionately from poor neighborhoods; and that attorneys’ fees are almost always

one-third of net recovery, which is the maximum allowed by law.” Id. at 1971.

201

See id. at 1972-76.

202

This observation is based on the author’s extensive experience working with funders,

plaintiffs, law firms, and investors, as well as on conversations with funding firms.

Exceptions tend to occur only when the funding is provided by an ad hoc funder rather

than a funding firm, which means that litigation over funding agreements in the courts are

based on agreements that are unlikely to be the industry standard.

203

The lack of data about the industry and its practices was a recurring theme during

the public hearing on the regulation of consumer litigation funding held by the New York

State Senate Standing Committee on Consumer Protection in May 2018. See NY Senate,

Public Hearing - Committee on Consumer Protection - 5/16/18, YOUTUBE (May 16, 2018),

https://www.youtube.com/watch?time_continue=245&v=y2hQNhpVJHk.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

finance. These increasingly include pension funds, university endowments, and

sovereign wealth funds.

204

)

Plaintiffs’ interests include access to justice and the wherewithal to withstand

the long and expensive process of litigation on the individual case level (as distinct

from the overall access to justice and average litigation length public concerns

discussed in the previous Section). Plaintiffs’ interests also include privacy in

relation to their finances. As I like to tell my students to illustrate this last point,

whether my mother-in-law is funding my slip-and-fall case and what kind of

strings she attaches to such funding has never been considered of relevance in a

litigation. That status quo is a good place to start the analysis, with deviations

requiring affirmative justification.

Of course, defendants have countervailing interests, such as being able to

pursue avenues reasonably calculated to lead to material information that may

help expeditiously and fairly resolve the dispute and a right to know, and confront,

the real party in interest in the case they are defending.

Finally, funders’ interests should also weigh in the balance. These include

intellectual property in the financial products they produce and a desire to keep

the costs of doing business (assuming a for-profit funder) low.

205

The latter means

a legitimate concern in avoiding being dragged into the discovery process, being

joined as a party, or otherwise being the target of strategic satellite litigation.

c. Forum Interests

In addition to avoiding conflicts of interest on the part of the judges, which is a

basic tenet of the rule of law, core concerns for the courts and the judicial system

as a whole are the efficient resolution of disputes and the overall integrity of the

system. These, too, may point towards limiting satellite litigation relating to

litigation funding in the form of seeking discovery from funders or joining them

as codefendants for purely tactical reasons, practices which may unnecessarily

complicate and raise the cost of litigation. But it also includes empowering judges

204

See Sara Randazzo, Litigation Financing Attracts New Set of Investors, WALL ST. J.

(May 15, 2016, 5:37 PM), https://www.wsj.com/articles/litigation-financing-attracts-new-

set-of-investors-1463348262 (“Pension funds, university endowments, family offices and

others have collectively pumped more than a billion dollars into the sector . . . .”).

205

By analogy, contingency fee agreements receive, under certain conditions,

protection based on the same rational. See Maya Steinitz & Abigail C. Field, A Model

Litigation Finance Contract, 99 IOWA L. REV. 711, 722-23 (2014).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

to figure out, through disclosure, whether the funding terms inappropriately

incentivize lengthening the litigation timeline as well as whether the funding

arrangement, e.g. the composition of a portfolio, incentivize the filing of prima

facie non-meritorious claims.

206

In the same vein, the judicial system also has an

interest in preventing arrangement types—such as highly synthetic derivatives

backed by contingent (or even speculative) litigation proceeds—that are likely to

flood the courts with non-meritorious cases.

207

2. Factors

Each of the interests discussed above can be mapped onto one or more concrete

factors in any given litigation or arbitration. This is important, because judges and

arbitrators should not be left to consider in the abstract whether disclosure, as a

general concept, increases access to justice or diversity in legal issues, for example,

but should instead be provided with guidance for how those interests might play

out in specific litigation scenarios depending on their profile, as understood in

light of the variables described above. The following Subsections describe those

specific factors.

a. The Profile of the Plaintiffs and Their Motive for Seeking Funding

A plaintiff’s profile and reasons for seeking funding are important because they

bear on the extent to which interests such as access to justice are at stake. Funded

plaintiffs may be consumers, start-up companies, established corporations,

developing and developed nations, a lead plaintiff in a class action, or the class

206

Some market participants have suggested to me that some law firms and/or

corporations are asking financiers to accept weak cases as part of a portfolio if they wish to

obtain the right to finance the entire portfolio (or, in other words, if they wish to do the

functional equivalent of taking an equity stake in the firm). If true, this is similar to the

practice of bundling prime and subprime mortgages in mortgage-based securities. To

highly simplify, the idea is that by first bundling and then “slicing” the bundles,

securitization allowed for the shifting of risk of subprime mortgages from the originators

and primary investors to the overall secondary market and the economy as a whole.

Famously, the true costs of this practice were also externalized on the subprime borrowers

who ended up in foreclosure, the taxpayers who needed to bail out banks and other

entities, and the global economy as a whole. See, e.g., Yuliya S. Demyanyk & Otto Van

Hemert, Understanding the Subprime Mortgage Crisis, 24 REV. FIN. STUD. 1848, 1875-76

(2011); Steve Denning, Lest We Forget: Why We Had a Financial Crisis, FORBES (Nov. 22, 2011,

11:28 AM), https://www.forbes.com/sites/stevedenning/2011/11/22/

5086/#36da42daf92f.

207

Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1318-22.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

itself, to name but some examples. The degree to which disclosure-based court

involvement and the rigors of the adversarial system should be brought to bear

may differ based on such characteristics of the funded plaintiffs.

To further elaborate, an established corporation might seek litigation funding

as a form of corporate finance. In this scenario, one might imagine a sophisticated

corporation using third-party litigation funding as a way to shift litigation risk, to

manage its balance sheet, or to obtain operating capital during a time when

litigation otherwise limits access to capital. Conversely, parties who might

otherwise lack the resources to withstand long and expensive trials, or even to

bring their claims at all, may seek financing in order to be able to access the civil

justice system.

208

These cases should not be treated alike for regulatory purposes.

Further, consumers are generally understood to require a higher level of

protection than do sophisticated entities. Similarly, members of a class are

understood to need more court protection than, perhaps, both of the preceding

categories.

209

b. Funder’s Profile and Motivation

Dispassionate for-profit litigation finance firms, secretive hedge funds, wealthy

individuals, family members, non-profits, law firms providing pro bono services,

208

See Anthony J. Sebok, Private Dollars for Public Litigation: An Introduction, 12 N.Y.U.

J.L. & BUS. 813, 813-14 (2016); Anthony J. Sebok, Should the Law Preserve Party Control?

Litigation Investment, Insurance Law, and Double Standards, 56 WM. & MARY L. REV. 833,

894-95 (2015); Steinitz & Field, supra note 205, at 716; W. Bradley Wendel, Paying the Piper

but Not Calling the Tune: Litigation Financing and Professional Independence, 52 AKRON L.

REV. 1, 13-14 (2018); Christopher P. Bogart, The Case for Litigation Funding, BURFORD: BLOG

(Oct. 11, 2016), http://www.burfordcapital.com/blog/case-litigation-funding

[https://perma.cc/

KLZ8-99VD]; Maya Steinitz, Contracting for Funding in “Access to Justice Cases” Versus

“Corporate Finance Cases,” MODEL LITIG. FIN. CONT. (June 24, 2013),

http://litigationfinancecontract.com/contracting-for-funding-in-access-to-justice-cases-versus-

corporate-finance-cases [https://perma.cc/WFK4-PD6G].

209

This was generally held to be the case, for example, in the September 11th litigation.

See Transcript of March 19, 2010 Status Conf., In re World Trade Ctr. Disaster Site Litig., 21

MC 100, Doc. No. 2037 at 54-55 (S.D.N.Y. Mar. 19, 2010). On the potential conflicts of

interest that third party funding of class action may introduce, see Brian T. Fitzpatrick, Can

and Should the New Third-Party Litigation Financing Come to Class Actions?, 19

THEORETICAL INQUIRIES L. 109, 115-23 (2018). See generally Deborah R. Hensler, Third-Party

Financing of Class Action Litigation in the United States: Will the Sky Fall?, 63 DEPAUL L.

REV. 499, 509-16 (2014) (outlining issues that may arise if third-party litigation financing

becomes frequent in class action suits in the United States).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

political action committees (PACs), foreign governments (through sovereign

wealth funds or otherwise), “crowds” funding via crowdfunding platform—all

these are examples of litigation funders currently active in the market. These

descriptors already hint at the wide variety of possible motivations for funding:

profit, affecting rule-change for ideological or commercial reasons, assisting the

indigent or a family member, hindering the competition, furthering foreign

policy, opening up the courts to underrepresented claims or claimants, privately

enforcing the law

210

—these and more may all be motivations for funding. Some

motivations are, arguably, more worthy of protection than others. To take an

extreme example, consider the firestorm that followed the Gawker case, where

Hogan’s backer seemed to be interested, troublingly, chiefly in revenge and where

his target was a member of the Fourth Estate.

To make explicit what the foregoing illustration highlights—the type-of-funder

factor overlaps (but is not coextensive with) the funders’ motivation. The

commercial funder envisioned in the previous paragraph will likely be somewhat

constrained by reputational considerations—wanting to be known for screening

and backing good cases and providing decent funding terms. It is also likely to be

interested in profitable cases which, usually, will correlate with meritorious ones,

and will likely be uninterested in vendettas, politics, foreign relations, and the

like. For good and bad, it will also not be concerned with promoting the public

interest. Conversely, not-for-profit funders may be concerned with (their version

of) the public interest but, of course, what constitutes and furthers the “public’s

interest” is often a contested matter. A sovereign wealth fund or a foreign

government may seek to advance foreign policy or military goals. A one-shot

funder

211

may be interested in profit, hindering a competitor, revenge, fame, or

politics. A PAC, or a politically-motivated wealthy individual, will probably wish

to advance a political agenda. A “crowd” may be comprised of people motivated

210

On third party funding’s effect on private enforcement of law through class and mass

action, see generally John C. Coffee, Jr., Securities Litigation Goes Global, LAW (Sept. 15,

2016, 12:00 AM),

https://www.law.com/newyorklawjournal/almID/1202767289255/securities-litigation-

goes-global/; Deborah R. Hensler, The Future of Mass Litigation: Global Class Actions and

Third- Party Litigation Funding, 79 GEO. WASH. L. REV. 306, 322-23 (2011).

211

On the disparate use of litigation by “one-shotters” versus “repeat players” to

advance goals beyond a win in a particular case, especially to affect changes in the law, see

Marc Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal

Change, 9 LAW & SOC’Y REV. 95, 97-114 (1974) [hereinafter Why the “Haves” Come Out Ahead].

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

by justice, politics, or profit. Interestingly, as the reaction to the Gawker case

illustrates, maintenance—funding without a profit motivation—may be more

problematic than champerty—funding for a profit—even though much of the

contemporary consternation around the rise of litigation finance focuses on

“profiteering” from others’ claims and from the justice system.

212

We should leave it to the discretion of the judge whether suspicion or evidence

of certain motivations should factor into the decision of whether and how much

to disclose of the funding arrangement. Similarly, the weight to be given to the

type of funder, which inter alia hints at motivation, is also a factor to weigh in the

balance.

c. The Case Type and the Forum

Individual litigation, class actions, mass actions, or arbitration (which can be

domestic, international regarding commercial law, or international regarding

investment law) implicate completely different issues which may call for court

supervision and public interest-based transparency as to how a case is funded, by

whom, in what manner, and for what goal.

For example, class and mass cases, wherein the lawyers rather than the clients

drive and control the case, are very different from individual claims. In the class

action context, in particular, members of the class are unnamed and may even be

unknown.

213

Traditionally, courts exercise more supervision over such litigation

including, critically, over settlements because of the myriad conflicts they entail

and the scale of threat they present to defendants. The presence of third-party

funding, in lieu of or in combination with attorney funding, is likely to exacerbate

212

Champerty is defined as an “agreement to divide litigation proceeds between the

owner of the litigated claim and a party unrelated to the lawsuit who supports or helps

enforce the claim” or, more pejoratively, as “[a]n agreement between an officious

intermeddler in a lawsuit and a litigant by which the intermeddler helps pursue the

litigant’s claim as consideration for receiving part of any judgment proceeds.” Champerty,

BLACK’S LAW DICTIONARY (11th ed. 2019). It is a form of maintenance whereby “assistance in

prosecuting or defending a lawsuit [is] given to a litigant by someone who has no bona fide

interest in the case.” Id. at Maintenance.

213

The writings on the conflicts of interest inherent in class and mass actions where the

lawyers, rather than the clients, control the litigation are legion. See, e.g., John C. Coffee,

Jr., Class Wars: The Dilemma of the Mass Tort Class Action, 95 COLUM. L. REV. 1343, 1358-67

(1995); Samuel Issacharoff, Class Action Conflicts, 30 UC DAVIS L. REV. 805, 827-30 (1997);

Geoffrey P. Miller, Conflicts of Interest in Class Action Litigation: An Inquiry into the

Appropriate Standard, 2003 U. CHI. LEGAL F. 581, 597 (2003).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

conflicts of interest in this context and so court involvement should be heightened

as compared to individual cases.

214

In another example, arbitration (excluding public international law disputes) is

a private process conducted in a private forum. By its very essence, private

adjudication behind closed doors involves less transparency than litigation in

open courts. Further, arbitrators—privately appointed ad hoc to resolve a specific

dispute based on the parties’ agreement that they do so—are not a branch of the

government entrusted with and required to safeguard the public interest in the

same manner judges are. Arbitrators, therefore, may need to be more circumspect

with the goals they wish to further in imposing disclosure.

215

But even here, more

granularity and nuance are required than simply identifying the case type or the

forum. For example, it is understood that international investment arbitration, in

which a foreign investor sues a government for violation of a bilateral investment

treaty, is a form of private adjudication of public disputes and as such arbitrators

sitting in such matters must hew more closely towards both transparency and

safeguarding public interests (generally

216

as well as specifically when it comes to

disclosure of who is funding the arbitration, in what manner, and in furtherance

of what goals

217

214

A commendable example is a recent procedural order by Judge Polster of the United

States District Court for the Northern District of Ohio, discussed infra Section D of this Part.

215

For the debates on the proper disclosure regime in international commercial

arbitration, see Elizabeth Chan, Proposed Guidelines for the Disclosure of Third-Party

Funding Arrangements in International Arbitration, 26 AM. REV. INT’L ARB. 281, 281-83

(2015); Jennifer A. Trusz, Note, Full Disclosure? Conflicts of Interest Arising from Third-

Party Funding in International Commercial Arbitration, 101 GEO. L.J. 1649, 1673 (2013).

216

For discussions of international investment arbitration as a form of public law and

the attendant considerations arbitrators must consider, see generally Susan D. Franck, The

Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law

Through Inconsistent Decisions, 73 FORDHAM L. REV. 1521, 1543-45 (2005); Stephan W. Schill,

Enhancing International Investment Law’s Legitimacy: Conceptual and Methodological

Foundations of a New Public Law Approach, 52 VA. J. INT’L L. 57, 71-73 (2011).

217

For discussion of the proper disclosure regime in international investment

arbitration, and how it differs from the desirable regime in international commercial

arbitration, see Rachel Denae Thrasher, Expansive Disclosure: Regulating Third-Party

Funding for Future Analysis and Reform, 59 B.C. L. REV. 2935, 2944-48 (2018); Frank J.

Garcia, The Case Against Third-Party Funding in Investment Arbitration, INT’L INST.

SUSTAINABLE DEV. (July 30, 2018), https://www.iisd.org/itn/2018/07/30/the-case-against-

third-party-funding-in-investment-arbitration-frank-garcia [https://perma.cc/52YH-

4EZU].

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

d. The Subject Matter

Funders have shown interest in cases spanning areas such as contracts, torts,

antitrust, intellectual property, consumer protection, qui tam, individual and

mass torts, human and civil rights, divorce, international commercial, and

investment law—to name some common examples. The degree of disclosure

desirable in these disparate areas of law is, arguably, different.

One can easily argue, for example, that transparency with respect to those

pulling the purse strings and influencing legal argumentation, strategy,

settlement, and precedent-making is much more important in international

investment disputes, which are governed by public international law, involve the

distribution of public money into private hands, and often adjudicate the validity

of the conformity of regulation and legislation in the areas of environmental

protection, workers’ rights, and consumer protection with sovereigns’

international obligation than it is in international commercial arbitration

involving contracts between private parties.

218

Similarly, divorce often implicates the third-party interests of minors.

Therefore, who influences the course of such litigation and its outcome, and the

court’s ability to bring such potentially real party in interest forth is different than

in, say, contract or even tort disputes.

219

As these examples illustrate, the subject matter of the litigation should affect

whether and what form disclosure of funding is appropriate.

e. Potential Effect on the Development of the Law

Famously, and as alluded to above, repeat players—like corporations, insurance

companies, and third-party funders—can and do “play for rules,” namely litigate

rather than settle in order to change the content of the law.

220

And “[w]hile rule

218

International investment law involves the protection of foreign investors from

governments in the jurisdictions in which they invest. Rights of action are afforded only to

the former, not the latter, and are granted in Bilateral Investment Treaties (hence, the

public international law nature of the dispute). See KATE MILES, THE ORIGINS OF

INTERNATIONAL INVESTMENT LAW: EMPIRE, ENVIRONMENT AND THE SAFEGUARDING OF CAPITAL

88-90 (2013).

219

On divorce finance, see Jeff Landers, Can’t Afford Your Divorce? New Firms Specialize

in Divorce Funding, FORBES (Jan. 15, 2015, 3:24 PM), https://www.forbes.com/

sites/jefflanders/2015/01/15/cant-afford-your-divorce-new-firms-specialize-in-divorce-

funding/#29b3d2457715.

220

See Galanter, Why the “Haves” Come Out Ahead, supra note 211, at 100.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

change is a public good, it may be profitable for litigation funders to invest in rule

change. This is because they manage a portfolio of litigation and, in particular,

because they invest repeatedly and sequentially in certain categories of cases.”

221

Investing in precedent, in other words, is as valuable for repeat players as is

lobbying for legislative change:

[G]oing to trial specifically in order to obtain rule change may be strategic

for litigation funders . . . because the value of precedent is greater for

them than it is for their one-shotter clients. Economists have argued that

“when neither party is interested in precedent, there is no incentive to

litigate, and hence no pressure on the law to change. When only one party

is interested in precedent, that party will litigate until a favorable decision

is obtained; the law in such cases will favor parties with such an ongoing

interest.”

222

Not every case has the potential to set precedent and change the course of the

law. But when a judge believes the case before her is of such nature, it is reasonable

to suggest she takes that factor under consideration, when deciding whether, to

what extent, and to whom disclosure is warranted. Under such circumstances

probing, for example, who controls the litigation—whether it is the client or the

funder—takes on a heightened significance.

f. The Structure of the Financing

The way financing is structured is, perhaps surprisingly, also an important factor

to consider when deciding what degree of involvement by the decisionmaker is

warranted.

223

For example, a case may be invested in passively or actively.

221

Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1312.

222

Id. at 1315 (quoting Paul H. Rubin, Why Is the Common Law Efficient?, 6 J. LEGAL

STUD. 51, 61 (1977)) (internal quotation marks added); see also Paul H. Rubin & Martin J.

Bailey, The Role of Lawyers in Changing the Law, 23 J. LEGAL STUD. 807, 807 (1994).

223

This often-overlooked factor is, in fact, so important that its nuances and intricacies

is a main reason that the ICCA–Queen Mary Task Force’s soft law production effort ended

up punting, rather than reaching, an agreed-upon guideline on disclosure. For a critique of

the Task Force’s grasp of the effects of deal structures, see Christopher P. Bogart, Deeply

Flawed: A Perspective on the ICCA-Queen Mary Task Force on Third-Party Funding,

BURFORD: BLOG (Oct. 6, 2017), http://www.burfordcapital.com/blog/icca-queen-mary-task-

force-report-flaws [https://perma.cc/9NJK-XCLU]. For scholarship on different possible

litigation finance structures, see generally Radek Goral, The Law of Interest Versus the

Interest of Law, or on Lending to Law Firms, 29 GEO. J. LEGAL ETHICS 253 (2016); Anthony J.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

Namely, a funder may never get involved after initially vetting a case, requiring

only to be informed of material developments. On the other end of the spectrum,

a funder may be very involved, including in selecting the lawyers, dictating

strategy, and controlling settlement decisions.

224

Historically, the greater the

control by the funder, the greater the suspicion and protection exercised by courts

(through the intricacies of the doctrine of champerty).

225

By the same token, the funding of individual cases involves different

considerations than does the rapidly-growing funding of portfolios of cases. In the

latter investment structure, the funders often contract directly with the law firm

and plaintiffs may not even be aware that their cases are being funded.

226

They

may therefore not be aware of salient features of their case such as the resulting

Sebok & W. Bradley Wendel, Duty in the Litigation-Investment Agreement: The Choice

Between Tort and Contract Norms When the Deal Breaks Down, 66 VAND. L. REV. 1831 (2013);

Maya Steinitz, Incorporating Legal Claims, 90 NOTRE DAME L. REV. 1155 (2015); Steinitz &

Field, supra note 205.

224

In the Mize litigation, for example, the funder bargained for an explicit right to

control settlement including a purported right to require the plaintiff to continue litigation

and prohibit her from settling or withdrawing. See Mize v. Kai, Inc., No. 17-cv-00915-NYW,

2018 WL 1035084, at *5 (D. Colo. Feb. 23, 2018) (“The agreement purports to limit Ms. Mize’s

ability to ‘discontinue the Claims with[out] the prior consent of [Litigation Management]’

. . . and prohibits Ms. Mize from settling the case without prior consent of Litigation

Management and requires Ms. Mize to settle if so directed by Litigation Management.”).

225

See Stan Lee Media, Inc. v. Walt Disney Co., No. 12-cv-02663-WJM-KMT, 2015 WL

5210655, at *2-3 (D. Colo. Sept. 8, 2015) (stating that due to an entity’s funding and control of

litigation there is “a colorable argument that [the entity] should be held to be a party to the

underlying litigation”); Abu-Ghazaleh v. Chaul, 36 So. 3d 691, 693-94 (Fla. Dist. Ct. App.

2009) (finding that a funder could be a party to a suit despite not being named in pleadings

if they had sufficient control). The same rationale applies to court scrutiny of the selection

of class counsel, litigation conduct, and settlement in class action. See generally BRIAN

ANDERSON & ANDREW TRASK, THE CLASS ACTION PLAYBOOK (2d ed. 2012) (referencing the ways

in which attorneys, not clients, control class actions and the consequent safeguards placed

by the rules of procedure and the court to protect the class member-clients).

226

See ROSS WALLIN, CURIAM, PORTFOLIO FINANCE AS A TOOL FOR LAW FIRM BUSINESS

DEVELOPMENT (2018), https://www.curiam.com/wp-content/uploads/Ross-Wallin-Westlaw-

Journal-Article.pdf [https://perma.cc/4QPR-WY6L] (“In portfolio finance transactions, a

litigation finance company provides capital to a firm . . . in exchange for a negotiated share

in whatever proceeds the firm receives from a portfolio of cases.”). The September 11th case

is an example of a case in which the plaintiffs had no idea of the funding until they were

slapped with the fees for it. See Binyamin Appelbaum, Investors Put Money on Lawsuits to

Get Payouts, N.Y. TIMES (Nov. 14, 2010), https://www.nytimes.com/2010/11/15/business/

15lawsuit.html.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

conflicts of interest and how the interest formula may affect their lawyers’

recommendations on whether, when, and for how much to settle.

227

And here is yet another example from this more-obscure and less self-evident

factor: whether a funder is reserving the right to create derivatives tied to the

litigation proceeds may have systemic effects on the courts and may therefore

implicate a public interest that is otherwise not common with respect to how one

finances her case.

228

To understand whether such a securitization prospect exists,

decision-makers may need to see whether certain terms—such as a right to assign

the claim or a portfolio of claims—are included in the funding agreement,

especially if the agreement is a standard form developed by funders.

More broadly, certain structuring may render a litigation contract a security. In

such a scenario, a whole host of securities regulation may come to bear.

229

And

there may be additional crossover regulation implicated in other funding

227

See N.Y. City Bar, Comm. on Prof’l Ethics, Opinion 2018-5 (July 30, 2018),

https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/

detail/formal-opinion-2018-5-litigation-funders-contingent-interest-in-legal-fees

(reasoning that portfolio funding may conflict with attorneys’ independence and

independent judgment).

228

See Steinitz, Whose Claim Is This Anyway?, supra note 147, at 1282-83 (discussing the

potential systemic effects of litigation proceed-backed securities) (“[I]t is possible that in

the foreseeable future we will also be witnessing the creation of a new form of securities —

legal-claims-backed securities. Reportedly, some tort-litigation lenders are already in the

practice of aggregating the claims they acquire and selling shares of the composite funds;

that is, they are engaged in a rudimentary form of securitization. Further support of the

proposition that securitization of this new asset class, namely legal claims and defenses,

may be forthcoming in the near future can be gleaned from the fact that the first wave of

litigation funding also generated a smattering of similar secondary trading in legal claims.

A few lawsuits were syndicated during the 1980s, with some instances of syndication

ending up in litigation. In addition, there is one case in which shares in future judgments

have been traded on Nasdaq.” (citations omitted)). For sources on the logic of bundling

prime and subprime investments — be they mortgages or lawsuits — via securitization and

the potential negative externalities such practices, if unchecked, can cause, including

negative systemic effects, see supra note 206 and accompanying text.

229

See generally Wendy Gerwick Couture, Securities Regulation of Alternative Litigation

Finance, 42 SEC. REG. L.J. 5, 16-19 (2014); Wendy Couture, Does Litigation Finance Implicate the

Policies Underlying the Securities Laws?, MODEL LITIG. FIN. CONT. (Oct. 7, 2013),

http://litigationfinancecontract.com/does-litigation-finance-implicate-the-policies-

underlying-the-securities-laws/ [https://perma.cc/K34H-VWH6] (“[L]itigation finance

implicates the securities laws’ policy of ensuring disclosure. Therefore, to the extent that a

litigation finance contract satisfies the elements of an ‘investment contract,’ it should be subject

to securities regulation.”); Richard Painter, The Model Contract and the Securities Laws Part III,

MODEL LITIG. FIN. CONT. (July 22, 2013), http://litigationfinancecontract.com/the-model-

contract-and-the-securities-laws-part-iii [https://perma.cc/MZ8S-YB77].

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

scenarios such as when a litigation is crowdfunded since crowdfunding is subject

to its own set of regulation.

230

The foregoing highlights the fact that various

regulators (not only courts) may have an interest in the terms under which

litigation is funded, the structure funding takes, and the systemic effects those

might have on the civil justice system as a whole as well as on the investing public.

g. The Purpose of the Contemplated Disclosure

The purpose(s) for which disclosure is sought—which may evolve and change over

the course of the litigation—can and should also affect not only whether

disclosure is warranted and to whom but especially which part of a funding

agreement should be disclosed.

If the purpose of disclosure is for a judge or arbitrator to check for conflicts,

disclosing the identity of the funder (and possibly its parent entities) may suffice

and could potentially be done in camera. If the purpose is to determine whether

the funder is a real party in interest,

231

which the court might wish to subject to its

authority or a party that should be granted a right to intervene, then the level of

control obtained by the funder—which may be embedded in a host of provisions

in the funding agreement

232

—may be relevant. In another example, if a party (e.g.,

a member of a class) or the court suspect a funder is engaged in the unauthorized

practice of law, disclosure of the role afforded to the funder in the funding

agreement will legitimately be in question, and may possibly come up through a

so-called intervention.

233

When supervision of a settlement is in question, both

230

On the advent of crowdfunding, see generally Manuel A. Gomez, Crowdfunded

Justice: On the Potential Benefits and Challenges of Crowdfunding as a Litigation Financing

Tool, 49 U.S.F. L. REV. 307, 321-333 (2015); Ronen Perry, Crowdfunding Civil Justice, 59 B.C.

L. REV. 1357, 1361-73 (2018). For regulation of crowdfunding generally, see, for example, 17

C.F.R. § 227.201 (2017) (outlining disclosure requirements).

231

See FED. R. CIV. P. 17(a) (“An action must be prosecuted in the name of the real party

in interest.”). In Abu-Ghazaleh v. Chaul, 36 So. 3d 691 (Fla. Dist. Ct. App. 2009), a funder

“was to receive 18.33% of any award” and “had to approve the filing of the lawsuit;

controlled the selection of the plaintiffs’ attorneys; recruited fact and expert witnesses;

received, reviewed and approved counsel’s bills; and had the ability to veto any settlement

agreements.” Id. at 693. Under those circumstances, the Court of Appeal of Florida held

that the funder has achieved the status of “party” under Florida law irrespective of the fact

that it was not so named in the pleadings. Id. at 693-94.

232

The direct and, more interestingly, indirect ways funders can gain control over the

litigation are discussed in Steinitz & Field, supra note 205, at 735-40.

233

See 7B CHARLES ALAN WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE

§ 1799 (3d ed. 2019) (explaining that intervention “enable[s] class members on the outside of

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

the degree of control and the funding formula may be fair game for scrutiny by a

judge or members of a class.

234

Financial terms may also be relevant to

determination of late-stage issues such as whether and how much fees to shift at

the end of a case.

235

The public interest in transparency with respect to understanding the scope

and nature of the new, growing, and game-changing phenomenon of litigation

finance could be another goal of disclosure.

236

The purpose of requesting disclosure may be of an altogether different nature,

though: abusive disclosure. Namely, requests for disclosure aimed at dragging a

funder into discovery disputes or even into the main litigation as a party in order

to prolong the litigation and raise its costs; to seek to find out the plaintiff’s

“reservation point”

237

at which it will settle not on the merits but because funding

has been exhausted or for some other, non-merits-based reason; and to glean the

the litigation to function as effective watchdogs to make certain that the action is fully and

fairly conducted”).

234

Judge Hellerstein’s decision in the September 11th case, discussed supra note 226, in

which he held, when scrutinizing a settlement, that attorneys, rather than the plaintiffs,

should absorb the costs of interest paid on loans used to finance the litigation, is an

example of why and when the financial terms may need to be disclosed. For a further

discussion of the fee controversy surrounding the case, see Mireya Navarro, Already Under

Fire, Lawyers for 9/11 Workers Are Ordered to Justify Some Fees, N.Y. TIMES (Aug. 27, 2010),

https://www.nytimes.com/2010/08/27/nyregion/27lawsuit.html.

235

In international arbitration scholarship much ink has been shed, and some arbitral

decisions have been issued, on the question of whether disclosure of funding is necessary

in order for arbitrators to determine whether to shift fees (a norm in international

arbitration which follows the so-called “British Rule” (loser pays) with respect to fee shifts).

See, e.g., Trusz, supra note 215, at 1677 (arguing that “institutions should expressly provide

that the tribunal may not consider third-party funding in any decisions on costs or security

for costs”). That scholarship and jurisprudence also discusses whether and to what extent

disclosure is warranted at the beginning of the process in order to determine whether

security of costs is warranted. See, e.g., Chan, supra note 215, at 283 (arguing that an arbitral

tribunal should be able to consider the funder’s financial support and the terms of

withdrawal for the funder when considering security for costs); Kelsie Massini, Risk Versus

Reward: The Increasing Use of Third Funders in International Arbitration and the Awarding

Security for Costs, 7 Y.B. ARB. & MEDIATION 323, 330-32 (2015) (arguing that it is beneficial for

the funder to be disclosed at the start of the arbitration proceedings for security of costs

purposes).

236

See supra text accompanying notes 197–203.

237

A “reservation point” is “the least favorable settlement that the client is willing to

accept.” LARRY L. TEPLY, LEGAL NEGOTIATION IN A NUTSHELL 81 (3d ed. 2016) (emphasis

omitted). The reservation point is affected by factors other than the value of the negotiated

asset and knowing an opposing party’s reservation point enables a party to make the lowest

offer that would be accepted.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

type of proprietary financial products a funder has developed for competitive

reasons that have nothing to do with the case at hand.

h. The Procedural Posture of the Case

The purpose for which disclosure is sought, as the discussion in the preceding

Subsection implicates, bleeds into another factor: the procedural posture of a case.

Funders have been known to step in and invest in a case before it is filed, after

filing but before trial, after trial but before appeal, and after a final judgment or

award has been rendered at the enforcement or collection stage.

238

The procedural

posture can and should affect disclosure decisions.

For example, at the enforcement or collection stage, financial or control terms,

which may have been relevant earlier in the proceedings, may no longer be

relevant; still, the nature of the case and of the parties may continue to be relevant.

And in another hypothetical, the very fact of funding, but nothing more, may be

all that is needed when deciding whether a contender for the role of class counsel

is “adequate” as required by FRCP Rule 23.

239

B. An Iterative Inquiry

Further, I suggest that the proposed balancing test may be deployed, with

appropriate modifications for timing and context and with due regard to cost, at

any stage of the litigation or arbitration. The analysis could even be repeated at

different stages of the litigation because, as the preceding Subsection explains, the

applicable factors may be different leading to a different result as to whether, to

what extent, and in what form to order any disclosure.

For instance, at the commencement of an international arbitration, the fact of

funding and identity of the funder may be sufficient because the question at hand

for a tribunal to decide is whether conflicts of interests exits. But at the end of the

process, if the case has not settled, the tribunal may need to see the financial and

control terms in order to decide whether and how much of the fees to shift under

238

See, e.g., Commercial Litigation Funding, BENTHAM IMF, https://www.benthamimf.

com/what-we-do/commercial-funding (last visited Sept. 9, 2019) [https://perma.cc/

2KFN-6NAQ] (stating that Bentham invests in claims at the pre-trial and trial steps, as well

as during appeals and to help with judgment collections).

239

See FED. R. CIV. P. 23(g)(1)(A)(iv). For the jurisprudential elaborations of these

requirements, see JEROLD S. SOLOVY ET AL., 5 MOORE’S FEDERAL PRACTICE § 23.120 (2003).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

the “loser pay” convention.

240

Financial provisions—e.g., how much funding has

been committed and what formula is used to the divide the litigation proceeds—

are regarded as particularly sensitive by many plaintiffs and funders and

particularly open to strategic gaming by defendants who can “game” the litigation

aiming to spend down the committed amount or trigger acceleration of interest.

The option to reevaluate can help prevent over-disclosure early on which may

prove unnecessary if a case settles early.

C. Additional Disclosure Calibration Tools

At this point, it should be evident that disclosure is a process, not an event, and

that decision-makers are faced with a spectrum of options, not with a “zero sum”

decision.

At one end of the spectrum, a judge or an arbitrator may require disclosure in

camera of the existence of funding only, with or without the mere identity of the

funder included. At the other end of the spectrum, is the disclosure to the court,

opposing party, and filing for the public record of the entire agreement. In the

middle of the spectrum are such tools as the disclosure of certain provisions only

and the redaction of others or the filing of a short, check-the-box closing

statement. A decision-maker can create further gradations by either declining a

disclosure without prejudice so that the matter can be revisited as the litigation

progresses or, conversely, by imposing a continuing duty to disclose so that if the

existence of funding or the identity of funders change throughout the life of the

litigation a plaintiff is under an obligation to so disclose.

In addition to regarding the disclosure decision as one that can be revisiting

later in the process, as suggested above, decisionmakers can make use of in camera

and/or ex parte submissions, redactions, “attorney’s eyes only” designations,

filing all or parts of the funding agreement under seal, or requesting attorneys to

certify representations about what an undisclosed agreement does or does not

contain. In short, the basic tools generally available to moderate undesirable

effects of discovery are all available in this context as well.

240

See INT’L COUNCIL FOR COMMERCIAL ARBITRATION, supra note 148, at 159.

FOLLOW THE MONEY? A PROPOSED APPROACH FOR DISCLOSURE OF LITIGATION FINANCE AGREEMENTS

The final, concluding Section of this Part provides an example of well-

calibrated, context-sensitive disclosure by a federal judge presiding over a

multidistrict litigation (“MDL”).

D. An Example: The Order Regarding Third-Party Contingent Litigation

Financing in In re Nat’l Prescription Opiate Litigation

A commendable example of a nuanced judicial approach that appears to have

taken into account the type of case, the funded parties, the procedural posture, the

possible deal structure (and its effects on conflicts of interest) and that made use

of tools such ex parte submissions and certification by the attorneys, is an order

by Judge Polster of the United States District Court for the Northern District of

Ohio, presiding over an MDL.

Preliminarily, it should be noted that Judge Polster both broadly defined “third-

party contingent litigation financing” as “any agreement under which any person,

other than an attorney permitted to charge a contingent fee representing a party,

has a right to receive compensation that is contingent on and sourced from any

proceeds of an MDL Case, by settlement, judgment, or otherwise,”

241

and

surgically exacted that the term does not include “subrogation interests, such as

the rights of medical insurers to recover from a successful personal-injury

plaintiff.”

242

Next is the disclosure regime tailored by Judge Polster to the case at bar.

“Absent extraordinary circumstances,” he ordered, “the Court will not allow

discovery into [third-party contingent litigation] financing,”

243

but “any attorney

in any MDL Case that has obtained [third-party contingent litigation] financing

shall:

• share a copy of this Order with any lender or potential lender.

• submit to the Court ex parte, for in camera review, the following:

(A) a letter identifying and briefly describing the [third-party contingent

litigation] financing; and

241

Order Regarding Third-Party Contingent Litigation Financing, In re Nat’l

Prescription Opiate Litig., No. 1:17-MD-2804, 2018 WL 2127807, at *1 (N.D. Ohio May 7, 2018).

242

Id. at 1 n.1.

243

Id. at 1.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

(B) two sworn affirmations—one from counsel and one from the lender—

that the [third-party contingent litigation] financing does not:

(1) create any conflict of interest for counsel,

(2) undermine counsel’s obligation of vigorous advocacy,

(3) affect counsel’s independent professional judgment,

(4) give to the lender any control over litigation strategy or settlement

decisions, or

(5) affect party control of settlement.”

244

In so ordering, without handing defendants an informational windfall, the

court thus placed the burden of safeguarding legal ethics despite the

complications of third-party funding, and potential liability in case of a failure to

meet it, on the gatekeepers with the best view of whether problems exist or arise.

And it also placed the lawyers, existing and potential funders on notice that the

watchful eye of the court is upon them.

CONCLUSION

In sum, the quest for a disclosure rule has set policymakers on a wild goose chase

that has led some to avoid or punt on the issue all together while leading others to

propose disclosure regimes that are either over- or under-protective of the

multiple stakeholders in this regulatory quandary—namely, plaintiffs,

defendants, funders, the public, and the courts—and their varying complex and

shifting interests. By reminding the legal community of the availability of

standards, especially balancing tests, and by fleshing out the specifics of what

such a balancing test might consist of in this context, I have endeavored to break

the Gordian knot of the surprisingly difficult question of whether and how to

structure a disclosure regime for litigation finance.

244

Id.

What’s So New About

Litigation Finance?

Disclosure and Regulation of a

New Take on an Old Practice

By William C. Marra

Investment Manager, Validity Finance.

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

Discussions of litigation finance frequently begin with the implicit or explicit

assumption that litigation finance is something new — a decidedly modern and

21st-century method of financing litigation. This is particularly true for the debate

about whether a mandatory disclosure rule should compel the automatic

disclosure of litigation finance agreements at the outset of litigation. Many

arguments in favor of mandatory disclosure of litigation investment agreements

stress litigation finance’s ostensible novelty, contending that mandatory

disclosure is necessary to combat litigation funding’s fresh and unique threat to a

lawyer’s ethical duties, to the champerty and maintenance laws, or to some other

legal or ethical prohibition.

245

This essay challenges the assumption that litigation finance or the risks it

allegedly presents are particularly new or unique, and it demonstrates why

undermining this faulty assumption goes a long way toward defeating many of the

arguments in favor of mandatory disclosure of litigation finance agreements.

In one sense, of course, it is plainly true that modern litigation finance is new.

The birth of contemporary “litigation finance” companies dates only to the 1990s

in Australia and the United Kingdom.

246

In the United States, commercial

litigation finance did not take off until the 2000s, when Credit Suisse launched an

appeals funding business, and later when Bentham IMF, Juridica Investments,

and Burford Capital entered the U.S. market.

247

When we talk about modern

litigation finance companies, we are not talking about companies with the vintage

of American Express, AT&T, or even Apple.

245

See, e.g., Letter from Lisa A. Rickard, President, U.S. Chamber Institute for Legal Reform, to Rebecca

A. Womeldorf, Secretary of the Committee on Rules of Practice and Procedure of the Administrative

Office of the United States Courts at 2, 7 (June 1, 2017) (“Chamber Letter”) (advocating mandatory

disclosure after casting litigation finance as a novel industry that has seen “[r]apid [g]rowth” and “a

dramatic expansion” since 2014); Joshua G. Richey, Comment, Tilted Scales of Justice? The

Consequences of Third-Party Financing of American Litigation, 63 EMORY L.J. 489, 489 (2013)

(describing litigation finance as a “relatively new phenomenon,” in the course of arguing for increased

regulation including mandatory disclosure). See also, e.g., Letter from Charles E. Grassley, Chairman,

U.S. Senate Judiciary Comm., & John Cornyn, Chairman, U.S. Senate Judiciary Comm., to Sir Peter

Middleton, Chairman, Burford Capital (Aug. 27, 2015) (requesting information from practitioners about

the “burgeoning industry” of litigation finance).

246

Marco de Morpurgo, A Comparative Legal & Economic Approach to Third-Party Litigation Funding,

19 CARDOZO J. INT’L & COMP. L. 343, 360–61 (2011).

247

See, e.g., Lake Whillans, The History and Evolution of Litigation Finance, ABOVE THE LAW (Jan. 27,

2017), https://bit.ly/2olrxCc; Mattathias Schwartz, Should You Be Allowed to Invest in a Lawsuit?, N.Y.

TIMES (Oct. 22, 2015), https://nyti.ms/369e4yv.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

But in another sense, third-party litigation finance is not particularly new.

248

see why, it’s helpful to first define “litigation finance.” At its broadest level,

litigation funders provide capital to individuals or corporations in connection

with legal claims.

249

Most commonly, a commercial litigation finance company

helps a plaintiff-side claimholder meet the costs of litigation, including attorneys’

fees and litigation expenses like expert fees, court filing costs, and travel

expenses.

250

The funder pays some or all of those fees and costs, and in exchange,

the funder is entitled to a portion of any case proceeds.

251

Litigation finance

transactions are typically “non-recourse,” which means that the funder’s return is

secured only by proceeds from the funded case(s).

252

The truth is that non-parties to a case have been helping individuals and

companies meet the often-exorbitant costs of litigation for decades and centuries,

and they have frequently done so in exchange for a share of case proceeds. Our

legal system has not simply permitted these methods of third-party financing — it

has often actively encouraged them, recognizing that they are important ways to

further access to the courts, particularly for those without the funds to self-finance

litigation.

We don’t have to search far and wide for examples. When a lawyer takes a case

on contingency, litigating the case for no up-front charge in exchange for a share

of case proceeds, she provides third-party financing. When an individual receives

free legal services from a public interest organization, she benefits from third-

party financing. When an employer pays an employee’s legal fees, or when a

parent pays an adult child’s divorce costs, the employer and parent provide third-

248

For an expanded version of the argument that modern litigation finance is not particularly “new,” see

Suneal Bedi & William C. Marra, The Shadows of Litigation Finance, 74 VAND. L. REV. __ (forthcoming

2021).

249

Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 MINN. L. REV. 1268,

1276 (2011) (defining “litigation finance” as “the provision of funds by companies who have no other

connection with the litigation”). See generally Anthony Sebok, Litigation Investment and Legal Ethics:

What are the Real Issues?, 55 CAN. BUS. L.J. 111, 112 (2014).

250

de Morpurgo, supra note 2, at 350–51 (2011) (defining litigation finance as “the specific practice in

which a third party offers financial support to a claimant in order to cover his litigation expenses, in return

for a share of damages if the claim is successful, or nothing is the case is lost”).

251

Mariel Rodak, Comment, It’s About Time: A Systems Thinking Analysis of the Litigation Finance

Industry and Its Effect on Settlement, 155 U. PA. L. REV. 503, 507 (2006).

252

Maya Steinitz & Abigail C. Field, A Model Litigation Finance Contract, 99 IOWA L. REV. 711, 713

(2014); Rodak, supra note 7, at 507.

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

party financing. These are just a few ways in which non-party funding of litigation

is a bedrock feature of our civil justice system.

It turns out that third-party litigation finance is, and long has been, all around

us. These modes of third-party financing are not all precisely the same as

commercial litigation finance. But these are distinctions without a difference for

purposes of the question whether third-party financing agreements should be the

subject of mandatory disclosure rules.

This essay does not purport to review all the arguments for and against

disclosure, either via mandatory disclosure or disclosure on a case-by-case basis.

Instead, I focus on the debate about mandatory disclosure of funding agreements

at the outset of litigation. At the federal level, the push for mandatory disclosure

of funding agreements is happening both before the Federal Rules Committee and

in Congress. Before the Federal Rules Committee, the United States Chamber of

Commerce has requested a rule that requires the initial 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 receive compensation that is

contingent on, and sourced from, any proceeds of the civil action, by settlement,

judgment or otherwise.”

253

In Congress, Senator Chuck Grassley has introduced

the Litigation Funding Transparency Act in both 2018 and 2019, seeking to require

the automatic disclosure, at the outset of class actions and multidistrict litigations,

of both the identity of any party with a financial interest in the case (other than

the named parties or counsel) and the funding agreement itself.

254

These proposals would expand disclosure requirements in two ways. First, they

would require broader disclosure of the identity of parties that are funding

litigation than is currently required under the current rules.

255

And second, they

would require the disclosure of the funding agreement itself.

253

See ADVISORY COMM. ON CIVIL RULES, AGENDA BOOK 345 (Nov. 2017),

https://bit.ly/3j9VvzE; Maya Steinitz, Follow the Money? A Proposed Approach for Disclosure

of Litigation Finance Agreements, 53 U.C. DAVIS L. REV. 1073, 1078 (2019).

254

Litigation Funding Transparency Act of 2019, S. 471, 116th Cong. (2019); Litigation Funding

Transparency Act of 2018, S. 2815, 115th Cong. (2018); Steinitz, Follow the Money, supra note 9, at

1077.

255

Federal Rule of Civil Procedure 7.1 currently requires litigants to disclose at the outset

of litigation the identity of “any parent corporation and any publicly held corporation

owning 10% or more of its stock,” to allow judges to determine whether they should

disqualify from a case. FED. R. CIV. P. 7.1(a)(1). See also id., Committee Notes on Rule – 2002

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

The arguments in support of mandatory disclosure presume that the modern

litigation finance industry represents a novel introduction of third-party funders

into our legal system, presenting unique risks that require a new disclosure

regime. Part I of this essay debunks this premise and demonstrates that our legal

system has long permitted and indeed encouraged third parties to finance

litigation to which they are not a party. The modern litigation finance industry is

not different in kind from these other forms of third-party funding.

Part II of this essay then demonstrates that the leading arguments in support of

mandatory disclosure — that litigation finance threatens a lawyer’s

independence, may involve unethical fee arrangements, may give rise to judicial

conflicts of interest, and may involve champertous funding agreements — could

just as easily be levied against the forms of third-party financing our legal system

has long allowed. But we have not subjected these other forms of third-party

financing to mandatory disclosure rules that require litigants to immediately

disclose their third-party financing without regard to a showing of relevance,

proportionality, and the absence of privilege. For example, litigants generally

need not disclose whether their lawyers are working on a contingency fee, whether

a family member is paying the costs of their divorce proceeding, or whether a third

party is funding their lawsuit on a pro bono basis.

The upshot: it is very difficult to justify mandatory disclosure of modern

“litigation finance” agreements provided by commercial or consumer litigation

finance companies, when we have not required disclosure of the various other

forms of third-party financing. And by resisting unnecessary mandatory

disclosure for only one form of third-party financing — by refusing to essentially

impose an indirect tax upon litigation finance — we help make our civil justice

system more accessible to all Americans, allowing even those without millions of

dollars in the bank to press their legal rights.

(stating that the rule “will support properly informed disqualification decisions in

situations that call for automatic disqualification under [the Code of Conduct for United

States Judges].” Some federal courts require by local rule expanded disclosure of entities

with a financial interest in the case, though these rules are frequently limited to the

disclosure of interests held by publicly held corporations only, and they do not require the

disclosure of any underlying financing agreements. See Steinitz, Follow the Money, supra

note 9, at 1079–80; ADVISORY COMM. ON CIVIL RULES AGENDA BOOK 209–29 (Apr. 2018),

https://bit.ly/31mdf4u

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

I. LITIGATION FINANCE BY ANOTHER NAME

It’s helpful to start with a simple question: Why do parties seek litigation finance?

Two motivations usually drive the decision: liquidity constraints and risk

aversion.

256

First, with respect to liquidity constraints: Litigation is expensive.

257

The United

States ranks 99th out of 126 countries for affordability and accessibility of civil

justice.

258

Bringing even a straightforward breach of contract claim can cost

hundreds of thousands, or even millions, of dollars. Not everyone has that kind of

money. The illiquid can be the truly indigent — those without any money to their

name — but it can also include those who have enough money to pay for second-

rate counsel but not their first-choice lawyers. If claimholders are forced to rely

only on their personal resources to bring a suit, those without sufficient liquidity

will be forced to abandon their claims entirely, or to proceed with counsel who are

not the right fit, perhaps because they lack sufficient expertise in the case’s subject

matter. If claimholders are permitted to obtain financing from others — whether

from their counsel through contingency fee arrangements, or from third parties

like commercial litigation funders —their ability to access the courts will be

significantly enhanced.

259

Second, with respect to risk aversion: Litigation is an uncertain endeavor.

Claimholders must invest money today in the hope that a court will vindicate their

claims and award them relief at some uncertain time in the future.

260

Risk sharing

256

For an expanded discussion of how liquidity constraints and risk aversion drive the decision to obtain

litigation finance, see Bedi & Marra, supra note 4.

257

See HON. JOHN G. ROBERTS, JR., 2015 YEAR-END REPORT ON THE FEDERAL JUDICIARY (2015) at 4,

11, https://bit.ly/2q73g1n (arguing that “in many cases civil litigation has become too expensive, time-

consuming, and contentious, inhibiting effective access to the courts”).

258

William C. Silverman & Madison Marko, The Right to Counsel in Civil Proceedings: An International

Perspective, PROSKAUER ROSE LLP (Apr. 11, 2019), https://bit.ly/2Qf1ZQD

259

W. Bradley Wendell, Paying the Piper But Not Calling the Tune: Litigation Finance and Professional

Independence, 52 AKRON L. REV. 1, 9–10 (2018); Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971

(N.Y. Sup. Ct. 2013) (“[L]itigation funding allows lawsuits to be decided on their merits, and not based on

which party has deeper pockets or stronger appetite for protracted litigation.”).

260

Joanna M. Shepherd & Judd E. Stone II, Economic Conundrums in Search of a Solution: The

Functions of Third-Party Litigation Finance, 47 ARIZ. ST. L.J. 919, 927 (2015) (“Prosecuting litigation

necessarily requires an immediate substantial capital investment for a remote future reward.”); David M.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

is an integral part of many endeavors in life, and few business owners bear the

entire risk and cost of starting a company, launching a new product, or expanding

into a new territory.

261

Just as companies frequently share risk for these ventures

by raising equity, issuing debt, or obtaining other forms of financing, so too might

they desire to offload some of the risk associated with litigating a case.

262

As you might imagine, the twin problems of liquidity constraints and risk

aversion have existed for centuries. More to the point, they long predate modern

litigation finance. It should thus come as no surprise that it wasn’t only ten or

fifteen years ago that claimholders started to find ways to solve their liquidity or

risk-tolerance problems.

In fact, we don’t have to strain to find lots of ways in which third parties have

long helped the indigent, the otherwise illiquid, or the risk averse bring

meritorious legal claims. Sometimes, the non-party finances the claim in

exchange for a stake in the outcome of the litigation, or for some other financial

reason. In other instances, the non-party operates from a non-financial motive,

which might include pure benevolence or the desire to shape the law in a

particular way.

Here are just some ways third parties help finance a claimholder’s litigation:

1. CONTINGENCY FEE LITIGATION

The contingency fee arrangement is such a bedrock part of our legal system that it

is easy to overlook it as a form of third-party financing. Lawyers who work on a

contingency fee do not charge their clients any fees for litigating their case.

Instead, the lawyer works “for free,” litigating the case but charging the client

nothing up front.

263

Sometimes the lawyer even pays the (often-substantial) costs

and disbursements associated with bringing a case, such as expert costs and court

Trubek et al., The Costs of Ordinary Litigation, 31 UCLA L. REV. 72, 76 (1983) (examining litigation as

“the process as the investment of scarce resources to achieve a future result”).

261

See generally Jonathan T. Molot, A Market in Litigation Risk, 76 U. CHI. L. REV. 367, 369 (2009).

262

Shepherd & Stone, supra note 16, at 923–24; Molot, supra note 17, at 369–70.

263

See Restatement (Third) of the Law Governing Lawyers § 38, cmt. e (2000) (“Under a contingent-fee

contract, however, a client who does not prevail is not liable to the lawyer for court costs and litigation

expenses, unless the client agreed to pay them or nonrefundable advances by the lawyer of such costs and

expenses are unlawful in the jurisdiction.”).

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

filing fees.

264

The lawyer only gets paid on the back end, receiving a percentage of

the recovery — usually between 30% and 40% — if the case succeeds.

265

But the

lawyer receives nothing if the case fails.

Contingency fee arrangements are a form of third-party financing because

lawyers are not parties to the case. These arrangements help solve a client’s

liquidity or risk-aversion problems. Imagine a small business owner has a breach

of contract claim against her supplier, but either does not have enough money to

pay a lawyer by the hour to litigate the case, or would rather not commit the

company’s depleted resources to litigation. Rather than turn away this prospective

client, a lawyer may take the case on contingency, financing the case on behalf of

the client in exchange for an expectation of payment when the case succeeds.

Where do lawyers get the money they need to litigate contingency-fee cases?

Sometimes lawyers use their own money, but other times, they obtain bank loans

secured in whole or in part by the law firm’s receivables. In this latter scenario, the

contingency fee litigation is financed both by the non-party lawyer and, in turn,

by a non-party lender such as a bank. The bank expects its loan to be repaid by

proceeds from the lawyer’s cases.

Contingency fees were once outlawed under the ancient doctrines of champerty

and maintenance, but those days are long over.

266

Indeed, the legal ethics rules

expressly permit lawyers to take most types of cases on contingency, requiring

only that the lawyer’s percentage recovery cannot be excessive.

267

And

contingency fee arrangements are frequently lauded as positive contributions to

our legal system, for they allow claimants to advance meritorious claims even if

they do not personally own sufficient resources to vindicate their legal rights.

268

264

See Restatement (Third) of the Law Governing Lawyers § 36(2) (2000).

265

See David A. Hyman et al., The Economics of Plaintiff-Side Personal Injury Practice, 2015 U. ILL. L.

REV. 1563, 1566–68 (2015).

266

Michael K. Velchik & Jeffrey Y. Zhang, Islands of Litigation Finance, 24 STAN. J. L., BUS., & FIN. 1,

20–22 (2019).

267

See ABA Model Rule 1.5(c) (“A fee may be contingent on the outcome of the matter for which the

service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other

law.”).

268

See, e.g., Issachar Rosen-Zvi, Just Fee Shifting, 37 FLA. ST. U. L. REV. 717, 727 (2010).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

Contingency fee agreements are a close cousin of commercial litigation

finance.

269

In both instances, someone who is not a party to the litigation agrees to

front the costs of litigation in exchange for a share of case recoveries on the back

end. Contingency fee financing, like commercial litigation financing, is non-

recourse, in that the financier receives payment only if the case succeeds. Indeed,

most commercial litigation finance agreements have a lawyer’s contingency fee

agreement baked into them, because funders typically finance only a portion of

the lawyer’s fees, asking the lawyer to fund the balance of the fees on contingency.

2. PUBLIC INTEREST ORGANIZATION LITIGATION

Public interest pro bono litigation is also a form of third-party financing. “Because

financing litigation—particularly Supreme Court litigation—is well outside the

means of the average citizen, civil liberties require coordination among funders to

effect social change.”

270

Public interest organizations like the NAACP, the ACLU,

and the Rockefeller Foundation frequently provide free representation, paying an

individual’s legal fees and expenses on the client’s behalf.

271

Litigation by public interest organizations may come in two forms. First, the pro

bono group’s primary objective may be to set favorable legal precedent in an area.

For example, an advocacy group may finance an individual’s test case to establish

a constitutional or statutory right that it hopes will apply to a broad class of

individuals. In these instances, the advocacy group certainly wants to obtain

victory for the named plaintiff, but its primary goal is to set legal precedent,

usually at the appellate level, for a wide class of individuals. In this category of

cases, the organization will often be disinclined to accept an early settlement that

would resolve the case before it goes up on appeal.

Second, pro bono litigation may be designed primarily to achieve a favorable

outcome for a particular client, with little regard to or expectation of setting

favorable court precedent. For example, an immigrant-rights group may pay the

legal costs of a refugee’s application for asylum, with the principal goal being to

269

Velchik & Zhang, supra note 22, at 19 (classifying contingency fee arrangements as a form of third-

party financing); George Steven Swan, S.J.D., Economics and the Litigation Funding Industry: How Much

Justice Can You Afford?, 35 NEW ENG. L. REV. 805, 834 (2001) (describing contingency fee arrangements

as an “economic precedent for the nascent litigation funding industry”).

270

Velchik & Zhang, supra note 22, at 17.

271

Id.

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

obtain relief for the particular client, not to litigate the case all the way to the

United States Supreme Court. Similarly, an anti-death-penalty group may be more

interested in sparing a death row inmate from execution than setting favorable

precedent at the appellate courts.

Litigation sponsored by public interest organizations amounts to third-party

financing because it allows an individual to advance a legal claim by relying on a

third party to pay the often considerable fees and costs associated with bringing

that claim.

272

Pro bono financing is frequently provided on behalf of the indigent,

who lack the ability to hire lawyers to vindicate their legal rights. Even if the third-

party public interest organization does not have a direct financial interest in the

case, it may have an indirect financial interest, and it will certainly have a strong

ideological interest in achieving a particular outcome.

Notably, pro bono litigation, like contingency fee litigation, was once attacked

as violating the doctrine of maintenance.

273

For example, during the Jim Crow era,

some southern states reinforced their existing maintenance and champerty

statutes to impede the efforts of advocacy groups like the NAACP to bring civil

rights litigation on behalf of poor African-Americans. It took a series of judicial

decisions, most famously the Supreme Court’s landmark NAACP v. Button, 371

U.S. 415 (1963), to defeat those lamentable efforts.

274

3. Financing claims of friends, family, and employees

Another broad category of third-party funding occurs when an individual or entity

pays the legal fees on behalf of someone they know, either through a family

relationship, friendship, or employment relationship. For example, generous-

minded individuals often pay legal fees on behalf of less-well-off family members

or friends. The classic example is a parent who pays her adult child’s divorce fees,

or a wealthy benefactor who helps a friend who was injured in a car accident bring

a civil claim against the reckless driver. While the financier typically does not

expect a share of case proceeds in return, each of these examples amounts to a

third party financing someone else’s legal expenses.

272

Id.

273

See id. at 18.

274

See id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

In other instances, an employer may agree to finance the litigation costs

incurred by an employee for actions the employee took on the job. The employer

sometimes has a contractual duty to pay the litigation expenses and even to

indemnify the employee for damages. For example, companies frequently pay the

legal defense costs of directors or officers sued in their personal capacity for a

breach of fiduciary duty. Similarly, state and federal governments typically pay

the legal defense costs of officers sued for violations of constitutional rights under

42 U.S.C. § 1983 or Bivens v. Six Unknown Named Agents of Federal Bureau of

Narcotics, 403 U.S. 388 (1971).

These arrangements are so commonplace that the legal ethics rules expressly

contemplate and permit them too. In particular, ABA Model Rules 1.8 and 5.4

expressly permit lawyers to be paid their fee by someone other than the

claimholder, notwithstanding the potential conflict of interest where the client’s

interests may diverge from the interests of the third party paying those legal

fees.

275

The rules do not ban these potentially beneficial arrangements — they

simply require that, in this circumstance, there may be “no interference with the

lawyer’s independence of professional judgment or with the client-lawyer

relationship.”

276

One possible distinction between commercial litigation funding and the

employer- or family-based funding is that the commercial litigation funder has a

direct financial stake in the outcome through a right to a share of case proceeds.

But an employer or benefactor paying a litigant’s legal fees may also have a

financial stake in the outcome. For example, an employer may be directly or

indirectly on the hook for any damages award against its employee, as is

frequently the case for government employees. Benefactors may feel the need to

financially support their friend or family member if that person is unable to

recover sufficient funds in the litigation. And even if they do not have financial

interests in the case, employers may have a strong interest in the legal outcome of

275

ABA Model Rule 1.8(f) (“A lawyer shall not accept compensation for representing a client from one

other than the client unless: (1) the client gives informed consent; (2) there is no interference with the

lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information

relating to representation of a client is protected as required by Rule 1.6.”); ABA Model Rule 5.4(c) (“A

lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services

for another to direct or regulate the lawyer's professional judgment in rendering such legal services.”).

276

ABA Model Rule 1.8(f); see also ABA Model Rule 5.4, Cmt. [2].

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

the case, for the precedent set in the litigation may affect the employer’s broader

commercial or legal interests, while benefactors paying the legal costs of friends

and family will certainly be emotionally invested in the case outcome.

4. Equity- or debt-based financing

When companies need money to launch a new product, expand into a new

territory, or open a new marketing channel, they can find that money in their bank

account, or they can raise the funds they need in the capital markets. Companies

typically raise this money by selling equity (selling someone else an ownership

interest in the company) or issuing debt (raising funds that must be paid back at a

certain rate of return over time).

277

Few companies are able to self-finance their

growth from Day One, so equity and debt financing are integral parts of the capital

market system that allows our economic system to flourish.

When companies raise funds for general corporate purposes, one of those

purposes may be to finance litigation. Litigation funders frequently meet with

claimholders who took out loans against their business, or even mortgaged their

property, to finance the cost of litigation, before they learned about commercial

litigation finance. Sometimes the litigant secured equity or debt financing

primarily for the purpose of using that money to finance litigation, and sometimes

they had mixed motives — a little bit of the money would go to pay their lawyers,

the rest to build a new plant or hire new workers.

While debt financiers often ask for collateral besides the proceeds of litigation,

third-party investors or creditors frequently expect that the successful outcome of

pending litigation will provide some or all of the resources that will make their

investment a success. Like the contingency fee lawyer — and like the commercial

litigation funder —these investors and creditors provide money to a corporation,

expecting that part of their financing will be used to cover the costs of litigation,

and further expecting that the return on their investment will come, in whole or

in part, from litigation proceeds.

And as previously noted, it is not simply claimholders but also lawyers

themselves who frequently obtain third-party debt-financing. While the ethics

277

See generally Katherine Pratt, The Debt-Equity Distinction in a Second-Best World, 53 VAND. L. REV.

1055, 1059–60 (2000).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

rules prohibit non-lawyers from owning an equity stake in a law firm,

278

contingency-fee lawyers frequently obtain bank loans backed in whole or in part

by the firm’s receivables. Third-party lenders to law firms thus effectively finance

litigation to which they are not a party, with the expectation of obtaining their

return on investment from the litigation.

II. IMPLICATIONS FOR DISCLOSURE

Although modern commercial litigation finance improves litigants’ ability to

access the courts, it has not received universal praise. Opponents of litigation

finance, including the United States Chamber of Commerce’s Institute for Legal

Reform and some legislators, have attempted to limit the spread of litigation

finance. As noted, they have pushed for the automatic disclosure of litigation

finance agreements to both the court and defendants at the outset of litigation,

without regard to whether those documents are relevant to the case, whether

disclosure would be proportional, or whether the documents are protected by a

legal privilege like the attorney-client privilege or the work product doctrine.

Proponents of mandatory disclosure advance a host of arguments to further

their push for mandatory disclosure. This essay does not provide every possible

response to those arguments. Instead, I highlight one crucial flaw: the arguments

for mandatory disclosure of litigation funding can equally be used to support

mandatory disclosure of the various forms of third-party financing just discussed

— yet the law generally does not require automatic disclosure of these other

mechanisms of third-party financing. Indeed, although some of these financing

methods may be revealed during discovery after a showing of relevance and

proportionality, many of us would bristle at the notion that they should always

and everywhere be automatically disclosed at the outset of litigation. Just as we

have long recognized that mandatory disclosure of these various other forms of

arrangements is not necessary, there is no reason to require mandatory disclosure

of commercial litigation finance.

278

ABA Model Rule 5.4. Arizona recently became the first state to repeal Rule 5.4 and allow nonlawyer

ownership of law firms. Sam Skolnik, Arizona First State to OK Nonlawyer Ownership of Law Firms,

BLOOMBERG LAW (Aug. 28, 2020), https://bit.ly/2ZypdqZ

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

1. LAWYER-CLIENT CONFLICTS OF INTEREST

One of the leading arguments offered in favor of mandatory disclosure of litigation

funding agreements is that litigation funders may create conflicts of interest for

lawyers, inducing them to violate various ethical rules. One leading flavor of this

argument, advanced by the Chamber of Commerce, is that litigation finance

presents a “threat … to the plaintiff’s right to control his or her own claim” and

creates “[t]he possibility of conflicts of interest among the plaintiff, the attorney,

and the funder.”

279

The Chamber has argued, without evidence, that funders might

control litigation strategy or demand that counsel give fealty to the funder, putting

the funder’s interests above those of the claimholder.

To be sure, we can dispute the premise of this argument. Reputable litigation

finance companies scrupulously adhere to the ethics rules and do not control

litigation. But even assuming this were a legitimate concern, a comparable

theoretical threat is present in just about all of the third-party financing

agreements discussed in Part I.

Consider the contingency fee arrangement. Commentators have long

recognized that “contingent fees in some situations may cause lawyers’ and

clients’ interests to conflict.”

280

Because a lawyer’s contingency fee typically

remains the same regardless of how much time and effort the lawyer invests in the

case, a lawyer has an incentive “to work fewer hours on a case than a fully

knowledgeable client paying an hourly rate would choose to have the lawyer

work.”

281

Likewise, a lawyer may have a financial incentive to settle a case early,

potentially for a lower-than-optimal amount for her client, before investing a

substantial amount of time and money in the case.

282

Some also argue that lawyers

working on a contingency may be more likely to engage in unethical litigation

conduct than those working on an hourly rate, since their ability to put bread on

the table depends upon winning the case.

283

279

Chamber Letter, supra note 1, at 14, 16.

280

Richard W. Painter, Litigating on a Contingency: A Monopoly of Champions or a Market for

Champerty?, 71 CHI.-KENT L. REV. 625, 670 (1995).

281

Id. at 671.

282

Id.

283

1 The Royal Commission on Legal Services, Final Report 177, 176–77 (1979) (“The fact that the

lawyer has a direct personal interest in the outcome of the case may lead to undesirable practices including

the construction of evidence, the improper coaching of witnesses, the use of professionally partisan expert

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

In other words, the argument that litigation finance may create conflicts of

interest between claimholder, funder, and lawyer applies with at least as much

force to contingency fee arrangements. In fact, the concern about conflicts is

arguably stronger when attorneys work purely on a contingency, because the

attorney gets paid nothing unless the case succeeds. Litigation finance mitigates

this potential conflict. That’s because in the most common form of litigation

finance arrangement, the funder pays half or more of the lawyer’s billable hours,

giving the lawyer a steady stream of income throughout the case. Because

litigation finance agreements allow lawyers to be compensated for a significant

portion of the hours they bill on a case, funding mitigates a lawyer’s incentive to

minimize time spent on a case or to settle for a suboptimal amount early in the

case.

A similar analysis applies to other forms of third-party financing. Imagine, for

example, that an employer is paying an employee’s legal fees. Imagine further that

the employer is a longstanding client of the lawyer, but the lawyer does not have a

long-term relationship with the employee. It is easy to see a potential threat to the

lawyer’s professional independence, as the lawyer may be tempted to satisfy the

employer’s desires rather than zealously represent the employee’s interests. A

similar dynamic can occur where a parent is paying for her child’s divorce costs,

or a generous benefactor is financing a friend’s medical malpractice claim. If a

third party holds the purse strings, a lawyer must be careful to resist the

temptation to follow the third-party funder’s wishes over those of her client.

Conflicts may also arise in pro bono litigation, particularly in “cause” litigation

where the third-party financier does not simply seek relief for the named plaintiff

but wants to establish favorable precedent, often at the appellate court or Supreme

Court level. It is no secret that “political and ideological goals, rather than strictly

monetary ones, often motivate clients in public interest cases.”

284

Imagine, for

example, that a union wishes to fund litigation on behalf of one of its employees.

As the litigation progresses, the employee may wish to accept a generous

settlement offer from the defendant, but this desire may conflict with the union’s

witnesses (especially medical witnesses), improper examination and cross-examination, groundless legal

arguments designed to lead the courts into error and competitive touting”), quoted in Painter, supra note

36, at 668.

284

Susan D. Carle, The Settlement Problem in Public Interest Law, 29 STAN. L. & POL’Y REV. 1, 4 (2018).

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

desire to keep litigating the case in the hope of establishing favorable precedent.

285

Will the lawyer’s advice to the employee be shaded by the lawyer’s knowledge that

the paying client — the union — wants to establish “the law of the land,” or by the

lawyer’s own desire to be involved in a precedent-setting case? Ideological

motivations can be stronger than monetary ones, and the fact that the third-party

funder does not stand to immediately gain financially from a favorable outcome

does not eliminate the possibility of a conflict.

Our legal system takes these threats to a lawyer’s independence seriously — but

it does not deal with these threats by requiring mandatory disclosure whenever a

third party is paying the attorney’s legal fees, or by requiring lawyers to disclose

whenever they are working on a contingent fee. Instead, we trust lawyers to satisfy

their ethical duties to maintain their independence and place the interests of their

clients first, without allowing opposing counsel to peer over their shoulder to

monitor compliance. For example, Model Rule 5.4(c) permits third parties to pay

a lawyer’s legal fees, but it provides that “[a] lawyer shall not permit a person who

recommends, employs, or pays the lawyer to render legal services for another to

direct or regulate the lawyer’s professional judgment in rendering such legal

services.” Likewise, lawyers may work on a contingency fee, but when they do,

they must maintain professional independence and put their clients’ interest first.

The question for proponents of mandatory disclosure is why lawyers can be

trusted to maintain their independence in all these other areas — contingency fee

arrangements, third-party payor arrangements, pro bono litigation, and so on —

but not in the context of commercial litigation finance. It is hard to see a satisfying

answer, particularly where these other instances of third-party funding present at

least as great, or even greater, theoretical conflicts of interest. Indeed, litigation

finance companies, as repeat players in the market for legal services, have

particularly strong incentives to adhere closely to the ethical rules requiring

attorney independence, lest they garner a poor reputation in the market or bring

the litigation finance profession into disrepute.

285

See id. at 31–32 (discussing a New Hampshire Bar Association ethics opinion permitting the union to

condition its payment for legal services on behalf of an employee on precluding the employee from

settling without the union’s permission or otherwise requiring the employee to reimburse the union for its

legal expenses incurred). See also N.H. Bar Ass’n Ethics Comm., Control of Settlement by Third Party

Paying the Lawyer’s Fees, (Dec. 8, 1993).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

2. UNETHICAL ATTORNEY FEE ARRANGEMENTS

Another argument often presented by proponents of mandatory disclosure is that

mandatory disclosure is necessary because litigation finance agreements may

violate the ethical rule against fee sharing. ABA Model Rule 5.4, like the analogues

in most states, provides that a lawyer generally may not “share fees with a

nonlawyer ….”

286

A “troubling ethical implication of [litigation finance],” the

Chamber of Commerce has speculated, “is the tendency of some lawyers who

enter into [litigation funding] arrangements to share their legal fees with the

funder.”

287

Proponents of mandatory disclosure have thus suggested that

mandatory disclosure is necessary to allow a court and opposing party to

preemptively check if the plaintiff’s lawyer is violating the ethical rule against fee

sharing.

As an initial matter, it is important to put this argument in context. Most

litigation finance agreements are between the funder and the claimholder. These

agreements, where the claimholder agrees to give a portion of her case proceeds to

the funder, simply do not implicate Rule 5.4’s prohibition against fee sharing.

Only agreements between the funder and the law firm arguably implicate Rule 5.4.

Thus what the Chamber’s argument would require is not simply disclosure of the

client’s litigation funding, but of any financing that the law firm receives to

support its contingency fee practice. That would indeed be a very broad and

intrusive requirement, and would seemingly have no stopping point. For example,

would a law firm have to disclose its private bank loans, so that counsel from one

law firm has an opportunity to scrutinize the finances of its competitor law firm?

In any event, the argument for disclosure based on speculative violations of

Rule 5.4 fits poorly with how our legal system polices potential rule violations in

connection with the broad range of other third-party financing agreements. Let’s

assume we can imagine hypothetical litigation finance agreements that may

286

ABA Model Rule 5.4(a). As noted, in August 2020 Arizona became the first state to eliminate Rule 5.4.

Meanwhile, Utah has created a regulatory sandbox to allow nonlawyer ownership of law firms on a

provisional basis, and other jurisdictions are looking at eliminating Rule 5.4 too. See Lyle Moran, Utah

embraces nonlawyer ownership of law firms as part of broad access-to-justice reforms, ABA J. (Aug. 14,

2020), https://bit.ly/35wy5RB

287

Chamber Letter, supra note 1, at 13.

WHAT’S SO NEW ABOUT LITIGATION FINANCE?

DISCLOSURE AND REGULATION OF A NEW TAKE ON AN OLD PRACTICE

violate the ethical rule against fee sharing. So too can we conjure other financing

agreements that may violate ethical rules.

For example, contingent fee arrangements must be reasonable and not

excessive.

288

But some contingency fee agreements may be unreasonable and

excessive. Should contingency fee arrangements therefore be subject to

mandatory disclosure?

Likewise, the model rules prohibit contingency fee arrangements in criminal

cases, or in domestic relations cases where the lawyer’s payment is contingent

upon securing a divorce or a particular amount of alimony or support.

289

But some

lawyers may enter into prohibited contingency fee agreements in these cases.

Should litigants be required to disclose at the outset of litigation their retainer

agreements in any criminal or domestic relations matter?

Once again, our legal system addresses potential violations of the ethical rules

by trusting lawyers to enter into ethical fee agreements that comply with the

lawyer’s professional responsibilities. Lawyers are not required to lodge their

retainer agreements with the court so that a judge and opposing counsel may

scrutinize the arrangements to ensure that no provision of law or ethics has been

violated. Why is litigation finance different? Indeed, if we trust lawyers to enter

into ethical fee agreements when lawyers may be unethical about the return

payable to the lawyer, it is hard to see why we should not trust them to be ethical

when it comes to the return payable to a third party.

3. JUDICIAL CONFLICTS OF INTEREST

Another argument frequently put forward in support of the mandatory disclosure

of litigation finance arrangements is that disclosure is necessary to avoid a

possible judicial conflict of interest. The Chamber of Commerce has suggested that

judges might have invested in litigation finance companies, or hedge funds

operating as litigation funders, and disclosure is necessary for the judge to

determine if she must recuse from the case.

290

288

ABA Model Rule 1.5(c).

289

ABA Model Rule 1.5(d).

290

Chamber Letter, supra note 1, at 15. See also Victoria Shannon Sahani, Judging Third-Party Funding,

63 UCLA L. REV. 388, 423, 427 (2016) (advocating in camera disclosure of the identity of any funder to

judges to determine financial conflicts of interest).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

It is hard to believe a judge would find it prudent to invest in one of the few

litigation finance companies that is traded on the public markets, much less in a

privately held litigation finance company. In fact, it is already improper for judges

to do so. The Code of Conduct for United States Judges prohibits judges from

having financial or business relationships with “lawyers or other persons likely to

come before the court on which the judge serves.”

291

State laws typically contain

the same prohibition.

292

There is little reasonable basis to assume a judge will have

a financial conflict of interest because a litigation funder is involved in a case. And

even if such a basis existed, this would justify at most disclosure in camera to the

court of the identity of any funder — not disclosure to the defendant of both the

identity of the funder and the funding agreement itself.

Even setting aside these points, the corporate disclosure rules do not require

disclosure of every single potential financial or personal conflict of interest, let

alone conflicts as phantom as a judge investing in a litigation finance company.

For example, the federal rules only require corporate parties to “identif[y] any

parent corporation and any publicly held corporation owning 10% or more of its

stock.”

293

Under these rules, a company need not disclose if another privately held

company, or an investor such as a private equity fund or angel investor, has a

financial interest in the company — notwithstanding the possibility that a judge

might have investments in the private equity firm, or may be friends with the

angel investor. For example, before Uber Technologies, Inc., went public, the

federal rules only required the company to report in its briefs that it is a “privately

held corporation” and that “[n]o parent corporation or publicly held corporation

owns 10% or more of its stock” — despite the fact that probably hundreds of

individuals or corporate entities (many of whom might be friends with a judge

presiding over a case involving Uber) had a financial stake in the company.

294

The committee notes to Federal Rule of Civil Procedure 7.1 have already

resolved this aspect of the disclosure debate — and they have resolved it squarely

against the Chamber’s argument. Those notes explain that although “the

291

Code of Conduct for United States Judges, Canon 4, ¶ D.

292

See, e.g., N.Y. Judicial Law, Code of Judicial Conduct, Canon 4(D).

293

FED. R. CIV. P. 7.1; see also FED. R. APP. 26.1(a).

294

See, e.g., Appellants’ Joint Opening Brief at ii, Mohamed v. Uber Technologies, Inc., No. 15-16178

(9th Cir. Oct. 21, 2015).

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100

disclosures required by Rule 7.1(a) may seem limited, they are calculated to reach

a majority of the circumstances that are likely to call for disqualification on the

basis of financial information that a judge may not know or recollect.”

295

The

committee notes further recognize that “[u]nnecessary disclosure requirements

place a burden on the parties and on courts,” and that “[i]t has not been feasible to

dictate more detailed disclosure requirements in Rule 7.1(a).”

296

There is no reason

to upset this compromise and create a gerrymander that sweeps in only one

additional — and especially unlikely — potential conflict of interest.

This point becomes particularly salient when viewed in light of the various

forms of third-party financing arrangements identified above. It is possible that

an anonymous benefactor who is friends with the judge has decided to fund a

claimholder’s case pro bono. It is also possible that a company in which the judge

has an interest has provided debt financing to a litigant, with the expectation that

the financing will be used at least in part to fund the litigation. But our legal system

has not required onerous disclosures to catch these hypothetical but highly

unlikely conflicts. It is hard to see why the extraordinary disclosure of litigation

finance agreements is necessary when it presents at best a comparable likelihood

of leading to a judicial conflict of interest than various other relationships for

which we have not required mandatory disclosure.

4. AVOIDING VIOLATIONS OF CHAMPERTY AND MAINTENANCE LAWS

Another argument often advanced to prop up arguments for mandatory disclosure

is that litigation funding agreements may violate the hoary prohibitions against

champerty and maintenance. Champerty prohibits what Blackstone called

“officious intermeddling in a suit that no way belongs to one, by maintaining or

assisting either party, with money or otherwise,” in return for a portion of case

proceeds.

297

The Chamber argues that “if a party is being sued pursuant to an

illegal (champertous) funding arrangement, the defendant has a right to know and

presumably would have standing to challenge such an agreement as champertous

under the applicable state law.”

298

295

Committee Notes on Rule, 2002, FED. R. CIV. P. 7.1.

296

Id.

297

4 W. BLACKSTONE, COMMENTARIES *134–36. See also In re Primus, 436 U.S. 412, 424 n.15 (1978).

298

Chamber Letter, supra note 1, at 13.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

101

As an initial matter, the Chamber is wrong to claim that the defendant would

have standing to challenge a funding agreement to which it is not a party. To the

contrary, courts in almost all jurisdictions hold that defendants do not have

standing to challenge allegedly champertous agreements entered into between

the plaintiff and a third party.

299

Thus in most jurisdictions, the only party that

should be able to challenge the agreement — the funded party — already has full

knowledge of the funding contract (because it is a party to that contract). This

point alone should dispose of this particular argument for mandatory disclosure.

Moreover, standard commercial litigation finance arrangements simply do not

violate the doctrines of champerty and maintenance in most jurisdictions. “The

consistent trend across the country is toward limiting, not expanding,

champerty’s reach.”

300

Champerty is on the decline principally because of a

growing belief that the doctrine is no longer necessary to cure the perceived evils

it was devised to combat. Ethics rules more directly prohibit lawyers from filing

frivolous claims or allowing third parties to control litigation. Thus a number of

jurisdictions, like Massachusetts, Minnesota, and South Carolina, have entirely

abolished champerty.

301

Other states prohibit champerty only insofar as someone

“officiously intermeddles” in someone else’s litigation to control and gin up

frivolous litigation — and the decisions further recognize that funders are

generally not officious intermeddlers.

302

Notably, the Chamber has sought

mandatory disclosure in all jurisdictions, without regard to whether local law

retains vestiges of champerty and maintenance law.

Even so, let us assume that a jurisdiction still recognizes champerty and

maintenance, that it is arguable that litigation finance violates these prohibitions,

and that a defendant would have standing to challenge that agreement. We can

also imagine a whole host of other third-party financing agreements that might

299

See, e.g., Kipperman v. Onex Corp., 411 B.R. 805, 886 (N.D. Ga. 2009); McMullin v. Borgers, 806

S.W.2d 724, 735 (Mo. Ct. App. 1991); Cone v. Benjamin, 27 So.2d 90, 107 (Fla. 1946); Sibley v. Alba, 95

Ala. 191, 197-98 (1892).

300

Del Webb Communities, Inc. v. Partington, 652 F.3d 1145, 1156 (9th Cir. 2011).

301

Saladini v. Righellis, 687 N.E.2d 1224, 1226 (Mass. 1997); Maslowski v. Prospect Funding Partners

LLC, 944 N.W.3d 235, 238 (Minn. 2020); Osprey, Inc. v. Cabana Ltd. P’ship, 532 S.E.2d 269, 277 (S.C.

2000).

302

See, e.g., Charge Injection Techs., Inc. v. E.I. Dupont De Nemours & Co., 2016 WL 937400, at *3–5

(Del. Super. Ct. Mar. 9, 2016); Odell v. Legal Bucks, LLC, 665 S.E.2d 767, 775 (N.C. Ct. App. 2008);

Kraft v. Mason, 668 So.2d 679, 683 (Fla. Dist. Ct. App. 1996).

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102

violate these prohibitions, and especially the prohibition against maintenance,

which forbids the mere “intermeddling” in another’s suit, regardless of whether

the third party will receive a portion of case proceeds in return. For example, a

defendant’s corporate financing agreements or its outstanding debts, or a civil

rights plaintiff’s receipt of pro bono funds from a third party may all conjure fact

patterns where the champerty or maintenance rules may theoretically be violated.

But these theoretical concerns have not led to the automatic disclosure of any

and all financing agreements, so that opposing counsel and courts may investigate

whether someone in the case is violating the law. Why should litigation funding

be treated any differently? Such idle suspicion of wrongdoing has never been

found to warrant discovery — much less mandatory disclosure. As the United

States Supreme Court has explained, “[j]udges are trusted to prevent

‘fishing expeditions’ or an undirected rummaging through bank books and

records for evidence of some unknown wrongdoing.”

303

New York law specifically

requires that discovery must be conducted in a way that “prevent[s] unreasonable

annoyance, expense, embarrassment, disadvantage, or other prejudice to any

person or the court.”

304

It is hard to see why we should depart from this practice

for only one form of third-party financing.

5. THE INSURANCE ANALOGY

The Federal Rules of Civil Procedure do require mandatory disclosure of insurance

agreements where an insurer may be liable for any judgment against

defendants.

305

Some opponents of litigation finance have seized on this fact,

arguing that mandatory disclosure of litigation finance is necessary to eliminate

the “current inequity” in the federal rules, whereby “defendants [are] required to

disclose to opposing counsel their contracts with insurers, but plaintiffs [are]

allowed to keep their funding arrangements under wraps.”

306

303

Cuomo v. Clearing House Ass’n, L.L.C., 557 U.S. 519, 531 (2009).

304

N.Y. CPLR § 3103(a).

305

FED. R. CIV. P. 26(a)(1)(iv).

306

Letter From 30 In-House General Counsels to Rebecca A. Womeldorf, Secretary of the Committee on

Rules of Practice and Procedure of the Administrative Office of the United States Courts at 1–2 (Jan. 31,

2019).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

103

The focus on the disclosure requirement for insurers ignores the many other

forms of third-party financing discussed above where mandatory disclosure is not

required. The world does not consist of only two types of third-party financing —

i.e., insurance and commercial litigation finance. And the vast majority of third-

party funding arrangements are not subject to mandatory disclosure. If plaintiffs

were required to disclose their commercial litigation finance agreements, true

“equity” would occur only if defendants were required to disclose all of their debt

and equity sources of capital, and other plaintiffs were required to disclose any

third-party funding or the terms of their lawyer’s contingency fee arrangements.

This would require a sea-change in our current mandatory disclosure regime.

The fact that insurance obligations must be disclosed speaks to the unique

nature of defense-side insurance; it does not provide an argument for disclosure

of other forms of third-party financing, including but not limited to commercial

litigation finance. The comments to Federal Rule 26 make this point explicit and

rebut any parallel between insurance and litigation funding. Those comments

explain that insurance is unique because “insurance is an asset created

specifically to satisfy the claim,” “the insurance company ordinarily controls the

litigation,” “information about coverage is available only from defendant or his

insurer,” and “disclosure does not involve a significant invasion of privacy.”

307

None of these observations is true about litigation finance. Litigation funding is

created after (not before) the claim exists. Funding does not exist to satisfy the

claim — instead, it simply provides financing to the claimholder, usually to meet

the legal fees and costs necessary to advance the claim. Funders do not control

litigation. And disclosure would involve a very significant invasion of privacy and

disclose key strategic information about the plaintiff’s litigation strength.

This last point gets to the heart of the disclosure debate. Mandatory disclosure

tells a defendant at least two critical pieces about the plaintiff’s case. First, it

discloses whether the plaintiff has funding — revealing both the strength of those

plaintiffs who have funding, and the weakness of those who do not. Second, it

discloses how much funding the plaintiff has — giving defendants great leverage

once they know that plaintiffs are running out of funds. For example, if the

defendant knows that the plaintiff has $2,000,000 in funding, the defendant has

307

Fed. R. Civ. P. 26, Notes of Advisory Committee on Rules — 1970 Amendment.

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104

a lot of leverage to reject a settlement offer proffered right about the time the

defendant estimates the plaintiff has burned through that litigation budget.

III. CONCLUSION

While commercial litigation finance companies may be new, third-party financing

of legal claims is not. Some of the most bedrock features of our civil justice system,

including contingency fee litigation and pro bono litigation, are instances where

third parties finance the often extraordinary costs of litigation. Other forms of

third-party financing are less obvious but no less real, including third-party

finance by employers, family, and friends, and even the raising of debt or equity.

Sometimes the purpose of third-party financing is to obtain a portion of case

proceeds or to achieve some other financial incentive, sometimes the funder seeks

a “dividend” in the form of favorable legal precedent, and sometimes the funder

simply wants to help someone else vindicate her legal rights.

This insight has important implications for the debate about mandatory

disclosure of litigation finance agreements. Opponents of litigation finance have

advanced various reasons for requiring mandatory disclosure, including fear that

funding agreements will impair attorney independence, will enact unethical fee

arrangements, will create judicial conflicts, or will violate legal prohibitions

against champerty and maintenance. But these arguments apply with at least as

much force, if not more, as the other forms of third-party finance discussed in this

essay. There is no reason to require mandatory disclosure of litigation finance

agreements, even as we have long recognized that mandatory disclosure of these

various other forms of arrangements is not necessary.

Commercial litigation finance is a relatively modern development, but it has

deep roots in our civil justice system. It is simply the latest in a long line of

developments that have permitted increased access to the courts. There is no

reason to uniquely shackle this one of many various forms of third-party

financing.

105

Hey, Big Spender: Ethical Guidelines

for Dispute Resolution Professionals

when Parties Are Backed by Third-

Party Funders

Elayne E. Greenberg*

First published by Arizona State Law Journal, Volume 51, Issue 1

A man without ethics is like a wild beast loosed upon this world.

— Albert Camus

* Professor Elayne E. Greenberg is Assistant Dean of Dispute Resolution, Director of the

Hugh L. Carey Center for Dispute Resolution and Professor of Legal Practice at St. John’s

University School of Law. Thank you Dean Simons and my St. John’s colleagues for your

encouragement. My colleagues at the AALS Alternative Dispute Resolution Section Works-

in-Progress Conference that was held at Sandra Day O’Connor College of Law at Arizona

State (October 20, 21 2018) raised questions that strengthened this paper. My gratitude to

Victoria Shannon Sahani for her astute review of the final draft. My appreciation to

Nicholas DiMarco (St. Johns Law ’19), my skilled research assistant, for his helpful

comments and astute edits on this draft.

HEY, BIG SPENDER: ETHICAL GUIDELINES FOR DISPUTE RESOLUTION PROFESSIONALS

WHEN PARTIES ARE BACKED BY THIRD-PARTY FUNDERS

106

INTRODUCTION

This first-of-its-kind paper introduces ethical guidelines and suggested practices

for dispute resolution providers and neutrals when third-party funders provide

financial backing for parties in U.S. domestic arbitrations and mediations.

308

Sophisticated third-party funders have realized that litigation and dispute

resolution are fast-growing, unregulated investment opportunities.

309

Seizing

these opportunities, third-party funders are now making billions of dollars in

profits through their strategic investments in domestic and global litigation and

dispute resolution with few ethical rules or regulations to curtail their investment

behavior.

310

Preferring to be secretive about the terms of their funding contracts

and invisible in their work, third-party funders are flourishing, in large part, by

operating below the regulatory radar.

311

The funders’ behavior has been allowed

308

See LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION 129–74 (Wolters Kluwer 2d ed. 2017); Memorandum from

Patrick A. Tighe, Rules Law Clerk to Ed Cooper et al. (Feb. 7, 2018), in ADVISORY COMM. ON

CIVIL RULES, AGENDA BOOK 209, 215 (2018),

http://www.uscourts.gov/sites/default/files/2018-04-civil-rules-agenda-book.pdf

[https://perma.cc/K9EB-QL3B]. Domestically, states have taken an inconsistent approach

regarding third-party funding as evidence by states’ statutes, case law and rules. Those

states that have adopted any rules and regulations focus on disclosure in litigation and the

boundaries of permissible funding arrangements. None of these rules and regulations

address the ethical issues for dispute resolution providers and neutrals that arise when a

party is receiving third-party funding.

309

See John Breslin, Funding Litigation a Billion-Dollar Business, LEGAL NEWSLINE (Aug.

30, 2017), http://legalnewsline.com/stories/511198462-funding-litigation-a-billion-dollar-

business [https://perma.cc/6XZH-GHJT]; Vanessa O’Connell, Funds Spring Up to Invest in

High-Stakes Litigation, WALL ST. J. (Oct. 3, 2011), https://www.wsj.com/articles/

SB10001424052970204226204576598842318233996 [https://perma.cc/69VW-ATNM].

310

See, e.g., sources cited supra note 1; see also Matthew Andrews, The Growth of

Litigation Finance in DOJ Whistleblower Suits: Implications and Recommendations, 123

YALE L.J. 2422, 2428–29 (2014) (discussing how litigation funding is a lucrative, growing

industry that invests in a range of cases including personal injury, employment

discrimination, intellectual property, and other commercial disputes); GEOFFREY

MCGOVERN ET AL., RAND INST. FOR CIVIL JUSTICE, THIRD-PARTY LITIGATION FUNDING AND CLAIM

TRANSFER: TRENDS AND IMPLICATIONS FOR THE CIVIL JUSTICE SYSTEM 12 (2010),

https://www.rand.org/pubs/conf_proceedings/CF272.html [https://perma.cc/QA2Z-J7U7]

(reporting that third-party funding is a multibillion dollar industry).

311

See NIEUWVELD & SAHANI, supra note 1, at 159–73 (indicating a growing minority of

states that have statutes requiring disclosure in the litigation context); see, e.g., Maya

Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 MINN. L. REV.

1268, 1277–78 (2011) (“In international arbitrations, the reason for this expansion [of third-

party funding] is partly a de facto absence of professional regulations that enables funders

and attorneys to operate outside of the disciplinary reach of bar associations.”).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

107

to proceed invisible and unchecked because courts and dispute resolution

providers and neutrals are too often unaware that a party is even receiving third-

party funding. Such unawareness, however, presents a potential ethical minefield,

not just for judges and litigators, but also for dispute resolution providers and

neutrals.

A discordant chorus of courts,

312

business gurus

313

and legal scholars, slowly

becoming aware of the potential ethical conflicts, have begun to voice concerns

that third-party funders may be traversing proscribed ethical boundaries

involving the practice of law. This growing group is calling for greater visibility,

transparency and ethical scrutiny of third-party funding practice in litigation. Of

course, when parties disagree, courts are the final arbiter of whether or not the

practice of third-party funding is even legal.

314

However, once courts resolve the

threshold issue of legality, there is growing support among the judiciary and legal

community to require litigants to disclose if they are receiving economic support

by a third-party funder.

315

Without such mandatory disclosure our legal system is

312

Compare Alison Frankel, New York’s Top Court Clamps Down on Shoestring Litigation

Funders, REUTERS (Oct. 28, 2016, 1:50 PM), http://www.reuters.com/article/us-frankel-

litigation/new-yorks-top-court-clamps-down-on-shoestring-litigation-funders-

idUSKCN12S2M3 [https://perma.cc/36TD-APAL] (describing recent N.Y. Court of Appeals

decision that expanded the reach of champerty), and Kevin LaCroix, Courts Throw Some

Shade at Litigation Funding Arrangements, D&O DIARY (Oct. 9, 2016),

http://www.dandodiary.com/2016/10/articles/litigation-%20financing-2/courts-throw-

shade-litigation-funding-arrangements/ [https://perma.cc/CA9H-H46P] (describing cases

in which funding arrangements were recently nullified in both Pennsylvania and

Delaware), with Digging Didn’t Help—Court Decision Supports Commercial Litigation

Funding, BENTHAM IMF (Feb. 12, 2014), http://www.benthamimf.com/blog/blog-full-

post/bentham-imf-blog/2014/02/12/digging-didn't-help---court-decision-supports-

commercial-litigation-funding [https://perma.cc/8EWV-QMEP] (describing recent decision

in the Northern District of Illinois that held confidential communications between party

and funder were protected by work product doctrine).

313

See Alison Frankel, Business Lobby Calls for Federal Rules to Require Litigation

Funding Disclosure, REUTERS (June 2, 2017, 11:55 AM), http://www.reuters.com/article/us-

otc-funding-idUSKBN18T2QR [https://perma.cc/UT2R-RJE7]. More than two dozen

business groups including the U.S. Chamber of Commerce are advocating that the Federal

Rules of Civil Procedure be modified to require parties to disclose if they are backed by

third-party funders.

314

See AM. BAR ASSOC. COMM’N ON ETHICS 20/20, INFORMATIONAL REPORT TO THE HOUSE OF

DELEGATES 1 (2012), https://www.americanbar.org/content/dam/aba/administrative/

ethics_2020/20111212_ethics_20_20_alf_white_paper_final_hod_informational_report.pdf

[https://perma.cc/RS55-PQK4] [hereinafter ABA 20/20 REPORT].

315

See Dorothy Murray & Edmund Northcott, Thoughts on Disclosure of Third Party

Funding, LEXOLOGY (June 20, 2017), https://www.lexology.com/library/

HEY, BIG SPENDER: ETHICAL GUIDELINES FOR DISPUTE RESOLUTION PROFESSIONALS

WHEN PARTIES ARE BACKED BY THIRD-PARTY FUNDERS

108

unable to address the real and potential ethical concerns about how third-party

funders are adversely affecting the attorney-client relationship, controlling

settlement, and potentially posing conflicts of interest with all involved in the

case.

Until now, such heated discourse in the United States about the ethics of third-

party funders has focused primarily on the ethics of third-party funding in

litigation, while only cursorily addressing the ethical issues of third-party funders

in U.S. domestic arbitration, a quasi-litigation procedure.

316

Even more curious,

the ethics of third-party funders in mediation, a party-directed procedure, has

been conspicuously absent from the conversation. Since the lion’s share of legal

cases are resolved by dispute resolution settlement rather than court judgment,

317

it makes more sense that any discussion about the ethical conduct of third-party

funders should address the ethical conduct of third-party funders in those dispute

resolution procedures that help promote settlement. The presence of a third-party

funder in a dispute resolution procedure may collide with the ethical obligations

of dispute resolution providers and neutrals, unless affirmative steps are taken to

detail.aspx?g=d01612dd-5a78-4f8a-ae6c-22ba3c064630 [https://perma.cc/VUA6-NVM4];

Jason D. Russell & Hillary A. Hamilton, Third-Party Litigation Financing: Mandatory

Disclosure on the Horizon?, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP & AFFILIATES (Apr.

19, 2017), https://www.skadden.com/insights/publications/2017/04/thirdparty-litigation-

financing-mandatory-discl (“Recent developments indicate that courts, rule committees

and even Congress may be leaning toward mandatory disclosure of third-party litigation

funding in civil litigation.”). But see Sam Reisman, Critics Pushing Back on 3rd-Party

Funding Disclosure Rule, LAW360 (June 21, 2017, 7:08 PM),

https://www.law360.com/articles/935786/critics-pushing-back-on-3rd- party-funding-

disclosure-rule [https://perma.cc/WW6H-XWXZ].

316

Our global brethren, however, have addressed the ethics of third-party funding in

the context of international arbitration. This is discussed later in the section. See generally

INT’L COUNCIL FOR COMMERCIAL ARBITRATION, REPORT OF THE ICCA-QUEEN MARY TASK FORCE

ON THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION (2018), http://www.arbitration-

icca.org/media/10/40280243154551/icca_reports_4_tpf_final_for_print_5_april.pdf

[https://perma.cc/A27G-P34A] [hereinafter ICCA REPORT]

317

See Marc Galanter, The Vanishing Trial: An Examination of Trials and Related

Matters in Federal and State Courts, 1 J. EMPIRICAL LEGAL STUD. 459, 461 (2004); Patricia Lee

Refo, The Vanishing Trial, 30 LITIG., Winter 2004, at 2 (2004),

https://www.americanbar.org/

content/dam/aba/publishing/litigation_journal/04winter_openingstatement.authcheckda

m.pdf [https://perma.cc/W9X6-QXGX] (stating that approximately 1.8% of federal cases

were actually decided by an adjudicated decision).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

109

avoid the collision.

318

This paper fills in that information gap, expands the

evolving discussion about the ethics of third-party funding, and refocuses on

providing ethical guidance for dispute resolution providers and neutrals when

litigation funders back parties in arbitration and mediation.

Our global brethren, who have long embraced litigation funding as an economic

necessity to fund the escalating costs of litigation, have also begun to heed this

warning and promulgate ethical rules to guide third-party funders’ behavior in

dispute resolution.

319

Globally, there are now legislative and regulatory initiatives

that require greater transparency when litigation funders are providing financial

backing for parties in international arbitration and mediation.

320

In the United

States, however, there is ambivalence about the legitimacy of litigation funding.

321

This paper is the first proposal for coordinated ethical guidelines for alternative

dispute resolution providers and neutrals to follow when third-party funders are

backing parties in domestic arbitration and mediations.

In order to develop responsive ethical guidelines for working with third-party

funders in dispute resolution, we must first grasp the complexities and nuances of

third-party funders, and this paper provides that context. Part I chronicles the

evolutionary role of third-party funders. It explains who third-party funders are,

why they were once prohibited, and the many permutations in which they now

exist. Part II provides an overview of two global initiatives that provide ethical

guidance when litigation funders are backing parties in a dispute resolution

procedure. Even though global legal regimes present different ethical challenges,

it is instructive to take the international pulse on this emerging issue and see

which ideas can be transported to the United States.

In Part III, the discussion focuses on the U.S. response to third-party funders by

highlighting notable court decisions, the American Bar Association’s Commission

on Ethics 20/20 report, and public interest research on this emerging topic. Part

III helps identify the U.S. areas of agreement and concern that need to be

incorporated into any ethical guidelines and best practices for dispute resolution

providers and neutrals. Part IV outlines suggested ethical guidelines and best

318

See Victoria Shannon Sahani, Reshaping Third-Party Funding, 91 TUL. L. REV. 405,

426–28 (2017).

319

See generally ICCA REPORT, supra note 9.

320

See generally id.

321

See NIEUWVELD & SAHANI, supra note 1, at 157.

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practices for dispute resolution providers, arbitrators, and mediators to follow

when parties are receiving third-party funding. This discussion concludes by

recognizing that this paper is an overdue acknowledgment that third-party

funders are backing parties in dispute resolution procedures and a recognition

that additional ethical issues will emerge. The reader is left with additional

questions that the dispute resolution community may want to consider as third-

party funders continue to play an evolving role in dispute resolution.

I. THE EVOLVING ROLE OF THIRD-PARTY FUNDERS

The narrative about how third-party funding has evolved from a proscribed

practice to an economic reality sheds light on the vestiges of concern about third-

party funders that persist today. It also provides a historical context for readers to

better understand the ethical concerns that should be addressed when third-party

funders are backing a party in a dispute resolution mechanism.

Historically, legal systems have had a long-standing antagonism towards those

third parties who try to inject themselves into the litigation of others. In large part,

courts believed that adjudication should involve only the litigants and the judge,

and courts feared that those outsiders who attempt to inject themselves in these

legal proceedings do so solely because they have a nefarious purpose that would

subvert the integrity of the justice system.

322

Such a hostile intrusion was

considered harmful to both the individual litigants and the system as a whole. As

you will read, that fear was founded. In legal systems dating back from ancient

Greek and then Roman times, there was a commitment to safeguard justice by

barring any outsider who attempted to inject himself between the litigants and the

judge.

323

These outsiders took different forms. In the fifth and fourth centuries

B.C., there were political clubs, known as sycophants, who would ban together and

322

. See Marc DeGirolami, On the Intellectual Origins of the Crime of Barratry, MIRROR

JUST. (Nov. 18, 2010), https://mirrorofjustice.blogs.com/mirrorofjustice/2010/11/on-the-

intellectual-origins-of-the-crime-of-barratry.html [https://perma.cc/9BNJ-NAW7]

(describing how champerty harmed the individual client and the legal system as a whole).

323

. Max Radin, Maintenance by Champerty, 24 CALIF. L. REV. 48, 50 (1935). There was a

recognized primacy in the relationship between the litigants and the judge. Id. The litigant

spoke directly to the judge. Id. Family and friends were encouraged to attend the court

proceedings only as providers of moral support for the litigant. Id. It was considered a

“serious fraud on the court” if a stranger attended, pretending to be a friend of the litigant.

Id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

111

provoke litigation against their political adversaries.

324

Similar to the Greek

sycophant, Romans had the calumniator—those who commenced baseless

litigation for the sole purpose of agitating the government.

325

This suspicion towards the intervention of outsiders to litigation continued into

the Middle Ages and was codified into both the common law and old English

statutes.

326

Barratry, champerty and maintenance are the codifications of three

categories of proscribed interference into the legal system.

327

Barratry described

the offense of those agitators who would provoke legal disputes.

328

Maintenance

is the general term used to describe when an outsider to the litigation advances

money to support an ongoing litigation without receiving a portion of the

outcome.

329

Champerty, a type of maintenance, refers to an outsider to the

litigation who advances money to support litigation with the understanding that

he will receive in return for his contribution, a profit or portion of the proceeds.

330

Over time, as legal systems strengthened their due process procedures to

address these concerns, courts, in their wisdom, also began to realize that not all

outsiders to litigation were a nefarious group, and that some outsiders even helped

advance justice. Thus, a more nuanced approach to outsiders was warranted. In

1886, Judge Thayer in the Dahms v. Sears case opined that “[m]any of the evils

which the law was intended to remedy have been overcome by countervailing

circumstances that have arisen, and, in effect, have been extinguished.”

331

With

this more nuanced perspective, for example, it was recognized that maintenance

could be re-characterized as an altruistic act that promotes social good by

providing public interest groups needed funding to bring forward a worthy claim

without the funders getting any money in return.

332

Yet even today, as the

324

. Id. at 49–51.

325

. Id. at 53.

326

. See id. at 57–58; see also S.J. Brooks, Champerty and Maintenance in the United

States, 3 VA. L. REV. 421, 421–22 (1916).

327

. Brooks, supra note 19, at 421.

328

. Id. at 423.

329

. Id.

330

. Id.

331

. Id. at 425 (quoting Judge Thayer in Dahms v. Sears, 11 P. 891, 898 (Or. 1886)).

332

. Simon Fodden, Barratry, Champerty, Maintenance, Oh My!, SLAW (Sept. 20, 2011),

http://www.slaw.ca/2011/09/20/barratry-champerty-maintenance-oh-my/

[https://perma.cc/G4K2-XV9N].

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following sections illustrate, domestic and global courts still maintain a cautious

approach to third-party funders. Vestiges of this mistrust continue to be evidenced

in our modern-day law. Such legal doctrines as unconscionability in contract law,

usury in consumer law and the laws regarding assignment of claims are examples

of continued modern-day vigilance of third-party funders’ actions.

333

Fueling this

mistrust in part is the difficulty involved in discerning who is a funder and

whether the funder is conducting himself within the permissible bounds of the

law.

In its most elemental form, third-party funding involves a funding entity who

provides financial support to a litigant in return for a share of the proceeds from a

settlement or judgment.

334

However, third-party funders come in many forms:

banks, hedge funds or individuals or entities that provides funding with the

expectation of profits.

335

The variations that exist in different types of third-party

funding are determinant in assessing whether the funding typology is legal and

has a permissible business purpose.

336

Furthermore, the characterization of a

third-party funder is important, because different disclosure and ethical

obligations attach to each characterization.

337

The contract between the funder and the litigant defines the financial

relationship between the funder and the funded party, the funder’s role in the

management of the case, and the allocation of responsibilities between the funder

and funded party. Yet, third-party funders resist disclosing these contracts,

insisting that the contracts are proprietary.

338

The third-party funding contract

varies from recourse to nonrecourse agreements.

339

Furthermore, there is no one

333

. See NIEUWVELD & SAHANI, supra note 1, at 136–37, 143–44.

334

. See ABA 20/20 REPORT, supra note 7, at 1; Victoria Shannon Sahani, Judging Third-

Party Funding, 63 UCLA L. REV. 388, 392 (2016).

335

. Sahani, supra note 27, at 392; ICCA REPORT, supra note 9, at 50–51.

336

. See Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation,

36 CARDOZO L. REV. 861, 877–79 (2015).

337

. Id. at 903–04.

338

. See Victoria Shannon Sahani, Blurred Lines Between Third-Party Funders and Law

Firms, KLUWER ARB. BLOG (Nov. 3, 2016), http://kluwerarbitrationblog.com/2016/

11/03/blurred-lines-between-third-party-funders-and-law-firms/ [https://perma.cc/E6X8-

SXYH] (citing to an emerging financial relationship in which the third-party funder is

playing a more active role in the case).

339

. ABA 20/20 REPORT, supra note 7, at 5–6. Recourse funding requires the funded party

to pay the funder for the cost of money, regardless of whether the party prevails. See id. at

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

113

typology of a third-party funder; consequently, each third-party funding

agreement differs in purpose, form and context.

340

Even the name “third-party

funder” may in many cases be a misnomer, because the funder, depending on the

terms of the contract, is often not an actual party to the litigation.

341

Therefore,

disclosure about the presence of funders and their contractual relationship with

the litigant is relevant to dispute resolution providers and professionals who will

be facilitating the settlement of the case.

342

II. GLOBAL EXPERIENCE SHAPES ETHICAL RULES

AND GUIDELINES

Our global brethren have embraced third-party funding as an economic necessity

to fund the escalating costs of litigation and international dispute resolution.

343

Along with such cumulative experience with third-party funders, however, comes

a heightened awareness about the potential ethical minefields that may occur

when third-party funders participate. This heightened awareness has served as

the global impetus to promulgate ethical rules and develop best practices for

dispute resolution providers and neutrals that require greater transparency of

third-party funders.

344

The global community recognizes that without these

defined boundaries, third-party funders, untethered by rules or regulations,

345

6. Nonrecourse funding requires the funded party to pay the funder only if the funded

party prevails. Id. at 7.

340

. See Sahani, supra note 11, at 411–12; ICCA REPORT, supra note 9, at 47–48.

341

. This author met with Alan Zimmerman, CEO and Legal Counsel of Law Finance

Group, a funding provider, on June 19, 2017. During our conversation, Mr. Zimmerman

noted how the term “third-party funder” is not an accurate label, because funders are not a

party to the litigation.

342

. See infra Part IV.

343

. See Third Party Funding in International Arbitration, ASHURST (Sept. 4, 2018),

https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide---third-

party-funding-in-international-arbitration/ [https://perma.cc/DS2P-DNV4] (discussing the

approaches to the legality of third-party funding taken by various jurisdictions, including

those that embrace it, such as Hong Kong and Singapore, and those that have rejected it,

such as Ireland); see also ICCA REPORT, supra note 9, at 17; Arbitration and Mediation

Legislation (Third Party Funding) (Amendment), No. 6, (2017) Cap. 609, A137, § 98 (H.K.).

344

. See sources cited supra note 36.

345

. See, e.g., THE ASSOCIATION OF LITIGATION FUNDERS OF ENGLAND AND WALES, CODE OF

CONDUCT FOR LITIGATION FUNDERS (Nov. 2011), https://www.judiciary.uk/wp-

content/uploads/JCO/Documents/CJC/Publications/CJC+papers/Code+of+Conduct+for+Li

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will continue to ethically collide with lawyers, dispute resolution providers and

neutrals, whose professional behaviors are defined by their respective ethical rules

of conduct.

346

In order for mediators and arbitrators to follow-through on their

ethical mandates about disclosure of conflicts of interest and impartiality, they

must first be made aware that a third-party funder with whom they have had

previous commercial transactions is now funding a participant in the current

matter.

347

This section highlights two global initiatives that are shaping the participatory

boundaries of third-party funders in dispute resolution: the passage of Hong

Kong’s Bill 2016, Arbitration and Mediation Legislation,

348

and the ICCA-Queen

Mary College of the University of London Task Force.

349

Although each initiative

has different purposes, both share common threads. Both recognize that there

needs to be disclosure about third-party funders in arbitration and mediation, and

that failure to have disclosure will perpetuate ethical violations of dispute

resolution tenets. Both recognize third-party funder is an umbrella term that

describes many permeations of economic support, some legal and others of

questionable integrity. And both initiatives call for greater oversight of third-party

funders.

A. HONG KONG’S BILL 2016, ARBITRATION AND MEDIATION

LEGISLATION

The passage of Hong Kong’s Bill 2016, Arbitration and Mediation Legislation

(Third-Party Funding) (“HK Bill 2016”) on June 14, 2017, is the first global

legislation that affirms the legitimacy of third-party funding in international

dispute resolution.

350

This legislation synchronizes Hong Kong’s Law on third-

tigation+Funders+(November+2011).pdf [https://perma.cc/7LVC-TQF2] (providing

guidelines for funders about adequacy of funds and accuracy of promotional literature,

including the requirement that litigation funding agreements (“LFAs”) should include the

litigation funder’s role in settling the case and withdrawing from the funding agreement).

346

. CATHERINE A. ROGERS, Gamblers, Loan Sharks, and Third-Party Funders, in ETHICS

IN INTERNATIONAL ARBITRATION 177, 182 (2014).

347

. See Sahani, supra note 27, at 401–02.

348

. See Cap. 609, A137, § 98.

349

. ICCA REPORT, supra note 9.

350

. See Bills Committee on Arbitration and Mediation Legislation (Third Party Funding)

(Amendment) Bill 2016, LEGIS. COUNCIL H.K. SPECIAL ADMIN. REGION CHINA,

https://www.legco.gov.hk/yr16-17/english/bc/bc102/general/bc102.htm

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

115

party funding in international dispute resolution with the practices of China’s

International Dispute Resolution providers by reaffirming that the common law

offenses of maintenance and champerty do not apply to third-party funding in

international dispute resolution.

351

Significantly, HK Bill 2016 applies not only to

the conduct of third-party funders in international arbitration, but also in

international mediation.

352

The HK Bill 2016 provides in its salient parts directives

regarding the regulation and disclosure of third-party funders participating in

arbitration and mediation.

The law requires that a Code of Practice be developed that provides “practices

and standards” for third-party funders to follow.

353

The Code of Practice is

currently in development by the HK government.

354

A third-party funded

agreement must be in writing,

355

and must also explicitly state the risk and terms

and include:

(i) the degree of control that third party funders will have in

relation to an arbitration [or mediation];

(ii) whether, and to what extent, third party funders (or persons

associated with the third party funders) will be liable to funded

parties for adverse costs, insurance premiums, security for costs

and other financial liabilities; and

(iii) when, and on what basis, parties to funding agreements may

terminate the funding agreements or third party funders may

withhold arbitration funding.

356

HK Bill 2016 also provides additional mandates that should be included in the

Code of Practice for third-party funders to ensure ethical practice. For example,

[https://perma.cc/B6K5-BJUT]. See also Cap. 609, A137, § 98E(a). It is important to

emphasize that this applies only to domestic arbitration. Third-party funding is still

prohibited in Hong Kong domestic litigation.

351

. Cap. 609, A137, § 98K; see also Third-Party Funding in International Arbitration,

supra note 36.

352

. Cap. 609, A137, § 98F.

353

. Id. § 98P.

354

. Joseph Chung, Draft Code of Practice for Third Party Funding of Arbitration and

Mediation, DEACONS (Oct. 26, 2018), https://www.deacons.com.hk/news-and-insights/

publications/draft-code-of-practice-for-third-party-funding-of-arbitration-and-

mediation.html [https://perma.cc/KY7X-FF7G].

355

. Cap. 609, A137, § 98H.

356

. Id. § 98Q(1)(b).

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prior to a party entering into a third-party funding agreement, third-party funders

should advise potential funded parties to consult with independent legal

counselors before entering into the third-party funding agreement.

357

Third-party

funders are required to have a “sufficient minimum amount of capital.”

358

Moreover, third-party funders are required to have in place procedures to respond

to “potential, actual or perceived conflicts of interest,”

359

and when complaints do

arise, “effective procedures” and “meaningful remedies” to address those

complaints.

360

In large part, Hong Kong enacted this groundbreaking legislation to reinforce

Hong Kong’s stature as a leading center for international dispute resolution in the

Asia-Pacific region.

361

The impact of this legislation is not limited to China, but

rather establishes regulation and disclosure standards concerning third-party

funders that can help shape the ethical contours of third-party funding in global

dispute resolution.

362

B. ICCA REPORT ADDRESSES THE ETHICAL ISSUES PRESENTED BY

THIRD-PARTY FUNDERS IN INTERNATIONAL ARBITRATION

In 2013, the International Council for Commercial Arbitration (“ICCA”) in

collaboration with the Queen Mary College of the University of London formed a

Task Force to provide “greater understanding about what third-party funding is

and . . . the issues it raises in international arbitration.”

363

In large part, the Task

357

. Id. § 98Q(1)(c).

358

. Id. § 98Q(1)(e).

359

. Id. § 98Q(1)(f).

360

. Id. § 98Q(1)(g).

361

. LEGIS. COUNCIL, REPORT OF THE BILLS COMMITTEE ON ARBITRATION AND MEDIATION

LEGISLATION (THIRD PATY FUNDING) (AMENDMENT), No. CB(4)1161/16-17, ¶ 8 (2016) (H.K.).

362

. See Singapore Civil Law Act (Chapter 43) Civil Law (Third-Party Funding)

Regulations 2017, c. 43, § 68. The Singapore Law followed on the heels of the Hong Kong

Law, as each center tried to gain control of the international arbitration and mediation

market. It is important to note that Singapore, like Hong Kong, does not permit third-party

funding in domestic Singaporean courts. See Third Party Funding of Arbitration in

Singapore and Hong Kong: A Comparison, ASHURST (Feb. 13, 2017),

https://www.ashurst.com/en/news-and-insights/legal-updates/third-party-funding-of-

arbitration-in-singapore-and-hong-kong-a-comparison/ [https://perma.cc/XQC3-UG7W].

363

. ICCA REPORT, supra note 9, at 3; see also id. at 7 (describing the scope of the Task

Force’s work to include “analysis of specific issues that directly affect international

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

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Force came together to address the reality that litigation funders were investing in

international arbitration because such arbitrations were of high value and offered

little opportunity for appeal.

364

Furthermore, there was concern that funders are

able to structure their funding agreements by choosing choices of law and forums

to avoid scrutiny of their investing practices.

365

In April 2018, the Task Force

issued a Report on its findings.

366

In order to accommodate “the range of existing third-party funding models”

and anticipate new developments, the Report adopted a broad working definition

of third-party funders and funding.

367

The Report defines “third-party funding” as:

[A]n agreement by an entity that is not a party to the dispute to

provide a party, an affiliate of that party or a law firm

representing that party,

a) funds or other material support in order to finance part or all of

the cost of the proceedings, either individually or as part of a

specific range of cases, and

b) such support or financing is either provided in exchange for

remuneration or reimbursement that is wholly or partially

dependent on the outcome of the dispute, or provided through a

grant or in return for a premium payment.

368

It goes on to define a third-party funder as:

arbitration proceedings and are capable of being addressed at an international level (i.e.,

conflicts of interest, privilege, and costs and security for costs)”).

364

. See, e.g., id. at 4 (“Since the Task Force was initially constituted in 2013 . . . . The

funding market has expanded in several respects. The number of funded cases has

increased significantly. The number and geographic diversity of third-party funders has

also increased, with new entities continuing to enter the market and consequently increase

the aggregate amounts available for funding.”); see also id. at 25–27 (discussing the

economics and return structures of third-party funding).

365

. See Rebecca Mulder & Marc Krestin, Third-Party Funding in International

Arbitration: To Regulate or Not to Regulate?, YOUNG ICCA BLOG (Dec. 18, 2017),

http://www.youngicca-blog.com/third-party-funding-in-international-arbitration-to-

regulate-or-not-to-regulate/ [https://perma.cc/XW7A-73YJ].

366

. ICCA REPORT, supra note 9, at i.

367

. Id. at 50.

368

. Id. See also id. at 56–70 for a survey of existing definitions.

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[A]ny natural or legal person who is not a party to the dispute but

who enters into an agreement either with a party, an affiliate of

that party, or a law firm representing that party:

a) in order to provide material support for or to finance part or all

of the cost of the proceedings, either individually or as part of a

specific range of cases, and

b) such support or financing is either provided in exchange for

remuneration or reimbursement that is wholly or partially

dependent on the outcome of the dispute, or provided through a

grant or in return for a premium payment.

369

In addition to the working definitions, the Task Force addressed four ethical

issues that are raised when third-party funders provide support in international

arbitration: (1) the potential conflicts of interest between the arbitrator and third-

party funder; (2) how sharing information with a third-party funder might affect

the attorney-client privilege; (3) whether there is a need for third-party funding to

provide security for costs; and (4) how the presence of a third-party funder affects

the allocation of costs.

370

1. Conflicts of Interest Between the Arbitrator and Third-Party Funder

371

The Report recognizes that the international arbitration community has become

an insular club in which third-party funders, attorneys and arbitrators have

ongoing contact.

372

Contributing to this insularity, attorneys on one case may

switch hats and serve as an arbitrator on another case.

373

Adding to this insularity,

third-party funders are increasingly tapping experienced attorney from this pool

to work for the funders and serve on their advisory boards.

374

Despite some

disagreement, the Report proposed “systematic disclosure” because “disclosure

by the funded party of the existence and identity of funders is necessary so that

369

. Id. at 50.

370

. Id. at 12.

371

. Id. at 63, 81–115 (discussing the revision of the International Bar Association (IBA)

Guidelines on Conflicts of Interest).

372

. See id. at 82.

373

. See Jennifer A. Trusz, Full Disclosure? Conflicts of Interest Arising from Third-Party

Funding in International Commercial Arbitration, 101 GEO. L.J. 1649, 1669–71 (2013).

374

. ICCA REPORT, supra note 9, at 82.

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119

arbitrators [can] make appropriate disclosures and decisions regarding potential

conflicts of interest.”

375

Accordingly, the Report calls for parties to “disclose the

existence of a third-party funding arrangement and the identity of the funder to

the arbitrator . . . as part of a first appearance . . . or as soon as practicable.”

376

This

proposal is “in keeping with global trends in regulation of third-party funding,”

consistent with an ICCA survey that found broad support for disclosure of third-

party funding arrangements and funders,

377

and recognizes the many potential

conflicts between arbitrators and funders that could arise in several

circumstances.

378

Colleagues in the arbitrator’s law firm might be working with

the third-party funder on another matter.

379

In another example, the arbitrator

could be the arbitrator on a case funded by the third-party funder, and then

counsel on another case funded by the same third-party funder.

380

Without

disclosure of these conflicts, the arbitrator’s impartiality and commitment to

maintaining an international arbitration of integrity would be called into

question.

381

2. Confidentiality and Attorney Client-Privilege

382

Prior to deciding to fund a case, third-party funders gather information from the

attorney and client to assess the viability of funding that case.

383

Is the sharing of

that information done so in a way that waives the attorney-client privilege or is it

done so in a way that protects the attorney-client privilege? As the Report notes,

“[t]he rise of third-party funding has added new complexities to existing

ambiguities about privilege in international arbitration.”

384

The Report identifies

three categories of information that implicate these complexities.

385

The first

category is privileged information that is provided to a third-party at the “initial

375

. Id. at 83.

376

. Id. at 81.

377

. Id. at 83.

378

. Id. at 82.

379

. See id. at 111.

380

. Id. at 112.

381

. See id. at 87.

382

. Id. at 117.

383

. See id.

384

. Id. at 118.

385

. Id. at 118–19.

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due diligence phase”

386

and after it has committed to funding the party.

387

The

second category involves the funding agreement itself.

388

The final category

includes documents produced and held by the funder, such as the funder’s

assessment of the case, “documents relating to the negotiation of the funding

agreement,” and legal opinions on the strength of the case generated by the

funder.

389

The Report takes the position that the “existence of funding and the identity of

a third-party funder is not subject to any legal privilege.”

390

The specific provisions

of a funding agreement, on the other hand, “may be subject to confidentiality

obligations . . . and may include information that is subject to a legal privilege.”

391

Production of these specific provisions should be ordered by the arbitral tribunal

only “in exceptional circumstances.”

392

Finally, on the question of waiver, the

Report states that the mere fact that privileged information is furnished to a third-

party funder should not waive the privilege, so long as the information was

provided “for the purpose of obtaining funding or supporting the funding

relationship.”

393

3. Allocation of Costs and Security of Costs

394

The Report also examined how to respond to security of cost applications at the

beginning of the arbitration and applications for allocation of costs at the end of

the arbitration when one or both parties are funded by a third-party funder.

395

As mentioned in the introduction of this article, the global legal regimes are

different than the U.S. legal system. One glaring difference is that the English

rule requires the losing party in litigation to pay the winner’s attorney’s fees, while

386

. Id. at 118. The Report describes that phase as “where funding is first requested and

the third-party funder requires information in order to decide whether or not to provide

financing.” Id.

387

. Id. at 119.

388

. Id.

389

. Id.

390

. Id. at 117.

391

. Id.

392

. Id.

393

. Id.

394

. Id. at 146.

395

. Id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

121

the American rule followed in the United States requires each party to be

responsible for its respective legal fees.

396

In arbitration, however, arbitrators

may award costs in a different proportion than the “all or nothing” English rule

would suggest.

397

In another departure from the distinction between the

American and English rule, the Federal Arbitration Act provides that U.S.

domestic arbitrators may enforce international arbitration awards that allocate

costs in a manner different than the American rule.

398

Thus, some of the advances

cannot be transported wholesale because of these differences.

However, these initiatives can also generate ideas about what should be

included in U.S. ethical guidelines for dispute resolution providers and neutrals.

Alternative Dispute Resolution (“ADR”) providers and neutrals should consider

requiring disclosure of third-party funding of a party participating in arbitration

and mediation. Another consideration is what information can be shared with

the other party because the attorney-client privilege has been waived and what

information remains privileged. In another example, the awarding of third-party

funding costs as part of the arbitration award may be one global practice that

may be transported to the United States and have ethical

ramifications.

399

III. IN THE UNITED STATES, A SLOWER PULSE

In contrast to the welcome global embrace for third-party funders, the United

States has maintained an ambivalent and cautious approach towards third-party

funding. Domestically, U.S. courts have divided on the legality of third-party

396

. Theodore Eisenberg & Geoffrey P. Miller, The English Versus the American Rule on

Attorney Fees: An Empirical Study of Public Company Contracts, 98 CORNELL L. REV. 327, 327

(2013).

397

. See Counting the Costs of Arbitration, BIRD & BIRD (Dec. 2005),

https://www.twobirds.com/en/news/articles/2005/counting-the-cost-of-arbitration

[https://perma.cc/7YYP-PWEG].

398

. See 9 U.S.C. § 207 (2018).

399

. See John Fellas, Can Arbitrators Award Third-Party Funding Costs in International

Arbitration?, N.Y. L.J. (June 30, 2017), https://advance.lexis.com/api/permalink/4b4d371e-

8751-4f20-8d3a-331c417074e4/?context=1000516 [https://perma.cc/ST4Q-TZ3T] (explaining

how cost-shifting, in which the arbitrator orders the losing party to pay the costs of the

prevailing party, is part of international arbitration. Litigation funding is now an included

part of those costs. Mr. Fellas posits that the Federal Arbitration Act could also be

interpreted to mean that costs include the cost of litigation funders.).

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funders.

400

Some courts have abandoned barratry, champerty and maintenance,

while other courts still rely on these prohibitions to help define permissible

outsider conduct.

401

To this day, courts still frown upon those outsiders to

litigation such as third-party funders who instigate, control, fund, and profit from

litigation to which they are not a party.

402

The litigant-judge relationship

remains sacrosanct.

403

One reason proffered for the U.S.’s hesitance about third-

party funding is a long-held value that one shouldn’t profit from another’s harm.

404

This section will provide a snapshot of the U.S.’s reaction by highlighting three

spheres of influence that are shaping the U.S.’s response to third-party funding:

the courts, the American Bar Association, and public interest groups such as the

Rand Institute and the U.S. Chamber Institute for Legal Reform.

A. SURVEY OF COURT RESPONSES

The U.S. courts have had a range of responses to third-party funders from

acceptance,

405

conditional acceptance,

406

to outright rejection of the concept.

407

Miller UK Ltd. v. Caterpillar, Inc.

408

is an instructive case that highlights the layers

of confidentiality issues raised by the presence of third-party funders. As a

threshold issue, the court found that litigation funding is legal in Illinois, because

the doctrines of maintenance and champerty “have been narrowed to a

filament.”

409

Moreover, the purpose of the funding in the case at bar was not “to

promote strife or contention,” but to provide needed economic backing to advance

the party’s claim.

410

Instructive to our discussion, the court explained analogizing third-party

funding to insurance is an inaccurate comparison because litigation funding and

400

. See ABA 20/20 REPORT, supra note 7, at 9–12; MCGOVERN ET AL., supra note 3, at 11–

12, 129 (discussing contemporary U.S. domestic court responses to third-party funding).

401

. See ABA 20/20 REPORT, supra note 7, at 11–12.

402

. MCGOVERN ET AL., supra note 3, at 23.

403

. See id. at 10–11.

404

. Id. at 23.

405

. See ABA 20/20 REPORT, supra note 7, at 9–12.

406

. See Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253, 1256 (N.Y. 2016).

407

. See, e.g., Johnson v. Wright, 682 N.W.2d 671, 677–78 (Minn. Ct. App. 2004).

408

. 17 F. Supp. 3d 711 (N.D. Ill. 2014).

409

. Id. at 727.

410

. Id. at 726.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

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insurance each create distinct financial relationships: “Abraham Lincoln once was

asked how many legs a donkey has if you call its tail a leg. His answer was four:

calling a tail a leg does not make it one.”

411

With insurance, the relationship

between insurer and insured is one of indemnification. The insurance company,

as the subrogee, is “limited to reimbursement for what it paid its insured and no

more.”

412

In contradistinction, the relationship between a litigation funder and

the party it funds is limited by the amount of funds the litigation funder has agreed

to loan the fundee. The funder is not a subrogee and will not pay for the fundee’s

losses or indemnify the funder.

413

The court also addressed whether privileged attorney-client information

shared with a third-party funder waived that confidentiality privilege or remained

privileged because the third-party funder shared a “common interest in the

successful outcome of the litigation.”

414

The court opined the sharing of

information with litigation funders was not protected by the common interest

doctrine, because the relationship was about money, not legal strategies or

opinions.

415

However, the court found that even though the information shared

with the third-party funder was not protected by the “common interest” doctrine,

it was protected by the confidentiality agreement that was signed by the funder

prior to receiving the privileged information.

416

B. ABA COMMISSION ON ETHICS 20/20

The American Bar Association Commission on Ethics 20/20 Information Report to

the House of Delegates (the “ABA 20/20 Report”) focuses on how the third-party

funders might ethically compromise the attorney-client relationship.

417

The

Commission cautioned about potential ethical threats to lawyers’ professional

responsibilities in three areas. First, the lawyer should ensure that any third-party

funding agreement or relationship does not compromise or disincentivize the

lawyer’s independent professional judgment in the attorney-client

411

. Id. at 729.

412

. Id.

413

. Id.

414

. Id. at 731–35.

415

. Id. at 732–34.

416

. See id. at 736–39.

417

. ABA 20/20 REPORT, supra note 7, at 15–29.

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relationship.

418

Thus, lawyers should avoid third-party funding agreements that

attempt to overtake control of the case.

419

Second, the lawyer should take care that

when the client or lawyer share privileged information protected by the attorney-

client privilege with the third-party funder, the lawyer should take steps to protect

that confidentiality.

420

Third, the lawyer should have an adequate understanding

of how third-party funders work so that the lawyer may inform and counsel the

client about any potential risks associated working with funders.

421

Of particular interest to dispute resolution neutrals, the Commission raised that

a contractual obligation with a third-party funder might influence a party’s

decision-making process regarding settlement.

422

Some agreements with third-

party funders explicitly state that the funder has to approve the settlement.

423

Yet,

even if the contractual agreement is silent on this point, the funded party may

“implicitly” consider the funded amount in assessing whether the settlement

number is adequate.

424

The Commission recognized that because there are so many variations of third-

party funding agreements, it is challenging to identify all the possible ethical

issues for lawyers that may arise from these different permeations.

425

Moreover,

as third-party funders continue to evolve and offer different types of financial

support, new ethical challenges could emerge.

426

The Commission reinforced that

the client, as a matter of agency law, has a right to delegate revocable settlement

authority to other agents such as a third-party funder.

427

However, any agreement

with a third-party funder should not interfere with a client’s option of terminating

the lawyer-client relationship at any time.

428

418

. Id. at 22.

419

. Id. at 21.

420

. Id. at 30.

421

. Id. at 38.

422

. Id. at 27.

423

. Id.

424

. Id. at 28.

425

. Id.

426

. Id. at 5.

427

. Id. at 27.

428

. Id. at 16.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

125

C. PUBLIC INTEREST RESEARCH

1. The Rand Report—Third Party Litigation Funding

429

In 2009, the UCLA-RAND Center for Law and Policy convened Third-Party

Litigation Funding and Claim Transfer: Trends and Implications for the Civil

Justice System (the “Rand Report”), the first U.S. symposium on third-party

funding.

430

Bringing together representatives from the business, legal, academic,

and not-for-profit communities, the group investigated how third-party funding

will impact the civil justice system.

431

The group did not anticipate that third-

party funders would provoke a rise in frivolous cases.

432

Rather, the group

concluded that more research was needed on whether third-party funders could

use risk analysis to identify and support more meritorious cases.

433

The group

discussed the ethical concerns raised by third-party funders such as the

confidentiality issues in the lawyer-client relationship.

434

Participants expressed

that there exists sufficient elasticity in the existing ethical rules to accommodate

these ethical concerns.

435

In a noteworthy follow-up to the 2009 Rand Report, Steven Garber examined

the economic, legal, and ethical issues related to third-party financing in the

United States,

436

in particular its possible effects on the likelihood and timing of

settlements.

437

First, Garber recognizes that disclosure of the mere existence of

third-party funding may make the defendant more inclined to settle.

438

This is

because “a defendant who knows that the plaintiff has [funding] may infer from

429

. The Rand Corporation is a non-profit research organization which “is dedicated to

making the civil justice system more efficient and more equitable.” Rand Institute for Civil

Justice, RAND CORP., https://www.rand.org/jie/justice-policy/civil-justice.html

[http://perma.cc/4YPC-QL87] (last visited Feb. 22, 2019).

430

. MCGOVERN ET AL., supra note 3, at 1.

431

. Id. at iii.

432

. Id. at 20.

433

. Id.

434

. Id. at 16.

435

. Id. at 17.

436

. See generally STEVEN GARBER, RAND CORP., ALTERNATIVE LITIGATION FINANCING IN

THE UNITED STATES (2010), https://www.rand.org/content/dam/rand/pubs/

occasional_papers/2010/RAND_OP306.pdf [https://perma.cc/VK5V-BJEX].

437

. Id. at 32.

438

. Id.

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the existence of [such funding] that the legal claim has legal merit or high

economic value . . . .”

439

Second, Garber reasons that “the existence of a non-

recourse loan to a plaintiff could impede settlements both early and late in the life

of the underlying lawsuit, but promote settlements during a period of time in

between.”

440

2. The U.S. Chamber Institute for Legal Reform

441

The U.S. Chamber Institute for Legal Reform, a non-profit affiliate of the U.S.

Chamber of Commerce and an advocacy group to promote civil justice reform, has

taken on the issue of third-party funding.

442

Unlike the Rand Report, which offers

a cautiously accepting approach to third-party funding, the U.S. Chamber

Institute for Legal Reform has been banging the drums and warning that “the sky

is falling” unless our legal system takes affirmative steps to protect against the

“parade of horribles” that third-party funders may cause.

443

The Chamber warns

that unchecked, third-party funders will promote frivolous litigation.

444

In a

passionate letter joined by over two dozen other business organizations, the

Chamber has also called for a revision of the Federal Rules of Civil Procedure to

require that parties disclose in all civil cases when they receive backing from third-

party funders.

445

439

. Garber notes that this scenario is most plausible in the context of investments in

commercial claims, however, because third-party funders in this context have rigorous

claim-assessment procedures. Id. at 33.

440

. Id.

441

. JOHN BEISNER ET AL., U.S. CHAMBER INST. FOR LEGAL REFORM, SELLING LAWSUITS,

BUYING TROUBLE: THIRD-PARTY LITIGATION FUNDING IN THE UNITED STATES (Oct. 2009),

http://www.instituteforlegalreform.com/uploads/sites/1/thirdpartylitigationfinancing.pdf

[

https://perma.cc/7WUH-P4KZ]

442

. About ILR, U.S. CHAMBER INST. FOR LEGAL REFORM, https://www.institutefor

legalreform.com/about-ilr [https://perma.cc/9YQN-2J2C] (last visited Feb. 24, 2018).

443

. See BEISNER ET AL., supra note 134, at 4–5.

444

. Id. at 5–7.

445

. The Committee on Rules of Practice and Procedure has considered such a proposed

amendment, once in 2014 and again in 2016. Memorandum from Hon. John D. Bates,

Chair, Advisory Comm. on Civil Rules, to Hon. David G. Campbell, Chair, Comm. on Rules

of Practice and Procedure (Dec. 6, 2017), in ADVISORY COMM. ON CIVIL RULES, AGENDA BOOK

235, 247–51, https://www.uscourts.gov/sites/default/files/2018-01-standing-agenda-

book.pdf [https://perma.cc/Z5TJ-VMHF]. On both occasions, the committee concluded that

the topic was not “ripe.” Id. at 247.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

127

Although the Civil Rules Committee has yet to revise the Federal Rules of Civil

Procedure, the concerns raised by the U.S. Chamber Institute for Legal Reform

have been heeded. On January 17, 2017, the U.S. District Court for the Northern

District of California required that parties in class actions must disclose whether

they are receiving funding.

446

In an even bolder action, on April 3, 2018, Wisconsin

enacted Wisconsin Act 235,

447

becoming the first state to require litigants in civil

actions to disclose their litigation funding agreements whether or not they are

asked to do so.

448

Then on April 10, 2018, the Civil Rules Committee issued a 50-

state survey regarding third party-funding disclosure.

449

Thus, even though the United States retains a cautionary approach to third-

party funders, some states are recognizing the importance of disclosure and are

beginning to enact statutes and court rules compelling disclosure.

450

The U.S.

courts, however, have yet to reach consensus on the legality of third-party funders.

The not-for-profits groups who have researched how litigation funders might

impact litigation have focused their efforts on amplifying their concerns about

how third-party funding could potentially erode the fabric of our justice system.

However, while these well-intentioned organizations continue to pontificate

about their concerns regarding third-party funders, the funders continue to

participate in such dispute resolution processes as mediation and arbitration,

invisible and unregulated. The next Part incorporates the expressed concern and

446

. See Standing Order for All Judges of the Northern District of California, Contents of

Joint Case Management Statement ¶ 19 (Nov. 1, 2018), https://cand.uscourts.gov/whaorders

[https://perma.cc/Q9EL-4KJF]; Memorandum from Patrick A. Tighe, supra note 1, at 211.

447

. WIS. STAT. § 804.01(2)(bg) (2018).

448

. Expectedly, supporters of disclosure applauded this legislation while litigation

funders voiced concerns that this legislation did not distinguish between disclosure

requirements for consumer and commercial cases. Jamie Hwang, Wisconsin Law Requires

All Litigation Funding Arrangements to Be Disclosed, A.B.A. J.: DAILY NEWS (Apr. 10, 2018,

10:45 AM), http://www.abajournal.com/news/article/wisconsin_law_requires_all_litigation_

funding_arrangements_to_be_disclosed/[https://perma.cc/3DMY-29XY].

While third-party

funders have accepted disclosure as part of international practice, third-party funders

continue to push back about efforts to require disclosure in the U.S. See, e.g., Mandatory

Disclosure of Funders Would Further Clog Overburdened Court Dockets, BENTHAM IMF (June

13, 2018), https://www.benthamimf.com/blog/blog-full-post/bentham-imf-

blog/2018/06/13/

mandatory-disclosure-of-funders-would-further-clog-overburdened-court-dockets

[https://perma.cc/G8PV-ULCT].

449

. Tighe, supra note 1, at 209–29.

450

. See id.

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advances the discussion by suggesting affirmative steps that should be taken by

dispute resolution providers and neutrals to address the ethical concerns

presented by third-party funders’ participation in dispute resolution.

IV. PROPOSED ETHICAL GUIDELINES AND BEST PRACTICES

FOR U.S. DISPUTE RESOLUTION PROVIDERS, ARBITRATORS,

AND MEDIATORS

In this Part, I offer ethical guidelines and best practice suggestions for ADR

providers,

451

arbitrators, and mediators so that the dispute resolution profession

may more responsively address the real and apparent ethical issues that arise

when a third-party funder backs a party who is participating in a dispute

resolution procedure.

452

The time has come for dispute resolution providers and

neutrals to acknowledge the reality of third-party funding, take affirmative steps

to maintain the integrity of dispute resolution practices, and consider the

potential benefits third- party funders bring to settlement. Some observe and

others ignore the reality that third-party funders are proliferating and backing

participating parties in our arbitrations and mediations with greater frequency.

This ignorance is untenable, for the presence of third-party funders that provide

financial backing to dispute resolution parties may at times challenge the ethical

obligations of dispute resolution providers and neutrals.

451

. See generally CPR–GEORGETOWN COMM’N ON ETHICS AND STANDARDS OF PRACTICE IN

ADR, PRINCIPLES FOR ADR PROVIDER ORGANIZATIONS (2002), https://www.cpradr.org/

resource-center/protocols-guidelines/ethics-codes/principles-for-adr-provider-

organizations/_res/id=Attachments/index=0/Principles-for-ADR-Provider-

Organizations.pdf [https://perma.cc/958L-JSRT] for guidance on how ADR providers

should provide quality information about the services they provide to avoid ethical issues

that would impugn the integrity of the organization and the dispute resolution procedures

it provides.

452

. In this section, ADR providers include the courts as well as private providers.

Litigants may actually mediate or arbitrate their dispute in three different contexts. First,

some litigants may decide on their own to mediate or arbitrate their dispute once their legal

dispute arises. In those cases, the litigants may opt to select their own private arbitrators or

mediators either through a private ADR provider (administered process) or on their own.

Second, the court may strongly recommend that litigants mediate or arbitrate their dispute

once a legal action is commenced. Third, litigants may be obligated to mediate or arbitrate

a dispute pursuant to contract.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

129

An overarching interest of dispute resolution providers, arbitrators, and

mediators when parties are backed by third-party funders is to obtain adequate

relevant information about third-party funders so that ADR professionals can

ensure that the dispute resolution process and any resulting settlement are

procedurally and substantively fair and just.

453

In order to address this

overarching interest, I offer three suggestions. First, dispute resolution providers

and neutrals should require titrated disclosure about the relationship between

the third-party funder and the party. Second, neutrals must be educated about

how to work with third-party funders when they are backing any of the

participating parties. Third, dispute resolution intake procedures, promotional

materials, contracting forms, and other required paperwork need to be modified

to gather relevant information about the third-party funder. I first explain these

general suggestions and then tailor the application of each of these suggestions to

the three different groups.

A. PROPOSAL ONE: TITRATED AND SEQUENTIAL DISCLOSURE ABOUT

THE RELATIONSHIP BETWEEN THE THIRD-PARTY FUNDER AND PARTY

Disclosure remains a hotly contested and nuanced issue in which third-party

funders tenaciously advocate for confidentiality of their contracting relationship

with the party while those purveyors of justice, many untrusting of third-party

funders, are demanding disclosure so that there is total transparency. Disclosure

is not an all or nothing proposition; rather, it is a nuanced term that embraces

what is disclosed, to whom disclosure is made, whether the information disclosed

remains confidential, and at what phase of the dispute resolution procedure the

information is to be disclosed. Acknowledging the apprehensions raised by

third-party funders about disclosure and the dispute resolution profession’s need

for quality disclosure about third-party funders, I recommend that disclosure

should be sequentially titrated and tailored to the different phases of the dispute

resolution procedures. The information that is required to be disclosed should be

based on the informational needs warranted at different phases of the given

dispute resolution procedure. Moreover, such sequential, titrated disclosure helps

453

. The measures for fair and just are measured differently in arbitration and

mediation. See Judith L. Maute, Public Values and Private Justice: A Case for Mediator

Accountability, 4 GEO. J. LEGAL ETHICS 503, 504–05 (1991).

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avoid broad disclosure about the third-party funder in those instances when

parties are not going forward with the dispute resolution procedure, or the

information is not necessary.

1. Three Levels of Sequential Disclosure During the Contracting Phase

of Arbitration and the Pre-Mediation Phase

a. Recommended Disclosure Level One

In the initial contracting phase between a party and the dispute resolution

provider, arbitrator or mediator, disclosure about third-party funders should be

limited to whether or not there is a third-party funder, and if there is, the names

of those in the funder’s organization. The rationale for disclosing the identity of

the third-party funder is to ferret out early on in the dispute resolution process

any potential conflicts that may exist between the third-party funder and the

neutral.

454

If there is a conflict, an ancillary issue that needs to be addressed at this phase is

whether the conflict between the third-party funder and the neutral is a waivable

one that first needs to be disclosed to the other party or is deemed to be a conflict

that is not waivable. If those involved want the opportunity to waive the conflict,

the identity and relationship of the funder must also be shared with the other

party involved in the matter. Identifying conflicts doesn’t necessarily mean

disqualification. Customarily, when there is a conflict, conflicts can be waived at

the consent of the parties.

455

Dispute resolution providers and neutrals can

incorporate this level of disclosure into the existing conflict procedures used.

Another option is for dispute resolution providers to institute a per se rule that

conflicts between the neutral and third-party funders cannot be waived. In that

case, the identity of the third-party funder does not have to be disclosed. Dispute

resolution professionals and providers have to decide on the rule they will choose

to incorporate as part of their practice, and then notify parties about this rule.

I offer a cautionary note about considering the second option and instituting a

per se ban on waiving conflicts. While some dispute resolution communities are

large and have many dispute resolution professionals from which to select a

454

. See ICCA REPORT, supra note 9, at 87.

455

. See id. at 81–115.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

131

neutral, some dispute resolution practice communities are insular and just have a

finite number of neutrals. In those instances, it is common that arbitrations and

mediations involve the same people, just wearing different hats. In those cases,

neutrals and providers may want to consider the ramifications of making conflicts

between neutrals and third-party funders conflicts that can’t be waived.

b. Recommended Disclosure Level Two

Once conflicts between the third-party funder and neutral are addressed and it is

decided that the parties wish to proceed with the dispute resolution procedure, an

additional level of disclosure that clarifies the relationship between the third-party

funder and participant needs to be made at the contracting phase. The importance

of such disclosure is to allow the dispute resolution provider, arbitrator, and

mediator to discern if the third-party funder is actually a party to the dispute

resolution procedure. Of course, determining whether or not a funder is a party is

controversial and is a label that third-party funders prefer to avoid.

456

However, our primary concern is to maintain the integrity of our dispute

resolution procedures. Therefore, dispute resolution providers, arbitrators, and

mediators must have knowledge of all the parties who are influencing and shaping

the resolution of the dispute.

If the third-party funder is a party, then what is its level of participation in the

dispute resolution procedure and the concomitant obligations that come with

that participation? For example, if the third-party funder is funding a party in

mediation, shouldn’t that third-party funder also be required to sign a

confidentiality agreement protecting the confidentiality of mediation

communications? In another example, if a party is to proceed to agreement and

the party’s funding agreement shows that the third-party funder is actually now a

party, should the third-party funder be required to participate in the arbitration?

i) Disclosure raises concomitant confidentiality issues if the third-party

funder participates in mediation and arbitration.

An important sub-issue that should also be addressed when clarifying the

relationship between the third-party funder and the party is clarifying which

456

. NIEUWVELD & SAHANI, supra note 1, at 47–48 discusses whether third-party funding

is characterized as a loan subjecting it to usury laws versus a loan.

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information that the lawyer and party shared with the third-party funder

remains confidential as part of the attorney-client privilege and which information

was shared in a way that waives the privilege. Whether or not the information that

is shared with a third-party funder is done so in a way that waives or protects the

attorney-client privilege has procedural implications in mediation and

procedural and evidentiary implications in arbitration.

When it is disclosed that a third-party funder is backing a mediation party, that

relationship raises three issues about mediation confidentiality that dispute

resolution professionals need to address to preserve the integrity of mediation.

A threshold issue that dispute resolution professionals need to clarify is how the

third-party funder should be characterized. This professional characterization is

important, because depending on the characterization of the third-party funder,

different confidentiality concerns have to be resolved. For example, if a third-

party funder learns in the course of a mediation confidential information about

the other party that could give the third-party funder a trading advantage, the

third-party funder should be barred from trading on that information. The second

issue to be addressed is whether the dispute resolution party will communicate

with the funder about mediation communications, and because there is an

expectation by all mediation participants that the mediation communications are

to remain confidential, should the third-party funder be compelled to also sign a

confidentiality agreement or should the confidentiality agreement be amended

so that it allows the dispute resolution party to consult with the third-party

funders as one of its experts? So in mediation, if the participating party has a

contractual relationship with the third-party funder that requires sharing of

information, consultation, and direction as the case progresses, then the

mediator should also have the third-party funder sign a confidentiality

agreement to protect mediation confidentiality.

457

If the third-party funder happens to also be a hedge fund, extra mediation

confidentiality protections are needed to protect mediation confidentiality and

prevent insider training. We learn from bankruptcy mediations in which hedge

funds participate that added ethical screens/walls are needed to secure the

457

. See id. at 154, stating that Indiana, Nebraska and Vermont are states who have

enacted legislation providing that the attorney-client privilege includes sharing privileged

work product and communication with third-party litigation funders.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

133

mediation communications.

458

Another wrinkle that dispute resolution

professionals need to address is that hedge funds that are also third-party funders

might learn confidential information in the mediation about the other party that

the hedge fund uses to trade on.

459

Unlike mediation, in arbitration, the arbitrator makes determinations and

issues awards based on the evidence presented.

460

Therefore, it is important to

ascertain whether information shared with the third-party funder is done so in a

way that protects or waives the attorney-client privilege.

c. Recommended Disclosure Level Three

A third level of disclosure that may be necessary is the financial relationship

between the third-party funder and the funded party. Although this information

may be needed in both arbitration and mediation, the information is needed in

each dispute resolution procedure for different reasons. In arbitration, the

information may be needed either to assess the costs one party incurred to go

forward with the arbitration or to ensure that the third-party funder has sufficient

funds to follow-through on his funding obligations. The decision about when this

disclosure should take place is context specific. For example, if the other party

makes a motion at the beginning of the arbitration for a bond of sufficiency,

then that information needs to be provided at the beginning of the arbitration

process. However, if no such motion is made, then the request for such

information might not be made until the end of the arbitration when the neutral

needs to be informed about the actual costs, including the cost of third-party

funding, that the party has incurred.

461

458

. See Charles Duhigg & Peter Lattman, Judge Says Hedge Funds May Have Used Inside

Information, N.Y. TIMES: DEALBOOK (Sept. 14, 2011, 9:28 PM),

https://dealbook.nytimes.com/2011/09/14/judge-says-hedge-funds-may-have-used-inside-

information/ [https://perma.cc/UX9B-2UKV].

459

. See GM Judge Aims to Prevent Insider Trading by Distressed Debt Funds, REUTERS

(July 15, 2013), https://www.reuters.com/article/idUS162810420130715

[https://perma.cc/DXM4-WYTJ].

460

. Comparison Between Arbitration & Mediation, FIN. INDUSTRY REG. AUTHORITY,

https://www.finra.org/arbitration-and-mediation/comparison-between-arbitration-

mediation [https://perma.cc/94Y3-R8EM] (last visited Mar. 3, 2019).

461

. See ICCA REPORT, supra note 9, at 146.

HEY, BIG SPENDER: ETHICAL GUIDELINES FOR DISPUTE RESOLUTION PROFESSIONALS

WHEN PARTIES ARE BACKED BY THIRD-PARTY FUNDERS

134

In mediation, the information might be helpful to assess each party’s

commitment to yield a just result or to better understand the economics of a

party’s decision or ambivalence about settlement. Here again, the timing of the

disclosure will be based on when this informational need arises. As one

illustration, if a party needs to reimburse a third-party funder the borrowed

amount, interest on that amount and an exponential return on any amount

recovered, the party may be reluctant to accept what appears to the mediator, a

reasonable settlement. Only when the party discloses the financial obligations to

the funder might a mediator better understand the impasse and be able work

with the parties in a more realistic way.

d. Recommended Disclosure Level Four

A fourth level of disclosure is the sharing of the third-party funder’s objective

assessment of the case. Because of their ability to create a matrix of information

about the merits of the case with admirable objectivity, third-party funders are

often considered to be super lawyers. Like other experts that are often part of

arbitration and mediation processes, funders can be invited to share their analysis

of the case, to provide evidence in the arbitration or to help address impasses in

mediation. To date, third-party funders have resisted sharing their analysis of a

case, insisting that their method of assessing whether a case is investment worthy

is proprietary, and not to be shared with others. Going forward, however, as the

push for greater transparency on the part of third-party funders gains momentum,

dispute resolution professionals will have to work with third-party funders, as they

work with other experts, to have third-party funders share their case analysis

without disclosing all their proprietary methods.

B. PROPOSAL TWO: TRAINING FOR ADR PROVIDERS, ARBITRATORS,

AND MEDIATORS

Professional dispute resolution training programs should be expanded to

include education about the additional skills neutrals need to work with those

parties backed by third-party funders. As was mentioned in the introduction of

this paper, many dispute resolution professionals and providers are unaware

that parties are backed by third-party funders even though increasing numbers

of parties are receiving dispute funding. Yet, as this article has explained, such

unawareness is creating an ethical minefield that potentially undermines the

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

135

integrity of dispute resolution. Thus, a specialized training module is needed to

heighten a neutral’s awareness about third-party funders and to provide neutrals

with the requisite skills needed to maintain a dispute resolution process of

integrity.

The contents of such an additional training module should include the ethical

issues that neutrals need to address when parties are funded; how to modify

intake and process procedures to ferret out the existence of third-party funders;

how to implement titrated levels of disclosure; strategies to help neutrals manage

their own cognitive biases about third-party funders; how to incorporate the

third-party funder’s assessment of the case into the process; and skills to manage

parties’ own biases about third-party funders.

At this time, those ADR providers and trainers who are ahead of the curve and

wish to develop a responsive training for neutrals will find more questions

raised than answers provided. The scholarship surrounding third-party funding,

to date, has centered on the ethics of the practice and the question of disclosure.

The specifics of how disclosure of third-party funders might actually influence

the dynamics with the neutral and participants, however, remain an unexplored

area. In Part V of this paper, I raise these emerging questions and posit the possible

dynamic shifts that third-party funders might spark arbitration and mediation.

V. HOW MIGHT DISCLOSURE IMPACT THE DYNAMICS

OF THE DISPUTE RESOLUTION PROCESS

Once one or both parties disclose that they are receiving dispute funding, any

conflicts emerging from that disclosure are addressed, and the dispute

resolution process proceeds, the disclosure itself could also potentially shape

the decision-making process of the neutrals and parties involved. Although

there is no specific research on point, cognitive psychologists provide us with

insights about how arbitrators, mediators, and disputants might be influenced by

the knowledge that a dispute is receiving third-party funding.

462

Biases about

462

. See generally MAHZARIN R. BANAJI & ANTHONY G. GREENWALD, BLINDSPOT: HIDDEN

BIASES OF GOOD PEOPLE (2013); Amos Tversky & Daniel Kahneman, Judgment Under

Uncertainty: Heuristics and Biases, 185 SCI. 1124 (1974).

HEY, BIG SPENDER: ETHICAL GUIDELINES FOR DISPUTE RESOLUTION PROFESSIONALS

WHEN PARTIES ARE BACKED BY THIRD-PARTY FUNDERS

136

third-party funding, the amount of funding that a party is receiving, and the

terms of the funding agreement may all influence the dynamics in both

arbitration and mediation.

A. EXPLICIT AND IMPLICIT BIAS ABOUT THIRD-PARTY FUNDING

Even though arbitrators and mediators are ethically mandated to be impartial,

463

they are also human beings who may have pre-existing ideas about the ethics of

third-party funding. These pre-existing ideas or biases may cause the neutral to

be explicitly or implicitly biased for or against third-party funders.

464

As with

many biases, such bias could be formed and reinforced by the self-selected media

and publications that the neutral has been exposed to about third-party

funders.

465

For example, if a neutral is following the U.S. Chamber Institute for

Legal Reform’s concerted efforts to disallow third-party funders from operating “in

the shadows,” the neutral might be leery of funders.

466

However, if a neutral is

enthusiastically following the success of hedge funds who are funding

litigation, then the neutral might view funders more favorably.

Such biases, whether explicit or implicit, favorable or unfavorable, might

influence how neutrals deviate from their ethical mandate of impartiality.

Depending on the bias of the neutral, the neutral might then interpret the fact

that a party is funded as an indication that the case at hand has enough merit to

warrant investment or just an indication that the party needed money.

Depending on the bias of the neutral, the neutral may consider the fact that a party

is funded either as an indication of the level of commitment of the parties to go

forward with the case or a vengeful step to drag the case on unnecessarily.

463

. See, e.g., CPR–GEORGETOWN COMM’N ON ETHICS AND STANDARDS OF PRACTICE IN ADR,

supra note 144, at 10 (“The ADR Provider Organization has an obligation to ensure that

ADR processes provided under its auspices are fundamentally fair and conducted in an

impartial manner.”).

464

. Jean-Christophe Honlet, Recent Decisions on Third-Party Funding in Investment

Arbitration, 30 ICSID REV.–FOREIGN INV. L.J. 699, 699–712 (2015) (citing a case in which

arbitrator Dr. Gavin Griffith Q.C. was unsuccessfully challenged because of the negative

views he expressed about third-party funders).

465

. BANAJI & GREENWALD, supra note 155, at 164; see also DAN ARIELY, PREDICTABLY

IRRATIONAL: THE HIDDEN FORCES THAT SHAPE OUR DECISIONS 201–23 (Harper Perennial ed.

2010) (2008).

466

. See BEISNER ET AL., supra note 134.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

137

Cognitive psychologists explain that our biases are more likely to emerge in

ambiguous situations where there are fewer rules to follow.

467

Thus, even though

mediators and arbitrators might both be influenced by their biases about third-

party funders, mediators might be more likely to be influenced by such bias.

468

The structure of the mediation process is more flexible and has less defined

procedures than the arbitration process. For example, mediation may be

conducted in joint meetings, private caucuses, or a combination of the two.

Although the mediation parties, not the mediator, have the ultimate decision-

making power, the mediator, in his role as a neutral, has greater discretion than

an arbitrator about how to engage with the parties and influence the contours of

the agreement the parties will reach.

On a subtler level, the dollar amount of the funding agreement might also

unconsciously influence both the arbitrator’s and mediator’s shaping of a fair and

just resolution. Cognitive psychologists educate about the power of anchoring, the

undue influence that an initial number is given in subsequent decision making.

469

Thus, allocations of costs in arbitration and an acceptable settlement number

might be unduly influenced by the amount of funding one or both parties are

receiving. Might an arbitrator be influenced in making an award by the fact that one

party has received a significant amount of backing by a third-party funder?

Alternatively, if a defendant received a significant amount of backing by a third-

party funder, might the arbitrator have greater sympathies for that defendant if

the arbitrator issues an award that orders the defendant to pay for damages and

costs? In mediation, how might the amount of the funding arrangements of the

participants shape the mediator’s prodding of a reasonable settlement?

Another yet unexplored issue is how, from the party’s perspective, a party

receiving funding calculates settlement decisions.

470

In part, the answer to this

467

. Tversky & Kahneman, supra note 155, at 1124.

468

. See e.g., Gilat J. Bachar & Deborah R. Hensler, Does Alternative Dispute Resolution

Facilitate Prejudice and Bias? We Still Don’t Know, 70 SMU L. REV. 817, 821–22 (2017); see

also Richard Delgado et al., Fairness and Formality: Minimizing the Risk of Prejudice in

Alternative Dispute Resolution, 1985 WIS. L. REV. 1359, 1400–04; Trina Grillo, The Mediation

Alternative: Process Dangers for Women, 100 YALE L.J. 1545, 1587–94 (1991).

469

. Tversky & Kahneman, supra note 155, at 1129.

470

. ROBERT H. MNOOKIM, SCOTT R. PEPPET & ANDREW S. TULUMELLO, BEYOND WINNING:

NEGOTIATING TO CREATE VALUE IN DEAL DISPUTES 112–13, 117–18 (2000) (describing how

transaction costs can either deter or expedite settlement).

HEY, BIG SPENDER: ETHICAL GUIDELINES FOR DISPUTE RESOLUTION PROFESSIONALS

WHEN PARTIES ARE BACKED BY THIRD-PARTY FUNDERS

138

is likely based on the type of funding agreement that exists between a party and

the funder. If a party has a recourse funding agreement in which the party is

obligated to repay the funder for the borrowed money plus interest, it is

reasonable to assume that such a financial obligation would be a consideration in

the party assessing what a reasonable settlement would be. Might a party receiving

an apology as part of that settlement might then devalue that apology if the party

also has to repay the funder the borrowed money? Possibly, if a party has a

nonrecourse loan, and doesn’t have to repay the funder unless the party is

victorious, the party may feel more empowered to proceed to judgment unless the

settlement offer is as high as the expected litigated

value.

Of course, disputants may have their own biases about third-party funders. If

the disputant believes that third-party funders only back cases of merit, the

disputant may be more inclined to settle once the disputant learns that the other

party is receiving dispute funding.

471

However, if a disputant believes third-party

funders are unethical scammers, the disputant may become less likely to settle

and more determined to pursue her claim to vindication once the disputant learns

the opposing side is receiving dispute funding.

Although this is an uncharted area, these are issues that dispute resolution

professionals should be considering as they more actively engage with

participants and the third-party funders who back them. Of course, neutrals need

to become self-aware of their biases about third-party funders, along with all their

other biases, so that the bias does not adversely influence the dispute

resolution process. Such heightened awareness extends beyond the initial

disclosure to see if there is a conflict with the neutral. Such heightened awareness

extends throughout the mediation and arbitration.

B. PROPOSAL THREE: MODIFICATION OF DISPUTE RESOLUTION

FORMS AND PROCEDURES THAT ACKNOWLEDGE THE POSSIBILITY

OF THIRD-PARTY FUNDERS

One way to change the status quo practice of “don’t ask, don’t tell” that has

allowed dispute resolution professionals to be unaware of the existence of third-

party funders is to modify dispute resolution forms and procedures to actually ask

471

. See GARBER, supra note 129, at 32.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

139

if there is a third-party funder involved in the case. Dispute resolution forms and

procedures should be modified to reflect an awareness that third-party funders

may be backing one of the parties. For example, ADR providers’ promotional

materials, published rules and procedures could provide that experts, including

third-party funders, may have a role in the given dispute resolution procedure.

As mentioned above, dispute resolution professionals may include such a query as

a regular part of their intake and contracting procedures.

CONCLUSION

The invisible practice of third-party funding is becoming increasingly visible. The

time has come for dispute resolution providers and neutrals to see what they have

yet to see before:

472

Third-party funders are shaping the practice of civil dispute

resolution. Whether you believe this is an economic reality needed to address

the escalating costs of conflict resolution or an evil that will erode our justice

system, the dispute resolution profession must take affirmative steps to address

the real and apparent ethical collisions between third-party funders and neutrals.

This paper proposes ethical guidelines and best practices that provide for

modification of dispute resolution providers’ intake procedures, titrated

disclosure of third-party funders, and training of neutrals. The goal is to help

respond to the conflict and confidentiality concerns raised when third-party

funders provide support for a party in arbitration or mediation.

This paper also appreciates that we are in the dawn of awareness about third-

party funders. As a profession, it is challenging to speculate about what we don’t

know, but we must try.

473

Going forward, we will benefit from empirical research

that clarifies how third-party funding shapes parties’ decision-making about

settlement. And of course, the looming overarching question is how third-party

funders will influence the delivery of justice. This paper invites dispute resolution

providers and neutrals to rethink their current practices, adapt, and work to create

practices and guidelines that protect the integrity of the dispute resolution

profession and the justice it provides.

472

. Mark 4:9 (NAB) (“Whoever has ears to hear ought to hear.”).

473

. “Change is the law of life and those who look only in the past or present are certain

to miss the future.” John F. Kennedy, President of the U.S., Address in the Assembly Hall at

the Paulskirche in Frankfurt (June 25, 1963).

140

141

Please Ask, Please Tell: Disclosing

Third-Party Funding in Mediation

Elayne E. Greenberg

474

Professor Elayne E. Greenberg is the Assistant Dean for Dispute Resolution, Professor

of Legal Practice, and Faculty Director of the Hugh L. Carey Center for Dispute Resolution

at St. John’s Law School. She thanks her research assistants, John T. Burger (’20) and

Danielle Marino (’21), for their contributions to this addendum.

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

142

INTRODUCTION

This addendum re-ignites the discussion about third-party disclosure in dispute

resolution that began in “Hey, Big Spender: Ethical Guidelines for Dispute

Resolution Professionals when Parties Are Backed by Third-Party Funders,”

475

and

advocates for mandatory third-party funding (hereinafter TPF) disclosure when

funded commercial cases are mediated.

As increasing numbers of domestic TPF commercial cases opt for settlement in

mediation, domestic Alternative Dispute Resolution (hereinafter ADR) providers

have still failed to adopt policies or procedure that address TPF disclosure in

mediation.

476

Don’t ask, don’t tell. Even though TPF disclosure is fast becoming a

required part of global mediation practice,

477

the U.S. continues to ignore lessons

from our global community about TPF disclosure in mediation. Instead, the U.S.

is engaging in a polarizing debate about third party funding disclosure in litigation

475

Elayne E. Greenberg, Hey, Big Spender: Ethical Guidelines for Dispute Resolution

Professionals when Parties Are Backed by Third-Party Funders, 51 ARIZ. ST. L.J. 131 (2019). In

that article, Professor Greenberg endorses TPF disclosure for both arbitration and

mediation. This addendum focuses on the distinct reasons for TPF disclosure in mediation.

The focus of TPF disclosure in mediation should not be misinterpreted to exclude the need

for TPF disclosure in arbitration.

476

See generally JUD. ARB. & MEDIATION SERVS., https://www.jamsadr.com (last visited

Nov. 25, 2019); INT’L INST. FOR CONFLICT PREVENTION & RESOL., https://www.cpradr.org (last

visited Nov. 25, 2019); AM. ARB. ASS’N, https://www.adr.org (last visited Nov. 25, 2019).

477

See, e.g., Arbitration and Mediation Legislation (Third Party Funding) (Amendment)

Bill, (2016) Cap. 1331, 1, § 1 (H.K.); Civil Law Bill (No 38 of 2016) (Singapore); Drew York,

Could Litigation Funding Disclosure Be Coming to Texas?, JDSUPRA: TILTING THE SCALES

(Mar. 20, 2019), https://www.jdsupra.com/legalnews/could-litigation-funding-disclosure-

be-79839/ (discussing global trend towards disclosure).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

143

that has become politicized,

478

legislated,

479

and litigated.

480

The dizzying and

detracting consequences of such polarization have eclipsed the exploration of

appropriate TPF mediation disclosure and have paralyzed any affirmative steps to

promote disclosure in mediation. Maintaining the status quo threatens the

integrity of mediation and comes at an irretrievable cost to funded parties.

481

478

See, e.g., York, supra note 4 (discussing the status of TPF in Texas); Lisa Miller, Perils

of Third-Party Funding, L.A. LAW., Mar. 2017, https://www.lacba.org/docs/default-

source/lal-magazine/2017-test-articles/march2017testarticle.pdf (noting that the

conversation about whether or not to have TPF disclosure in litigated courts in California

was a hotly debated issue); John Freund, Republican Senators Reintroduce Litigation

Funding Disclosure Bill, LITIG. FIN. J., (Feb. 15, 2019),

https://litigationfinancejournal.com/republican-senators-reintroduce-litigation-funding-

disclosure-bill Compare Brackett B. Denniston, III et. al., Letter Re: Proposed Amendment to

Fed. R. Civ. P. 26(a)(1)(A), INST. FOR LEGAL REFORM (Jan. 31, 2019),

https://instituteforlegalreform.com/wp-content/uploads/media/TPLF_letter_1.31.19

.pdf (CEOS letter supporting disclosure), with Alison Frankel, Litigation Funders Blast U.S.

Chamber, GCs for Disclosure Push, REUTERS (Feb. 25, 2019),

https://www.reuters.com/article/

legal-us-otc-litfunding/litigation-funders-blast-u-s-chamber-gcs-for-disclosure-push-

idUSKCN1QA2Z4 (arguing that this sentiment is disingenuous and merely a response to

pressure to disclose).

479

See, e.g., WIS. STAT. § 804.01(2)(bg) (2017-18) (requires the disclosure); N.D. CAL. CIV.

LOCAL R. 3-15 (requiring disclosure of non-party interested entities or persons). The enacted

rule allowed for more limited discovery than what was initially proposed. See Ben Hancock,

Northern District, First in Nation, Mandates Disclosure of Third-Party Funding in Class

Actions, RECORDER (Jan. 23, 2017),

https://www.law.com/therecorder/almID/1202777487488/

Northern-District-First-in-Nation-Mandates-Disclosure-of-ThirdParty-Funding-in-Class-

Actions/

480

See, e.g., In re Valsartan N – Nitrosodimethylamine (NDMA) Contamination Prods.

Liab. Litig., 405 F. Supp. 3d 612 (D.N.J. 2019) (denying defendant’s broad discovery request

of plaintiff’s litigation funding agreements and documents, but allowing in-camera review

of documents to assess if the litigation funder was controlling or advising the funded

party); Space Data Corp. v. X, No. 16-cv-03260-BLF, 2017 U.S. Dist. LEXIS 22571 (N.D. Cal.

Feb. 16, 2017) (defendants move to compel discovery of the board minutes in which the

litigation funder was denied because the request was neither relevant or proportional)

[Does this parenthetical match the citation? The cited source appears to be dealing with a

motion to dismiss under 12(b)(6), not a motion to compel.]. The U.S. District Court for the

Northern District of California denied as irrelevant defendant Micron Technology’s

demand that plaintiff MLC Intellectual Property disclose the identity of any third-party

funder backing MLC’s patent infringement lawsuit. MLC Intellectual Prop., LLC v. Micron

Tech., Inc., No. 14-cv-03657, 2019 WL 118595 (N.D. Cal. Jan. 7, 2019) (denying defendant’s

request to disclose the identity of the funder backing the plaintiff because the request did

not identify a specific showing of relevance).

481

See, e.g., Greenberg, supra note 2.

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

144

This addendum refocuses back to the need for domestic TPF disclosure in

mediation and brings to life the importance of TPF disclosure in mediation

practice. In Section One, this discussion begins by distinguishing mediation from

adjudicatory processes, showing how mediation’s distinct values and purposes

call for the adoption of TPF disclosure. Section Two will explain what is meant by

disclosure. Once the identity of the TPF is disclosed, Section Three clarifies how

third-party funders, with their enhanced settlement acumen, bring value-added

benefits to the mediation table. Included in this section will be the views of an

industry actor whose participation during in-person mediations helped facilitate

the resolution of his firm’s funded cases. This addendum then concludes with a

renewed call to action to dispute resolution professionals, funded parties, and

funders to implement practices and procedures that encourage TPF disclosure in

mediation.

SECTION ONE

Third-party funding disclosure should become a required mediation practice to

safeguard mediation’s purpose, practice, and ethical underpinnings.

482

Unlike

adjudicatory processes, mediation is a party-directed dispute resolution process

that should require the disclosure of TPF to preserve mediation’s transparency

and to foster trust among mediation participants, distinguishing components of

mediation’s practice ethos.

483

Mediation, in its most basic form, is an assisted

negotiation in which the mediator helps the parties reach a resolution to the

presenting conflict, as the conflict is defined by the parties.

484

Although ADR

processes like arbitration and mediation are confidential if the parties so desire,

their confidentiality purposes are somewhat different.

485

What distinguishes

482

See, e.g., Elayne E. Greenberg, Ethical Compass: When the Empty ADR Chair Is

Occupied by a Litigation Funder, NYSBA N.Y. DISP. RESOL. LAW., Spring 2017, at 7;

Greenberg, supra note 2.

483

Andrea Maia, Transparency Is a Necessary Requirement to Find the Way for the Best

Agreement, KLUWER MEDIATION BLOG (Oct. 25, 2012), http://mediationblog.kluwer

arbitration.com/2012/10/25/transparency-is-a-necessary-requirement-to-find-the-way-for-

the-best-agreement/; Joseph Folger, Harmony and Transformative Mediation Practice:

Sustaining Ideological Differences in Purpose and Practice, 84 N.D. L. REV. 823 (2008).

484

See, e.g., A Guide to the Mediation Process for Lawyers and Their Clients, JAMS

MEDIATION SERVS., https://www.jamsadr.com/mediation-guide (last visited Dec. 1, 2019).

485

Compare the provisions for confidentiality at arbitration, see, e.g., AAA Statement of

Ethical Principles, AM. ARB. ASS’N, https://www.adr.org/StatementofEthicalPrinciples (last

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

145

mediation from adjudicatory processes such as arbitration and litigation is that

mediation participants—protected with the cloak of confidentiality and guided by

the skill of the mediator—collaborate to develop a party-directed resolution of the

presenting issue in their case, as well as any underlying problems and ancillary

issues.

486

TPF disclosure in mediation is essential to promoting the candor,

understanding, and problem-solving that are hallmarks of mediation conflict

discourse.

487

Distinguishable from the conflict discourse in arbitration and

litigation, mediation conversations, including conversations about TPF

disclosure, are not cloistered by the procedural rules of evidence or discovery.

488

This frees mediation participants to engage in conflict conversations that are

candid rather than positional rants.

489

In this unshackled milieu, mediation

participants often discover that their conflict discourse evolves from

conversations of blaming to conversations that help develop a deeper

understanding of the problem and a willingness to collaboratively shape a

responsive resolution to the problem at hand.

490

Evolving from this candor, deeper

understanding, and collaboration that take place in mediation, mediation

participants and the mediator begin to develop the trust needed to shape a

durable, party-directed agreement.

491

As discussed more fully below, the

visited Dec. 1, 2019) (arbitration is a private process that is not subject to public access such

as litigation), with those for mediation, see, e.g., Kimberly Taylor, Mediation:

Confidentiality and Enforceability of the Process, JAMS (Apr. 6, 2015),

https://www.jamsadr.com/blog/2015/

mediation-confidentiality-and-enforceability

486

Taylor, supra note 12.

487

Taylor, supra note 12; Greenberg, supra note 2.

488

See David W. Henry, Mediation as a Dark Art: A Mediator’s Message to Parties Seeking

to Settle the Difficult Case, AM. BAR ASS’N (Mar. 22, 2014),

https://www.americanbar.org/groups/

business_law/publications/blt/2014/03/02_henry/ (“[A] lawyer’s knowledge of evidence

and procedure is of little value.”).

489

Taylor, supra note 12.

490

See, e.g., MODEL STANDARDS OF CONDUCT FOR MEDIATORS § VI(A)(4) (AM. ARB. ASS’N

2005) (“A mediator should promote honesty and candor between and among all

participants, and a mediator shall not knowingly misrepresent any material fact or

circumstance in the course of a mediation.”). See generally ERIC GALTON & LELA P. LOVE,

STORIES MEDIATORS TELL (2012).

491

See, e.g., Richard Salem, Trust in Mediation, BEYOND INTRACTABILITY (July 2003),

https://www.beyondintractability.org/essay/trust_mediation; Frances E. McGovern, Trust

and the SRBA Mediation, 52 IDAHO L. REV. 335 (2016).

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

146

disclosure of TPF in mediation can contribute to the mediation conflict discourse

by offering the funder’s objective assessment of the case and suggesting workable

options for settlement.

The disclosure of third-party funders at the beginning of the mediation is also

implicitly required to preserve ethical mediation practice.

492

The Model Standards

of Conduct for Mediators, the mediator ethical code that contours the ethical

underpinnings of mediation, mandates that mediators oversee a mediation

process that promotes party self-determination,

493

maintains mediator

impartiality,

494

discloses real or perceived conflicts,

495

safeguards

confidentiality,

496

and preserves the integrity of the process.

497

As one example,

disclosure about the third-party funder would contribute to the scope of

information mediation participants would need to give their meaningful informed

consent to proceed with mediation and, ultimately, consent to any resolution.

Mediation participants could not give their meaningful informed consent, the

essence of party self-determination, if a funded party failed to disclose the identity

of the funder.

498

Perhaps, once a mediation participant learns that the other

mediation participant is funded, the unfunded participant may reassess her

492

See, e.g., Greenberg, supra note 2.

493

MODEL STANDARDS OF CONDUCT FOR MEDIATORS § I(A) (AM. ARB. ASS’N 2005) (“A

mediator shall conduct a mediation based on the principle of party self-determination.

Self-determination is the act of coming to a voluntary, uncoerced decision in which each

party makes free and informed choices as to process and outcome. Parties may exercise

self-determination at any stage of a mediation, including mediator selection, process

design, participation in or withdrawal from the process, and outcomes.”).

494

Id. § II(A) (“A mediator shall decline a mediation if the mediator cannot conduct a

mediation in an impartial manner. Impartiality means freedom from favoritism, bias or

prejudice.”).

495

Id. § III(A) (“A mediator shall avoid a conflict of interest during and after a mediation.

A conflict of interest can arise from involvement by a mediator with the subject matter of

the dispute or from any relationship between a mediator and any mediation participant,

whether past or present, personal or professional, that reasonably raise a question of a

mediator’s impartiality.”).

496

Id. § V(A) (“A mediator shall maintain the confidentiality of all information obtained

by the mediator in mediation, unless otherwise agreed to by the parties or required by the

applicable law.”).

497

Id. § VI(A) (“A mediator shall conduct a mediation in accordance with these

Standards and in a manner that promotes diligence, timeliness, safety, presence of the

appropriate participants, party participation, procedural fairness, party competency and

mutual respect among all participants.”).

498

Id. § I(A) (“Self-Determination”).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

147

evaluation of the case, reconsider if mediation is appropriate, rethink her

mediation advocacy strategy, and re-evaluate the viable parameters of

settlement.

499

In a second illustration, TPF disclosure at the beginning of the mediation

maintains the integrity of mediation by addressing any potential conflicts of

interest that may exist among the funders, neutrals, and other mediation

participants. If a funded party failed to disclose that fact to the mediator and the

other mediation participants at the outset, the mediator participant might

proceed with an unknown conflict of interest with the TPF. Even if the fact of

funding was disclosed later in the mediation or discovered at the conclusion of the

mediation, the integrity of the mediation process would be compromised and the

basis of any agreement would be put at risk.

500

In a third example, disclosure of

third-party funders allows mediators to structure a mediation process of integrity

which “promotes . . . the presence of appropriate parties.”

501

Third-party funders

should be considered “appropriate parties” since the contractual agreement

between third-party funders and the funded parties often requires, at a minimum,

that the funded party consult and share information as the case proceeds to

resolution. In mediation, “appropriate parties” is more of a term of art that

includes anyone that might contribute to the mediation discussion and influence

the settlement discussions.

502

An unexplored ethical issue is whether, if at all, the disclosure of a third-party

funder compromises mediator impartiality.

503

This author speculates that the

499

Id.

500

Id. § VI (“Quality of the Process”).

501

Id.

502

See, e.g., Mark J. Bunim, A Twist in Standard Mediation: The Insurer Is at the Table,

N.Y.L.J. (July 29, 2010), https://www.law.com/newyorklawjournal/almID/1202463997409/

a-twist-in-standard-mediation-the-insurer-is-at-the-table/# (raising the importance of

having an insurance representative with settlement authority at the mediation table);

DWIGHT GOLANN, SHARING A MEDIATOR’S POWERS: EFFECTIVE ADVOCACY IN SETTLEMENT (2013)

(suggesting that during the pre-mediation phase, mediators should discuss with the

attorneys who are the people needed to attend the mediation to help make the mediation

successful); Greenberg, supra note 2 at 154 (explaining why mediators need to know about

the relationship between the mediation party and their third-party funder).

503

Id. § II(A) (“Impartiality”). When the author presented the idea of TPF disclosure in

arbitration and mediation at conferences, neutrals raised repeated concerns about how

such disclosure might affect their impartiality. Marc Goldstein? Marc Goldstein was one of

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

148

answer to this question depends on the individual mediator. As mentioned in the

beginning of this article, the polarizing debate about third-party funders has

publicly depicted third-party funders either as a needed-good that helps parties

access justice, or as a modern-day version of the medieval justice evils of barratry,

champerty, and maintenance. Thus, at this point in time, individual mediators

may be swayed by information on either end of the spectrum, or maintain an

agnostic stance about third-party funders.

504

Thus, TPF disclosure in mediation comports and advances mediation’s purpose

and ethics. An unresolved question that is addressed in the next section is what

should be the appropriate scope of TPF disclosure.

SECTION TWO

The elephant in the room and in this paper is, if there is mandatory third-party

disclosure in mediation, what should be the scope of that disclosure? Disclosure is

a not a binary analysis, but rather a complex inquiry that requires a nuanced

examination of that which is disclosed and what, if anything, should remain

confidential. Disclosure should be titrated and multi-level, consistent with the

purpose, goals, and ethics of mediation.

505

First, the names of the funder should be

disclosed to see if there is a conflict with the neutral provider or any other

mediation participants.

506

Second, if there are no conflicts and/or any conflicts are

waived and the mediation proceeds, the TPF should sign the mediation

confidentiality agreements to preserve the confidentiality of mediation

communications.

507

Third, as the mediation proceeds, the funded party should

disclose the financial arrangement between the TPF and the funded party so that

the mediator and the mediation participants better understand the funded party’s

economic considerations when considering settlement. Fourth, the TPF should

disclose the funder’s objective assessment of the case if it will help overcome any

those arbitrators I had discussed this with. Can I have the sentence without his name? I

think so. I can just delete it.

504

Although all judges, arbitrators, and mediators have biases, mediators’ biases are

more likely to emerge in a mediation setting because of mediation’s informal structure and

lack of procedural rules. See, e.g., Greenberg, supra note 2 (citing to the work of Tversky &

Kahneman, Banaji & Greenwald and Daniel Ariely).

505

Greenberg, supra note 2.

506

Greenberg, supra note 2.

507

Greenberg, supra note 2.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

149

impasses to settlement.

508

Addressing a concern expressed by TPFs, the disclosure

of the TPF’s cases assessment does not have to include any proprietary

information. As with all expert assessments that assist mediation participants to

make rational and objective assessments about their disputes, however, the

disclosure of a TPF’s case assessment could help mediation participants reassess

the merits of their case.

509

Some third-party funders, however, have maintained a stance against

disclosure, arguing that any disclosure about third-party funders will threaten the

third-party funder’s proprietary work. Other funders, like Mr. Boaz Weinstein, co-

founder and partner of Lake Whillans Litigation Finance, take a more reasoned

approach to funding disclosure.

510

Mr. Weinstein expounded on his views about

the disclosure:

“ . . .we do not object to disclosure provided that (i) disclosure is limited to the

fact of funding (i.e., that the fact that there is funding and the identity of the

funder is disclosed), rather than the terms (i.e., the opposing party does not get to

know the specific terms of funding such as amount, returns, priority, etc.); and (ii)

disclosure is enacted as part of a broader ‘holistic’ regime that takes up not just the

question of whether the identity of the funder is disclosed but also the question of

what discovery is permitted regarding that funding. In other words, it does not

make sense to us to examine the question of disclosure in isolation and then have

lots of discovery battles over what documents can be obtained from the

claimholder/funder regarding funding. While there is a substantial body of law

that has been built up rejecting such forays, it would be best if there were clear

guidance put in place at the same time as disclosure rules are put in place.”

511

Still others believe the answer to the scope of third-party disclosure depends on

how you characterize third-party funders.

512

Some analogize third-party funding

508

See Greenberg, supra note 2 at 155 (discussing how the decision to disclose raises

whether attorney-client privilege will be waived or preserved).

509

Greenberg, supra note 2.

510

Telephone interview with Boaz Weinstein, Co-founder and Partner, Lake Whillans

Litig. Fin. (Nov. 15, 2019) [hereinafter “Phone conversation”] (notes of the conversation on

file with author)).

511

Email from Boaz Weinstein, Co-founder and Partner, Lake Whillans Litig. Fin., to

author, (Nov. 26, 2019) (on file with author).

512

See, e.g., Victoria Sahani, Reshaping Third-Party Funding, 91 TUL. L. REV. 405 (2017);

Charles Silver, Litigation Funding Versus Liability Insurance: What’s the Difference?, 63

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

150

to insurance.

513

According to such thinkers, third-party funding, as with insurance,

should be obligated to disclose the complete terms of their agreement

514

and be

available to fully participate in settlement procedures such as mediation.

515

Amidst all these seemingly divergent opinions regarding disclosure, there appears

growing consensus that if there is to be any disclosure, there should be disclosure

just to check for any conflicts. Still, the major ADR providers have yet to take this

first step. The next section shows how the in-person participation of a TPF in

mediation not only advances mediation’s ethics and purpose, but brings

enhanced settlement skill to the mediation table.

SECTION THREE

When third-party funders participate in the in-person mediation, they bring to the

mediation table their settlement acumen, a “value-added” benefit that helps

mediation parties develop a more rational and realistic approach to settlement.

Third-party funders are, in fact, “super lawyers” whose business success depends

on accurately assessing the merits of a case seeking funding.

516

To date, however,

third-party funders have not regularly participated in domestic in-person

mediations, at a cost to funded-mediation participants. Don’t ask, don’t tell.

For some funded mediation participants and their funders, the discussion of

having third-party funders actually attend the in-person mediation evokes the

long-term negotiating tension between creating value and distributing value, the

decision to share information or withhold information.

517

Because of this tension,

DEPAUL L. REV. 617 (2014); Michelle Boardman, Insurers Defend and Third Parties Fund: A

Comparison of Litigation Participation, 8 J.L. ECON. & POL’Y 673 (2012).

513

See, e.g., Silver, supra note 39. But see Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d

711 (N.D. Ill. 2014) (distinguishing litigation funding from insurance).

514

See Silver, supra note 39.

515

Bunim, supra note 29.

516

See, e.g., Caroline Simson, 3rd-Party Funding Now a Top Alternative Choice for

Lawyers, LAW360 (May 16, 2019, 7:24 PM), https://www.law360.com/articles/1160547/3rd-

party-funding-now-a-top-alternative-choice-for-lawyers; Sara Randazzo, The New Hot Law

Job: Litigation Finance, WALL ST. J. (July 5, 2018), https://www.wsj.com/articles/the-new-

hot-law-job-litigation-finance-1530783000

517

ROBERT H. MNOOKIN ET AL., BEYOND WINNING: NEGOTIATING TO CREATE VALUE IN DEALS

AND DISPUTES 17 (2000) (Negotiators often remain blinded by the fear that if they disclose

information, they will be exploited by the other side. This fear obstructs negotiators to

appreciate how disclosure may create value in the negotiation.).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

151

funded mediation participants and their funders may be apprehensive about

disclosing that they are receiving third-party funding, in fear that the other

participant will exploit that information to the other participant’s advantage.

Although savvy negotiators have conquered this fear by applying the principle of

reciprocity in negotiations to test the goodwill of their negotiating counterpart and

minimize the risk of sharing too much information,

518

some funded parties remain

unconvinced. Moreover, even though some scholars have extolled the benefits of

having third-party funders participate in mediation, some have discounted this

sage as just an academic’s verbal pontification.

519

However, the real-life mediation participation experience of a respected third-

party funder like Boaz Weinstein may help ameliorate that concern. Mr. Weinstein

has opted to participate in mediation in those cases where the funded party

requested his participation, and he thought his presence in the role of funder

would be helpful.

520

“We are in favor of settlement and negotiated resolutions.”

521

In those mediations in which he participated, Mr. Weinstein brought a “value-

add” to the process.

522

Mr. Weinstein noted that as a mediation participant, third-

party funders are rational decision-makers who have experience in settlement.

523

They have a fluency with numbers and understanding of the mediation process

that help the parties fashion a realistic settlement. And the presence of the funder

provides welcome support to the funded party.

524

Of course, as a mediation

participant, Mr. Weinstein signed confidentiality forms so that the cloak of

confidentiality was maintained.

Mr. Weinstein posits that, since a small minority of cases that apply for funding

are actually funded, the mere disclosure that a party is funded signals that a case

has merit.

525

Further, should the case not settle, the funded party has the capacity

518

ROBERT B. CIALDINI, INFLUENCE: THE PSYCHOLOGY OF PERSUASION 17 (2007).

519

This author has received this concern in her presentations about the benefits of third-

party disclosure.

520

Phone conversation, supra note 37.

521

Phone conversation, supra note 37.

522

Phone conversation, supra note 37.

523

Phone conversation, supra note 37.

524

Phone conversation, supra note 37.

525

Phone conversation, supra note 37.; Greenberg, supra note 2.

PLEASE ASK, PLEASE TELL: DISCLOSING THIRD-PARTY FUNDING IN MEDIATION

152

to follow through on the claim.

526

Mr. Weinstein recounted how it wasn’t until one

of his funded parties disclosed in mediation that he was funded, that the funded

party’s litigation claim was taken seriously.

527

The other party had erroneously

thought that the plaintiff did not have the economic muscle to follow through on

his claim, and this disclosure “changed the tenor” of the mediation.

528

While further research is required to determine the true impact of TPF

disclosure on parties’ behavior, intuition and anecdotal evidence suggest that the

disclosure and even direct participation of TPFs in mediation may bring

substantial “value added” to settlement discussions. Hopefully, these

contributions will help shape realistic and durable mediated agreements for

parties

CONCLUSION

This is a renewed call to action for domestic ADR providers, mediators, attorneys

who represent funded parties in mediation, and third-party funders themselves to

reconsider the value of third-party disclosure in mediation and to take affirmative

steps to promote TPF disclosure. The ethics, purpose, and practice of mediation

require TPF disclosure in mediation. Moreover, the “value added” by third-party

funders’ participation in mediation optimizes the likelihood of realistic and

durable settlements. Please ask, please tell.

526

Phone conversation, supra note 37.

527

Phone conversation, supra note 37.

528

Phone conversation, supra note 37.

153

Disclosure of Third-Party Funding

in International Arbitration

Victoria Shannon Sahani

†

Victoria Shannon Sahani, Professor of Law, Arizona State University Sandra Day

O’Connor College of Law; J.D., Harvard Law School; A.B., Harvard University; member of

the Advisory Board of Dispute Resolution Library of the New York University School of Law

Center on Civil Justice; co-author of the book THIRD-PARTY FUNDING IN INTERNATIONAL

ARBITRATION (Wolters Kluwer, 2nd. ed., 2017) (with Lisa Bench Nieuwveld); Vice Chair of

the Academic Council of the Institute for Transnational Arbitration

(http://www.cailaw.org/

Institute-for-Transnational-Arbitration/academic-council.html); member of the ICCA-

Queen Mary Third-Party Funding Task Force (http://www.arbitrationicca.org/

projects/Third_Party_Funding.html); member of the Advisory Council of the Alliance for

Responsible Consumer Legal Funding (ARC Legal Funding) (http://arclegalfunding.org/).

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

154

INTRODUCTION TO THIRD-PARTY FUNDING

Third-party funding has evolved into a ubiquitous “feature of modern litigation”

that in some jurisdictions is “an accepted and judicially sanctioned activity

perceived to be in the public interest.”

529

Similarly, third-party funding has

become even more prevalent in international arbitration, particularly considering

the high dollar amount of most arbitral awards. In addition, several major

arbitration seats have officially embraced third-party funding in international

arbitration through legislation or court opinions, including Australia, England,

and Wales, most of the states in the United States, Germany, the Netherlands,

several provinces in Canada, Singapore, Hong Kong, South Africa, and Nigeria

(indirectly).

530

Furthermore, there are many other jurisdictions where third-party

funding may be happening, but no official governmental response has yet ensued.

This article proceeds as follows. The remainder of this introduction defines

third-party funding, describes basic third-party funding transaction structures,

and outlines the major debates surrounding the existence of third-party funding

in international arbitration. Next, this article outlines the reasons and scope for

disclosure and describes rules and guidelines for third-party funding as

articulated by institutions, arbitral tribunals, domestic courts, treaties, and

domestic legislation. This article then addresses third-party funders as custodians

of confidential information and charges them with ensuring the legitimacy of the

arbitration process and preventing arbitrator conflicts of interest. Finally, this

article addresses the rising influence of “outcome-motivated” (or not-for-profit)

funders, whose primary focus is something other than making a financial profit

from the case.

529

Excalibur Ventures v. Texas Keystone, [2016] EWCA (Civ) 1144, paras. 1 and 31.

530

See generally LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION (Wolters Kluwer, 2nd ed., 2017) (identifying laws addressing

third-party funding or litigation funding in over 60 countries worldwide, including within

the United States chapter all 50 states, the District of Columbia and Puerto Rico); Robert

Wheal, Elizabeth Oger-Gross, Tolu Obamuroh & Gustav Lexner, Third Party Funding in

Arbitration: Reforms in Nigeria, WHITE & CASE (Nov. 27, 2018), https://www.whitecase.com/

publications/alert/third-party-funding-arbitration-reforms-nigeria (“The Bill . . . effectively

legalizes [sic] TPF in arbitration (but not litigation) in an indirect fashion. It does so by

including the costs of obtaining TPF as part of costs of arbitration. In other words, the Bill

does not expressly state that TPF will be legal, but the consequence of including it as part of

costs of arbitration logically means that the Bill has tacitly permitted TPF.”).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

155

DEFINING THIRD-PARTY FUNDING

Before proceeding further, it is crucial to articulate a working definition for the

term “third-party funder,” while also recognizing that any definition will

necessarily be both underinclusive and overinclusive of the universe of entities

that may rightly be called “third-party funders.”

531

The Task Force on Third-Party

Funding in International Arbitration, jointly organized by the International

Council for Commercial Arbitration (ICCA) and Queen Mary University of London

School of Law, is one of the most recent entities to promulgate a universal

definition of third-party funding in its final report published in April 2018.

532

Although the Task Force’s Report does not address all aspects, questions, and

potential problems involving third-party funding, it does address a wide variety of

pertinent issues, including definitions, disclosure, conflicts of interest,

evidentiary privileges, costs and security for costs, investment arbitration, and

general principles of best practice, as a starting point for a worldwide discussion

of these issues. The Task Force dedicates Chapter 3 of its report to discussing the

intricacies of the debate surrounding how to properly define third-party funding

and provides more than one definition of third-party funding to address different

contexts. In fact, the report does not settle upon a single definition of third-party

funding, but rather the report articulates multiple nuanced definitions that may

apply depending on the circumstances and characteristics of the situation.

This article adopts the following generalized definition articulated in Chapter 3

of the Task Force Report:

The term ‘third-party funding’ refers to an agreement by an entity that is not a

party to the dispute to provide a party, an affiliate of that party or a law firm

representing that party,

a) funds or other material support in order to finance part or all of

the cost of the proceedings, either individually or as part of a

specific range of cases, and

531

See Victoria Anne Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36

CARDOZO L. REV 861, 866 n.20 (2015) (discussing the difficulty in defining third-party

funding and third-party funders).

532

ICCA QUEEN MARY TASK FORCE REPORT ON THIRD-PARTY FUNDING IN INTERNATIONAL

ARBITRATION (International Council for Commercial Arbitration 4th ed. 2018),

http://www.arbitration-icca.org/publications/Third-Party-Funding-Report.html

[hereinafter TASK FORCE REPORT].

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

156

b) such support or financing is either provided in exchange for

remuneration or reimbursement that is wholly or partially

dependent on the outcome of the dispute, or provided through a

grant or in return for a premium payment.

533

In essence, a “third-party funder” is an entity that is neither a party to the

arbitration nor a party’s legal counsel that “provides the financial resources to

enable costly litigation or arbitration cases to proceed.”

534

The third-party funder

may provide such financing to a single party directly or to a law firm representing

one or more parties in one or more disputes.

535

Unlike a traditional lender, if the

funded party loses the case, the funder may not seek repayment from any other

assets of the funded party.

536

Finally, it is important to note that third-party funding is not only used by

impecunious parties. There are many corporate entities that use third-party

funding as a form of corporate finance to raise money for the company, allocate

risk, maintain liquidity, or to smooth out the dispute resolution costs line item on

the company’s balance sheet, if the company finds itself with a steady stream of

disputes.

537

Third-party funding can also take the form of a type of litigation

expenses insurance, such as after-the-event or before-the-event insurance, for a

financially sound individual or entity that may expect to be sued in the future.

538

Thus, it is not appropriate for an opposing party to apply for security for costs (e.g.,

533

TASK FORCE REPORT, supra note 4, at 50. Note that the Task Force addressed only

international arbitration, so consumer third-party funding was not addressed in the report.

534

See Association of Litigation Funders, Litigation Finance: What is litigation funding?,

http://associationoflitigationfunders.com/litigation-finance/

535

Id. (“Some members of the Association of Litigation Funders also provide financing to

law firms wishing to manage their exposure to conditional fee arrangements in litigation

work, and can offer financing against other litigation-related risks, such as a portfolio of

litigation claims.”).

536

Id. (“In return, if the case is won, the funder receives an agreed share of the proceeds of

the claim. If the case is unsuccessful, the funder loses its money, and nothing is owed by

the litigant.”).

537

See Sherina Petit, James Rogers & Cara Dowling, Third-Party Funding in Arbitration - the

Funders’ Perspective: A Q&A with Woodsford Litigation Funding, Harbour Litigation

Founding and Burford Capital, NORTON ROSE FULBRIGHT INT’L ARB. REP., no. 7, Sept. 2016, at 3

(on file with author).

538

See generally LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION (Wolters Kluwer, 2nd ed., 2017) (explaining the use of after-the-

event and before-the-event insurance in multiple jurisdictions).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

157

posting a bond or letter of credit to cover any potential costs award against the

losing party) simply because the opposing side has a third-party funder, unless

there is additional evidence indicating that the funded party is also impecunious.

This principle was articulated by the tribunals in the RSM v. Saint Lucia, EuroGas

v. Slovak Republic, and South American Silver v. Bolivia cases, discussed later in

this article.

The menu of possible third-party funding arrangements is complex, innovative,

and ever-changing, so there are undoubtedly third-party funding arrangements

not covered by the aforementioned definition.

539

Nevertheless, the definition from

the Task Force Report, reproduced above, provides a reasonable, well-defined

platform from which to describe how disclosure of third-party funding

international arbitration operates.

THIRD-PARTY FUNDING TRANSACTION STRUCTURES

There are a seemingly endless number of structures and types of third-party

funding, and the industry is devising new financial products at a rapid pace.

Traditional (at this point, almost classic) third-party funding is structured as an

investment in the costs of international arbitration that the funded party must

repay to the funder plus some calculated amount of profit only if the funded party

wins the case.

540

Most third-party funders, however, have created and deployed

innovative, new financial products beyond this traditional structure. This article

addresses third-party funding structures that fall roughly into three major

categories. First, there are third-party funding structures in which the funder

539

For example, in defense-side funding, the respondent typically does not recover any

funds from the arbitration, unless the respondent lodges a successful counterclaim or is

awarded costs against the claimant. See Victoria Anne Shannon, Harmonizing Third-Party

Litigation Funding Regulation, 36 CARDOZO L. REV. 861, 876, 892, 894-895 (2015). Defense-

side funding, however, is not nearly as common in international arbitration as claim-side

funding, so this article focuses more on the role of third-party funders in claim-side

funding of international arbitration. For an in-depth analysis of the problems of defining

the terms “third-party funder” and “third-party funding,” see generally Chapter 3, in TASK

FORCE REPORT, supra note 4. Another example is third-party funding used as a type of

corporate finance. See Sherina Petit, James Rogers & Cara Dowling, Third-Party Funding in

Arbitration - the Funders’ Perspective: A Q&A with Woodsford Litigation Funding, Harbour

Litigation Founding and Burford Capital, NORTON ROSE FULBRIGHT INT’L ARB. REP., no. 7, Sept.

2016, at 3 (on file with author).

540

See LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION 3 (Wolters Kluwer, 2nd ed., 2017).

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

158

remains a separate entity, as in traditional or classic third-party funding.

Moreover, funders now regularly package those classic third-party funding

investments into portfolios to hedge risk, as well as provide money directly to law

firms to finance multiple cases that the law firm is handling.

541

Second, some newer innovations involve a third-party funder becoming part of

the funded party.

542

An example of this arrangement is when the third-party

funder takes an equity stake in the funded party, via direct ownership or as a

shareholder, in exchange for its investment.

543

Another example is the third-party

funder and funded party creating a joint-venture entity or special-purpose entity

into which the funded party transfers ownership of the claim; then, the newly

created entity that owns the claims becomes the named party to the case.

544

Third, in the future, this author predicts that third-party funders will

increasingly take equity stakes in law firms or build their own law firms from

inception.

545

There are already a few examples of this phenomenon in existence.

546

This will likely become increasingly common in the coming years as the legal

profession becomes more corporatized and gains greater access to traditional

methods of corporate finance that have existed for decades in the private sector.

547

There are also other types of financial arrangements that could be classified as

third-party funding. For example, non-profit funding involves an entity or

individual funding a case (usually only a single case or party) for a reason other

than profit, such as to bring about a specific outcome in the case or to support a

particular industry, regulation, or political goal.

548

There are also types of before-

541

See Victoria Sahani, Mick Smith & Christiane Deniger, Third-Party Financing in

Investment Arbitration, CONTEMPORARY AND EMERGING ISSUES ON THE LAW OF DAMAGES AND

VALUATION IN INTERNATIONAL INVESTMENT ARBITRATION 33 (Christina L. Beharry ed., 2018),

https://brill.com/abstract/book/edcoll/

9789004357792/BP000010.xml (discussing not-for-profit funders)

542

See Victoria Shannon Sahani, Reshaping Third-Party Funding, 91 TULANE L. REV. 405,

435-444 (2017) (discussing funder-party collaborations involving creating new corporate or

partnership structures).

543

Id.

544

Id.

545

Id. at 444-70 (discussing funder investment in law firms and ownership of law firms).

546

Id.

547

Id. at 408-09, 455 (describing the example of the United Kingdom’s Legal Services Act

2007, c. 29 (Eng.) that took effect in 2013 allowing Alternative Business Structures, which

enables external non-lawyer investors to hold minority stakes in law firms, and providing

the example of one third-party funder, Burford, creating a new law firm under this law).

548

See Victoria Sahani, Mick Smith & Christiane Deniger, Third-Party Financing in

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

159

the-event, after-the-event, legal expenses, or liability insurance policies — the

main form of defense-side third-party funding — as well as defense clubs

organized by certain industries, such as the shipowners industry.

549

Many of those

types of financing for legal expenses predate the existence of classic third-party

funding, even though they share similar characteristics.

In addition to these recognizable structures, the range of bespoke financial

products that third-party funders offer — individualized and tailored to a

particular client, case, or business need — will continue to morph and expand like

a spider’s web. The rate of change is such that, by the time this article is in print,

there undoubtedly will be new types of third-party funding available that did not

exist at the time of this writing.

DEBATING THE EXISTENCE OF THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION

With such rapid expansion and adoption come increasing avenues for debate

about the future of third-party funding. When third-party funding was newer, the

arguments against its use in international arbitration included funder

interference in the attorney-client relationship, waiver of evidentiary privileges

for information disclosed to the funder, funders stirring up frivolous or dubious

claims, funder influence over client settlement decisions, undisclosed conflicts of

interest that funder participation may create, and lack of transparency, among

other issues.

550

In recent years, there has been a widespread acceptance of third-

party funding in international commercial arbitration — even among its harshest

critics — albeit with heightened calls for disclosure of the existence and identity

of funders in international arbitration, a position ultimately adopted by the final

report of the aforementioned Task Force.

551

The argument that has prevailed in

international commercial arbitration is that, essentially, claimants are entitled to

Investment Arbitration, CONTEMPORARY AND EMERGING ISSUES ON THE LAW OF DAMAGES AND

VALUATION IN INTERNATIONAL INVESTMENT ARBITRATION 48-50 (Christina L. Beharry ed.,

2018), https://brill.com/abstract/book/edcoll/9789004357792/BP000010.xml (discussing

not-for-profit funders).

549

See TASK FORCE REPORT, supra note 4, at 6, 9-10 (discussing traditional insurance that

pays legal expenses and maritime arbitration defense clubs).

550

See, e.g., LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION 15-16 (Wolters Kluwer, 2

ed., 2017).

551

See TASK FORCE REPORT, supra note 4, at 81.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

160

the same access to justice regarding financial assistance with their arbitrations

that respondents enjoy through their insurance companies and parent

corporations. Thus, the future of third-party funding in international commercial

arbitration appears to be relatively settled in favor of the continuation of the

industry, with added disclosure requirements and other rules and regulations that

will likely be adopted in future years.

552

The current battleground regarding the propriety of third-party funding is in

the realm of investment arbitration. Funding investment treaty arbitration is

viewed as a fundamentally different proposition than funding commercial

arbitration. In investment arbitration, the rigidity of the parties’ roles may create

lopsided funding incentives. When the investor and host state sign a separate

contract, such as a concession agreement, they each have an equal opportunity to

bring claims against each other according to their contractual dispute resolution

method, which may be arbitration. Third-party funding in that context would be

similar to international commercial arbitration.

When there is no pre-dispute arbitration clause or contract between the investor

and the host state, however, the consent to arbitrate must be found in the bilateral

or multilateral investment treaty ratified by the host state and the investor’s home

state. The investor is not a party to the treaty, so the investor’s “written” consent

is evidenced by the investor filing a claim under Articles 25 and 28 of the ICSID

Convention or under the provisions of the investment treaty. The state is always

the respondent, and it is extremely rare for investment treaties to provide express

consent for host states to bring counterclaims, at least partly because the arbitral

tribunal’s jurisdiction over such counterclaims is dubious under traditional

investment treaties.

553

Thus, third-party funders typically fund only investor-

552

See, e.g., Tom Jones, Kinnear Sheds Light on ICSID Rules Amendment, GLOB. ARB, REV.,

(Apr. 6, 2018), https://globalarbitrationreview.com/article/1167749/kinnear-sheds-light-

on-icsid-rules-amendment

553

There is, however, at least one recent treaty that may provide jurisdiction for a host state

to bring a claim against an investor in domestic litigation. See Tarcisio Gazzini, The 2016

Morocco–Nigeria BIT: An Important Contribution to the Reform of Investment Treaties,

INVESTMENT TREATY NEWS (Sept. 26, 2017), https://www.iisd.org/itn/2017/09/26/the-2016-

morocco-nigeria-bit-an-important-contribution-to-the-reform-of-investment-treaties-

tarcisio-gazzini/ (describing the innovations in this treaty, including putting obligations on

investors to comply with the laws of the host state and providing a state the opportunity to

sue an investor in the courts of its home country for violations of the treaty obligations).

While this treaty does not allow for a state to bring an investment arbitration claim against

an investor, the treaty does provide a judicial route through which the state may be

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

161

claimants in investment arbitrations brought exclusively under a treaty;

respondent-side funding in investment treaty-based arbitrations is nearly

nonexistent.

554

Because the funder is always paid from the funds of the respondent

in any type of dispute resolution, then the funder is always paid with funds from

the respondent state in investment arbitration. In essence, states are the sole

payers in a system of third-party funding for investment treaty arbitration in

which they are unable to enjoy a benefit equivalent to investors’ benefits.

Fundamentally, this is the opposite side of the access to justice issue that arises in

commercial arbitration — this is access to justice for respondents rather than

claimants — which highlights one of the underlying structural problems in

investment treaty arbitration.

555

This structural problem will likely receive at least a partial answer in the future

with respect to third-party funding. The International Centre for the Settlement of

Investment Disputes (ICSID) has added provisions regarding the disclosure of

third-party funding in Rule 14 of its revised Rules of Arbitration and will include

provisions requiring the disclosure of third-party funding at the outset of the

case.

556

In addition, at least four investment treaties, described later in this article,

have already included provisions requiring disclosure of third-party funding.

Finally, third-party funding was discussed during the 34th session of the

UNCITRAL Working Group, and it is possible that Working Group III will address

third-party funding in its future deliberations.

557

In sum, it appears that, for now,

the resounding call for mandatory disclosure in both commercial and investment

arbitration is the international arbitration community’s way of gleaning more

compensated for any wrongs the investor commits under the treaty. In addition, the treaty

is silent regarding whether states may bring counterclaims against investors in investment

treaty arbitration, which may open the door to jurisdiction over such claims. The effects of

these provisions will be tested if a case is eventually commenced under the treaty.

554

There may be at least one notable exception. Narghis Torres, Co-Founder and CEO of

LexFinance (http://www.lex-finance.com/), publicly stated, at an event titled “Third-Party

Funding in Investor-State Dispute Settlement” hosted by Columbia Law School on October

17, 2017, that his firm regularly finances respondent states in investment arbitration,

https://www.youtube.com/watch?v=ZPCtpZfPigw

555

For a discussion of access to justice in international arbitration, see generally Victoria

Shannon Sahani, A Thought-Experiment Regarding Access to Justice in International

Arbitration, ICCA CONGRESS SERIES, no. 20, (2019).

556

See International Centre for Settlement of Investment Disputes (ICSID) Secretariat,

Working Draft #3: Proposals for Amendment of the ICSID Rules, at 41, 91 (Aug. 2019).

557

See U.N. Comm’n on Int’l Trade Law (UNCITRAL), Rep. of Working Group III on the

Work of Its Thirty-Fifth Session, U.N. Doc. A/CN.9/92935, para. 13 (2018).

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

162

information about the third-party funding industry to determine whether the

industry should be further regulated at the international level.

PARAMETERS FOR DISCLOSURE OF THIRD-PARTY FUNDING

IN INTERNATIONAL ARBITRATION

The major individuals and entities involved in international arbitration — parties,

attorneys, arbitrators, law firms, arbitral institutions, and courts — are publicly

invested in the success of the international arbitration system. Until recently,

third-party funders were privately — some might even say secretly — invested in

the international arbitration system. Over the past few years, however, calls for

disclosure of the existence of third-party funding and the identities of third-party

funders have led arbitral tribunals, arbitral institutions, and state governments to

begin to craft and implement various disclosure rules for third-party funding. The

following section provides a survey of those disclosure rules as they exist at the

time of this writing.

REASONS FOR DISCLOSURE

Arbitral tribunals typically find out about third-party funding through either

voluntary or mandated disclosure. There are various motivations for disclosure,

types of information disclosed, and recipients of the information disclosed. With

respect to motivations for disclosure, theoretically, there are four major categories

of motivation for this disclosure; three are required, while one is discretionary.

First, a tribunal may require a party to disclose its third-party funding at the

request of the opposing side in conjunction with the opposing side’s application

for costs or security for costs, which is tied to the implementation of a “loser pays”

rule, commonly known as the “English rule,” on cost allocation at the conclusion

of an international arbitration.

558

Second, a tribunal may require such disclosure so that the arbitrators can check

for financial, professional, or personal conflicts of interest related to the third-

party funding.

559

In such cases, arbitral rules or guidelines may require disclosure

558

See, e.g., Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkm., ICSID Case

No ARB/12/6, Procedural Order No. 3 (June 12, 2015); Kılıç İnşaat İthalat İhracat Sanayi ve

Ticaret Anonim Şirketi v. Turkm., ICSID Case No ARB/10/1.

559

See IBA Conflict Guidelines, General Standard 6(b), 7(a), the Orange List (section 3.4),

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

163

by arbitrators, who in turn may require disclosure from the parties in the case in

order to determine what the arbitrators need to disclose.

560

Such disclosure

obligations may also arise under rules of professional ethics and professional

responsibility for lawyers and arbitrators under national law or arbitral rules.

Furthermore, some investment treaties require funded parties to disclose their

funding in order to utilize any dispute settlement mechanisms detailed in the

treaty.

561

Third, many publicly held corporations are required to disclose any

“material transactions” under the laws of their home jurisdictions.

562

Depending

on the nature of the funding arrangement, a publicly held corporation entering

into a funding arrangement may meet the definition of a “material transaction”

that would require disclosure.

563

Fourth, parties may voluntarily choose to disclose

their own funding arrangements to the opposing side to have a strategic influence

on settlement discussions or on the outcome of the case. This type of disclosure is

discretionary, and its actual effect on settlements or outcomes is debatable.

SCOPE OF DISCLOSURE

Whether disclosure is ordered by the tribunal or voluntarily achieved, there can be

considerable variation regarding what information is disclosed from case to case.

The variation could be described as a sliding scale regarding how much or how

little information is disclosed. The most basic disclosure would be simply the fact

that a funding arrangement exists without further detail. Often the identity and

contact information of the funder is disclosed along with the existence of the

funding arrangement to assist arbitrators in checking whether a conflict of interest

may exist. Less often, certain characteristics or terms of the funding agreement

and the Non-waivable Red List (section 1).

560

See IBA Conflict Guidelines, General Standard 7(a); International Chamber of Commerce

(ICC), Note to parties and arbitral tribunals on the conduct of the arbitration under the ICC

Rules of Arbitration, para. 24, (Oct. 30, 2017), https://iccwbo.org/publication/note-parties-

arbitral-tribunals-conduct-arbitration [hereinafter, ICC Note to Parties and Tribunals].

561

See e.g., Comprehensive Economic and Trade Agreement, arts. 8.1, 8.26 (Sept. 14, 2016),

http://data.consilium.europa.eu/doc/document/ST-10973-2016-INIT/en/pdf

562

Jonas Von Goeler summarizes these obligations as follows: “Importantly, the presence of

a third-party funder may need to be disclosed for reasons not linked to the arbitration

proceedings, namely to comply with public disclosure requirements imposed upon listed

companies, and following disputes between the parties to the funding agreement ending

up in state courts.” See JONAS VON GOELER, THIRD-PARTY FUNDING IN INTERNATIONAL

ARBITRATION AND ITS IMPACT ON PROCEDURE 128 (Wolters Kluwer, 2016) (italics in original).

563

Id.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

164

may be disclosed. This could range from a few key details, such as whether the

funder has agreed in advance to pay security for costs, to an outline of the terms

of the full agreement. Far more infrequently, part or all of the written funding

arrangement may be disclosed pursuant to a tribunal order.

564

This almost never

happens voluntarily, unless the funding agreement is the subject matter of the

dispute. Finally, the funder’s valuation of the case is almost never voluntarily

disclosed. Typically, the only way that the funder’s valuation would be disclosed

is if it is written into the funding arrangement and the full written arrangement is

disclosed, which is also rare. Also, the funder’s valuation may not be informative

from a practical perspective, because such valuations are prepared knowing that

they may be produced to the tribunal and the opposing side, and therefore, such

valuations may be sanitized or abbreviated to avoid revealing too much

information about the funder’s decision-making process.

In addition, there are generally three categories of recipients of the disclosed

information. The first recipients are usually the immediate participants in the

arbitration, such as the tribunal, the opposing parties, and the parties’ counsel.

Second, the arbitral institution may receive disclosure of the funding arrangement

if the funder is paying fees and costs directly to an institution, or to check conflicts

of interest, if the institution will be appointing arbitrator(s) directly. Third, a

governmental regulatory body may receive disclosure of the third-party funding

arrangement, for example, if a publicly held corporation must disclose such an

arrangement to regulators or investors as a material transaction.

565

SOURCES OF AUTHORITY REGARDING DISCLOSURE OF THIRD-PARTY

FUNDING IN INTERNATIONAL ARBITRATION

Institutional Rules and Guidelines

The first guidance on third-party funding in international arbitration was issued

in 2014. The 2014 International Bar Association (IBA) Guidelines on Conflicts of

Interest in International Arbitration (IBA Guidelines) were revised to incorporate

provisions to require parties to disclose the existence of third-party funding and

564

See infra notes 586-593 and the accompanying text for a discussion of Muhammet Çap &

Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkm., ICSID Case No ARB/12/6, Procedural

Order No. 3 (June 12, 2015).

565

Id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

165

the identity of the funder to the arbitrators, who, in turn, are required to disclose

any potential conflicts of interest to the parties and the arbitral institution.

566

Following such disclosure, an arbitrator may be required to decline an

appointment or withdraw from a case, if the parties do not waive the conflict or if

it is a conflict that cannot be waived.

567

Throughout the text, the IBA Guidelines

define a third-party funder according to the attribute that funders “have a direct

economic interest in the award.”

568

As mentioned in the introduction to this

article, the Task Force on Third-Party Funding in International Arbitration took a

different approach to defining third-party funding, in part due to the challenges

raised by variations in the interpretation of the phrase “direct economic interest”

that arose in international arbitration discourse in the years following the issuance

of the IBA Guidelines.

In December 2015, the International Chamber of Commerce (ICC) Commission

on Arbitration issued a report entitled “Decisions on Costs in International

Arbitration” that provided some guidance to arbitrators regarding third-party

funding.

569

Notably, the commission provided a different definition of a third-

party funder in its report than the definition in the IBA Guidelines: “A third-party

funder is an independent party that provides some or all of the funding for the

costs of a party to the proceedings (usually the claimant), most commonly in

return for an uplift or success fee if successful.”

570

The commission then provides

the following guidance to tribunals: “Where a tribunal has reason to believe that

566

See supra notes 559-560 and accompanying text.

567

An example of a potentially unwaivable conflict might be if an attorney is serving as

arbitrator in a case where Party A is funded by funder X and the same attorney is

simultaneously serving as counsel to Party B in a different case in which Party B is funded

by the same funder X. Because funder X is paying the attorney representing Party B in Party

B’s case, the attorney must avoid even the appearance of bias while serving as an arbitrator

in Party A’s case in which funder X is also participating. This is likely an unwaivable

conflict, although it is not directly mentioned in the IBA guidelines. To be safe, the

arbitrator in this hypothetical should withdraw from judging Party A’s case. The conflict

might be waivable, however, if instead the arbitrator served successively as counsel, then

arbitrator, rather than simultaneously as both counsel and arbitrator in two cases involving

funder X.

568

See IBA Conflict Guidelines, General Standard 6(b).

569

See ICC Comm’n on Arb., Decisions on Costs in International Arbitration - ICC

Arbitration and ADR Commission Report, at 16-17 (Dec. 1, 2015),,

http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2015/Decisions-on-

Costs-in-International-Arbitration---ICC-Arbitration-and-ADR-Commission-Report/

[hereinafter ICC Costs Report].

570

Id. at 17 n.44.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

166

third-party funding exists, and such funding is likely to impact on the non-funded

party’s ability to recover costs if successful, the tribunal might consider ordering

disclosure of such funding information as is necessary to ascertain that the

process remains effective and fair for both parties.”

571

The report also provides a

worldwide survey of laws regarding disclosure of third-party funding

572

and a

worldwide survey of cost provisions in all international arbitration rules.

573

addition, the report recommends that an arbitrator consider discussing with the

parties, among other things, “sensitive matters, such as whether there is third-

party funding and any implications it may have for the allocation of costs, whether

the identity of the third-party funder (which could be relevant to possible conflicts

of interest) should be disclosed, and whether contingency, conditional or success

fee arrangements have been agreed, and how the parties expect these matters to

be considered in relation to the assessment of costs.”

574

Surprisingly, the International Chamber of Commerce (ICC) Court of

Arbitration seems to have adopted a definition of third-party funder that more

closely resembles the IBA Guidelines than the ICC Commission’s Report. In its

Note to parties and arbitral tribunals on the conduct of the arbitration under the

ICC Rules of Arbitration (30 Oct. 2017 version), the ICC Court gives arbitrators the

following guidance in Paragraph 24: “Relationships between arbitrators, as well as

relationships with any entity having a direct economic interest in the dispute or

an obligation to indemnify a party for the award, should also be considered in the

circumstances of each case.”

575

The Singapore International Arbitration Centre (SIAC) was, arguably, the first

arbitral institution in the world to adopt an explicit rule on third-party funding,

which took effect on January 1, 2017.

576

Rule 24(l) gives an arbitral tribunal in an

investment arbitration the power to order disclosure of third-party funding,

including the details of the arrangement itself.

577

Similarly, the China

International Economic and Trade Arbitration Commission (CIETAC)

incorporated Article 27 into the CIETAC Investment Arbitration Rules, which took

571

Id. at 17, para. 89.

572

Id. at 45-46.

573

Id. at 49-55 (Appendix C: Relevant Provisions of Arbitration Rules).

574

Id. at 7, para. 32

575

See ICC Note to Parties and Tribunals, supra note 32, para. 24.

576

See SIAC Investment Rules, r. 24(1).

577

Id.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

167

effect on October 1, 2017, requiring disclosure of third-party funding and allowing

arbitrators to order disclosure of the third-party funding agreement and to issue

cost orders relating to third-party funding.

578

In its Working Paper #3, published in August 2019, the International Centre for

Settlement of Investment Disputes (ICSID) has incorporated a new draft of Rule 14

in its arbitration rules and Rule 12 in its conciliation rules requiring disclosure of

third-party funding to the ICSID Secretary-General in order to check for arbitrator

or conciliator conflicts of interest.

579

The rule also states that the ICSID Secretary-

General will transmit the notice to the parties and the arbitrators in order to assist

in checking for conflicts of interest. ICSID is expected to finalize its rule revisions

by early 2020.

ARBITRAL TRIBUNALS

Many tribunals have articulated principles regarding disclosure of third-party

funding in international arbitration such that it would be impossible to describe

every decision in this brief article. Instead, this article provides highlights

regarding trends in how tribunals have addressed third-party funding in

international arbitration. Most of the decisions discussed in this article are

decisions in investment arbitration cases, due to the public nature of many

investment arbitration awards and procedural orders. In contrast, most

commercial arbitration awards remain private and, therefore, are unable to be

included in this article’s sampling.

In some cases, the funded party has voluntarily disclosed funding without any

adverse consequences, such as in the UNCITRAL investment arbitration case Oxus

Gold plc v Republic of Uzbekistan

580

in which the tribunal stated that the funding

has no impact on the arbitral proceeding.

581

Sometimes, however, voluntary

disclosure can be misunderstood by the opposing side.

582

In most cases, however,

578

See CIETAC Arbitration Rules, art. 27.

579

See International Centre for Settlement of Investment Disputes (ICSID) Secretariat,

Working Draft #3: Proposals for Amendment of the ICSID Rules, at 41, 91 (Aug. 2019).

580

See Oxus Gold plc v. Republic of Uzb., UN Comm’n on Int’l Trade Law, Final Award (Dec.

17, 2015).

581

See id. para. 127 (“It is undisputed that Claimant is being assisted by a third party funder

in this arbitration proceeding. The Arbitral Tribunal has mentioned this fact in its

Procedural Order Nos. 6 and 7. However, this fact has no impact on this arbitration

proceeding.”).

582

See Jonas von Goeler, Third-Party Funding in International Arbitration and Its Impact

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

168

the arbitral tribunal has ordered disclosure of the identity of the third-party

funder and — more rarely — may also order disclosure of the terms of the funding

arrangement. For example, a dispute regarding termination of the funding

arrangement in the ICSID case S&T Oil Equipment & Machinery Ltd v Romania was

litigated in the U.S. courts, which required disclosure of the terms funding

arrangement in court litigation.

583

As a result of this dispute over the funding

arrangement, the funder, Juridica, ceased paying S&T Oil’s fees and costs in the

ICSID case, and the ICSID tribunal ultimately terminated the proceedings due to

this nonpayment.

584

In this case, the funding agreement was in dispute, so

disclosure of its terms was appropriate.

In most cases, however, the funding agreement is not in dispute, so disclosure

of its terms is not appropriate. For example, in the ICSID case EuroGas Inc. and

Belmont Resources Inc. v. Slovak Republic, the tribunal ordered the claimant to

reveal the identity of its third-party funder for the purposes of checking for

arbitrator conflicts of interest, but did not require the claimant to disclose any of

the terms of the funding arrangement.

585

In that case, the claimant had previously

voluntarily disclosed that it was funded by a Luxembourg-based funder, but the

claimant did not disclose the identity of that funder until ordered to do so by the

tribunal.

on Procedure, 127 (citing X v. Y and Z, ICC Case, Procedural Order of 3 August 2012,

published in Pinsolle, CAH. ARB. (2013), 399-416) (“In the ICC case X v. Y and Z, for example,

the claimant transferred a litigation funding agreement to the respondents without further

explanation, leading counsel for the respondents to the assumption that ‘[t]his agreement

was sent maybe by mistake’.”).

583

See S&T Oil Equipment & Machinery, Ltd, et al v. Juridica Investments Limited, et al, 456

Fed. Appx. 481, 2012 WL 2842, (5th Cir., 5 Jan. 2012) (requiring disclosure of funding

arrangement to resolve a dispute between S&T and Juridica regarding termination of the

third-party funding provided for the ICSID case S&T Oil Equipment & Machinery Ltd v.

Romania, ICSID Case No ARB/07/13, Order to Discontinue Proceedings (16 July

2010)); Bernardo M. Cremades Jr., Third Party Litigation Funding: Investing in Arbitration

(2011) 8 TRANSNATIONAL DISPUTE MANAGEMENT 12–15 (discussing these two S&T cases); Nate

Raymond, Litigation funding gone wrong, THE AMERICAN LAWYER, (25 Apr. 2011), available at

http://www.law.com/jsp/tal/PubArticleTAL.jsp?id=1202492845664&slreturn=1law.com

(discussing the U.S. Fifth Circuit case, S&T v. Juridica).

584

See supra note 562.

585

See EuroGas, Inc. and Belmont Resources, Inc. v. Slovak Republic, ICSID Case No

ARB/14/14, Transcript of the First Session and Hearing on Provisional Measures, 145 (Mar.

17, 2015) (“We think that the Claimants should disclose the identity of the third-party

funder, and that third-party funder will have the normal obligations of confidentiality.”).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

169

Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkmenistan, an

ICSID case, provides a rare example of a tribunal ordering a claimant to disclose

both the identity of the funder and the terms of the funding arrangement.

586

doing so, the tribunal invoked its “inherent powers to make orders of the nature

requested where necessary to preserve the rights of the parties and the integrity of

the process.” In April 2014, Turkmenistan had requested the tribunal to order the

claimant to disclose whether it had engaged the services of a third-party funder,

as well as the terms of that arrangement.

587

In Procedural Order No. 2, the tribunal

refused the request and listed several reasons why a tribunal could justifiably

order disclosure of third-party funding, such as “avoid[ing] a conflict of interest,”

“transparency,” “identify[ing] the true party to the case,” cost allocation, and

protecting confidential information.

588

One year later, Turkmenistan renewed its request for such disclosure to ensure

that there were no conflicts of interests with the arbitrators or counsel in the case

and to check whether the claimants were “still the actual owners of the claims in

this arbitration.”

589

In order to bolster its renewed request, Turkmenistan also

cited the newly enacted General Standard 7(a) and the Explanation to General

Standard 7(a) of the International Bar Association (IBA) Guidelines on Conflicts of

Interest in International Arbitration, which took effect in October 2014.

590

Turkmenistan also stated that it was considering applying for security for costs in

the case due to the presence of the third-party funder.

591

In Procedural Order No. 3, the tribunal decided to grant Turkmenistan’s

renewed request in order to “ensur[e] the integrity of the proceedings and to

determine whether any of the arbitrators are affected by the existence of a third-

party funder” and because the claimant did not pay an order for costs in another

related case.

592

It is important to note that the tribunal did not specify in its

586

See Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkm., ICSID Case No.

ARB/12/6, Procedural Order No. 3 (June 12, 2015).

587

Id. para. 1.

588

Muhammet Cap & Sehil Insaat Endustri ve Ticaret Ltd. Sti. v. Turkm., ICSID Case No.

ARB/12/6, Decision on Jurisdiction, para. 50 (Feb. 13, 2015) (quoting Procedural Order No.

2).

589

See Muhammet Çap & Sehil Inşaat Endustri ve Ticaret Ltd Sti v. Turkm., ICSID Case No

ARB/12/6, Procedural Order No 3. para. 2 (June 12, 2015).

590

Id. para 2.

591

Id. para 2.

592

Id. paras. 9-12. The other related case in which the claimant had not paid the costs

ordered was Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkm., ICSID

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

170

procedural order which of the terms of the funding arrangement were required to

be disclosed and which could stay confidential.

593

This creates uncertainty

regarding whether such disclosure may unfairly disadvantage the disclosing party

or unfairly advantage the party receiving the information.

Similarly, in the PCA case South American Silver v. Bolivia, Bolivia “request[ed]

the Tribunal to order the Claimant to ‘disclose the identity of the funder of this

arbitration, as well as the terms of the funding agreement signed with him.’”

594

in the Muhammet Cap case, it would appear that the parent company of the

claimant had earlier voluntarily disclosed the existence of the third-party funding,

but not the identity of the funder or the terms of the agreement.

595

Turkmenistan, Bolivia argued that it was seeking this disclosure and security for

costs due to the economic difficulties of the claimant coupled with the existence

of third-party funding.

596

Bolivia also cited the 2014 IBA Guidelines provision “that

third-party funders should be equated with the funded party to verify the

existence of conflict of interests, and that the funded party is obliged to disclose

any relationship that exists between her (including third-party funders) and the

arbitrators.”

597

South American Silver (SAS) in its reply to Bolivia’s request agreed

to disclose the name of its funder but noted that “the terms of SAS’s funding

agreement are irrelevant to the issues in dispute in this arbitration and that the

terms of that agreement are confidential, commercially sensitive, and that SAS

and the funder would incur prejudice if the Tribunal ordered SAS to disclose the

terms of the funding agreement.”

598

With respect to Bolivia’s application for

security for costs, the tribunal adopted the standard articulated by the majority of

the tribunal in RSM v. Saint Lucia and EuroGas v. Slovak Republic that the “the

mere existence of a third-party funder is not an exceptional situation justifying

security for costs.”

599

In the end, the tribunal decided to order disclosure of the

Case No. ARB/10/1.

593

See Jean-Christophe Honlet, Recent Decisions on Third-Party Funding in Investment

Arbitration, 30 ICSID REV., no. 3, 2015, at 699-712.

594

South American Silver Ltd. v. Plurinational State of Bol., PCA Case No. 2013-15,

Procedural Order No. 10, para. 13 (Jan. 11, 2016).

595

Id. para. 25.

596

Id. para. 25.

597

Id. para. 29.

598

South American Silver Ltd. v. Plurinational State of Bol., PCA Case No. 2013-15, Claimant

Opposition to Respondent Request for Cautio Judicatum Solvi and Disclosure of

Information, paras. 38, 40 (Dec. 14, 2015).

599

Id. para. 74 (citing EuroGas, Inc. & Belmont Resources, Inc. v. Slovak Republic, ICSID

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

171

name of the funder “for purposes of transparency, and given the position of the

Parties” but determined that there was no basis to order disclosure of the terms of

the funding arrangement.

600

Domestic Courts

In terms of relevant domestic court disclosure standards, the courts of the United

Kingdom have experienced an increase in cases related to the disclosure of third-

party funding in domestic litigation as well as international arbitration.

Specifically, with respect to disclosure of third-party funding in domestic

litigation relating to an international dispute, the English High Court in Arroyo &

Ors v. BP Exploration Co (Colombia) Ltd. took the view that parties with funding

arrangements…are entitled to be treated in the same way as other parties to

litigation…. All that the Existence of ATE [after-the-event insurance]

arrangements adds to the case is that it gives these Claimants access to a fund…

which they would otherwise not have. But there is no more reason for the

Claimants to give disclosure of the details of their insurance fund in an ATE case

than there would be for them to give disclosure of the funds in their savings

accounts, or the funds available from non-ATE insurers.

601

Thus, it appears that the English High Court applied the general rule that a party

is not required to disclose its funding sources and declined to create an exception

for third-party funding arrangements, such as after-the-event insurance (ATE).

United States courts have not yet had the opportunity to address third-party

funding in an international arbitration, although there are numerous examples of

domestic courts addressing litigation funding in purely domestic cases.

602

Treaties

At the time of this writing, it appears that only one ratified treaty addresses

disclosure of third-party funding. The Comprehensive Economic and Trade

Case No. ARB/14/14, Procedural Order No. 3 – Decision on Requests for Provisional

Measures, para. 123 (June 23, 2015).

600

Id. paras. 79, 80, 84.

601

Arroyo & Ors v. BP Exploration Co. (Colombia) [2010] EWHC (QB) Case No. HQ08X00328,

[48], [52].

602

See LISA BENCH NIEUWVELD & VICTORIA SHANNON SAHANI, THIRD-PARTY FUNDING IN

INTERNATIONAL ARBITRATION (Wolters Kluwer, 2nd ed., 2017) (presenting a 50-state survey of

third-party funding laws in the United States).

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

172

Agreement (CETA), ratified by Canada and the European Union, contains

provisions defining third-party funding and requiring that the funded party

disclose to tribunal and the opposing party the name and address of the third-

party funder at the time of the submission of the claim or at the time the funding

agreement is concluded, whichever is sooner.

603

With respect to proposed treaties,

a similar provision appears in the EU-Singapore Investment Protection

Agreement, which has not yet been ratified.

604

In addition, the European

Commission (EC) has proposed including provisions nearly identical to the CETA

provisions in the Transatlantic Trade and Investment Partnership (T-TIP), which

has not yet been concluded.

605

In addition, the current draft of the EU-Vietnam

Investment Protection Agreement, Ch. 8, Ch. II, Sec. 3, Art. 2, contains a similar

definition of third-party funding as “any funding provided by a natural or juridical

person who is not a party to the dispute but who enters into an agreement with a

disputing party in order to finance part or all of the cost of the proceedings in

return for a remuneration dependent on the outcome of the dispute or in the form

of a donation or grant.”

606

Art. 11 provides for a similar disclosure requirement as

CETA and the EC’s proposed T-TIP provisions, except it also adds a required

disclosure regarding the “nature of the funding arrangement.”

607

It also requires

that “the Tribunal shall take into account whether there is third-party funding”

when making decisions regarding costs and security for costs.

608

The text of the

EU-Vietnam Free Trade Agreement was published after the negotiations

concluded on 1 February 2016, but the treaty has not yet been ratified.

609

603

See Comprehensive Economic and Trade Agreement, arts. 8.1, 8.26 (Sept. 14, 2016),

http://data.consilium.europa.eu/doc/document/ST-10973-2016-INIT/en/pdf

604

See EU-Singapore Investment Protection Agreement, art. 3.8, https://eur-

lex.europa.eu/resource.html?uri=cellar:55d54e18-42e0-11e8-b5fe-

01aa75ed71a1.0002.02/DOC_2&format=PDF#page=29

605

See European Comm’n, Draft, Chapter II, in Transatlantic Trade and Investment

Partnership, arts. 1, 8, http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc

_153807.pdf

606

See EU-Vietnam Investment Protection Agreement, ch. 8, ch. II, § 3, art 2, https://trade.

ec.europa.eu/doclib/docs/2018/september/tradoc_157394.pdf

607

Id. ch. 8, ch. II, § 3, art. 11.

608

Id.

609

See Vietnam, EUR. COMM’N, http://ec.europa.eu/trade/policy/countries-and-regions/

countries/vietnam/ (“The legal review of the negotiated text is currently on-going and will

be followed by translation into the EU's official languages and Vietnamese. The

Commission will then present a proposal to the Council of Ministers for approval of the

agreement and ratification by the European Parliament.”).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

173

National Legislation

With respect to national statutes, on 10 January 2017, Singapore’s parliament

passed the Civil Law (Amendment) Bill No. 38/2016 permitting third-party

funding in international arbitrations seated in Singapore as well as related court

and mediation proceedings.

610

The bill abolishes the torts of champerty and

maintenance but preserves the defense that a contract is against public policy or

illegal under Singapore law. The bill expressly provides for an exception for third-

party funding agreements, expressly stating that such agreements are not contrary

to public policy or illegal. Courts will continue to have the power to inquire into

the nature of the third-party funding, and future amendments to Singapore’s

Legal Profession (Professional Conduct) will require lawyers to disclose the

existence of their clients’ third-party funding arrangements and will prohibit

lawyers from accepting commissions or referral fees from third-party funders.

Similarly, on 11 January 2017, in Hong Kong, the Arbitration and Mediation

Legislation (Third Party Funding) (Amendment) Bill 2016 was introduced into the

Legislative Council for Second Reading.

611

This bill legalized third-party funding in

international arbitrations and mediations seated in Hong Kong. Rather than

abolishing the torts of maintenance and champerty, the bill instead carves out an

exception for third-party funding of arbitration only, but not for domestic

litigation. Like Singapore, the bill preserves the defense that a contract is against

public policy or illegal under Hong Kong law. Disclosure of the existence of the

funding and identity of the funder is required. The Bill also provides that an

“authorized body” appointed by the Secretary of Justice will issue a “code of

610

See Civil Law (Amendment) Bill No. 38/2016; Key Bills Passed in Singapore, as Hong Kong

Moves Towards Funding, GLOB. ARB. REV. (Jan. 11, 2017), http://globalarbitration

review.com/article/1079959/key-bills-passed-in-singapore-as-hong-kong-moves-towards-

funding; The Singapore Bills: a Detailed Look, GLOB. ARB. REV. (Jan. 12, 2017),

http://globalarbitrationreview.com/article/1079960/the-singapore-bills-a-detailed-look

611

See Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Bill

(2016), (proposed legislation),

http://www.gld.gov.hk/egazette/pdf/20162052/es32016205213.pdf?

cid=social_20170106_69214806&adbid=817404762849046528&adbpl=tw&adbpr=190964959

%20; Press Release, Department of Justice, The Government of the Hong Kong Special

Administrative Region, Third Party Funding of Arbitration: Amendments Proposed for

Arbitration Ordinance and Mediation Ordinance (Dec. 28, 2016),

https://www.doj.gov.hk/eng/public/pr/20161228_

pr2.html; Key Bills Passed in Singapore, as Hong Kong Moves Towards Funding, GLOB. ARB.

REV. (Jan. 11, 2017), https://globalarbitrationreview.com/article/1079959/key-

bills-passed-in-singapore-as-hong-kong-moves-towards-funding

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

174

practice,” after “consult[ing] the public,” for third-party funders operating in

Hong Kong, describes some of the provisions that would be included in this code

of practice, and provides for a limited enforcement mechanism for “non-

compliance with the code of practice.” The Hong Kong government published its

highly anticipated “Code of Practice of Third Party Funding of Arbitration” on 7

December 2018, and the code took effect on February 1, 2019.

612

Among other

provisions, the code requires that a funder must remind the funded party of its

obligation to disclose information about the funding.

It is likely that requests for disclosure relating to third-party funding

arrangements in international commercial and investment arbitration will

become more prevalent, and tribunals will be more likely to be granted such

requests.

613

However, it is important to balance the need for transparency with the

potential for one party to become advantaged or disadvantaged in the arbitration

as a direct result of the information disclosed.

614

In addition, the non-funded party

may be tempted to present dilatory requests or arguments to the tribunal

following the disclosure.

615

Tribunals must be vigilant in order to ensure that the

disclosure of third-party funding does not influence the flow or tone of the arbitral

proceedings.

Although it did not directly address international arbitration, in January 2017,

the United States District Court for the Northern District of California — the

district in which many Silicon Valley-related disputes are heard — became the

first U.S. federal court to adopt a rule requiring attorneys to disclose whether a

third-party funder is involved in class actions.

616

The rule was later reworded to

extend to all cases filed in the Northern District of California.

617

In April 2018, the

612

Press Release, Government of the Hong Kong Special Administrative Region, Code of

Practice for Third Party Funding of Arbitration Issued (Dec. 7, 2018), https://www.info.

gov.hk/gia/general/201812/07/P2018120700601.htm; Code of Practice of Third-Party

Funding of Arbitration (Dec. 7, 2018), https://gia.info.gov.hk/general/201812/07/

P2018120700601_299064_1_1544169372716.pdf

613

See generally Jean-Christophe Honlet, Recent decisions on third-party funding in

investment arbitration, 30 ICSID REV., no. 3, 2015, at 699-712.

614

Id.

615

Id.

616

See Ben Hancock, Northern District, First in Nation, Mandates Disclosure of Third-Party

Funding in Class Actions, RECORDER, (Jan. 23, 2017, 10:07 PM),

http://www.therecorder.com/

home/id=1202777487488/Northern-District-First-in-Nation-Mandates-Disclosure-of-

ThirdParty-Funding-in-Class-Actions

617

See N.D. Cal. Civ. Ct. R. 3-15, https://www.cand.uscourts.gov/localrules/civil

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

175

State of Wisconsin became the first state (rather than a single court) to pass

legislation that requires disclosure of third-party funding in all cases in Wisconsin

courts.

618

Other states will likely follow suit. These examples chart a new path

toward greater disclosure of the participation of third-party funders in domestic

litigation, which other courts or arbitral institutions may choose to follow in the

future.

DISCLOSURE-RELATED ROLES FOR THIRD-PARTY FUNDERS

IN INTERNATIONAL ARBITRATION

Third-party funders serve several distinct roles in international arbitration that

affect disclosure requirements under the applicable sources of authority,

discussed earlier in this article. Those roles include serving as custodians of

confidential and privileged information; preventing arbitrator conflicts of

interest, thereby ensuring the legitimacy of the international arbitration system;

and investing in claims for motivations other than profit-making.

NONDISCLOSURE: FUNDERS AS CUSTODIANS OF CONFIDENTIAL

AND PRIVILEGED INFORMATION

Third-party funders receive confidential and privileged information about the

funded party’s case and are involved in maintaining the preexisting regime of

non-disclosure of such confidential and privileged information. In this way, third-

party funders could be said to be custodians of confidential and privileged

information during the arbitration proceedings. Funders receive information

from parties or law firms that they choose to fund, and those entities trust that the

funder will maintain the secrecy of that information.

619

Funders also receive key

information about the dispute-resolution system (both litigation and arbitration)

and about particular cases from the parties or law firms that seek their services but

whom they choose not to finance.

620

Funders ask potential clients to share a lot of

618

See WIS. STAT. § 804.01(2) (2018); John Freund, Wisconsin Becomes First State to Require

Disclosure of Third Party Legal Funding, LITIG. FIN. J. (Apr. 4, 2018) (on file with author).

619

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 118.

620

See Victoria Shannon Sahani, The Impact of Third-Party Funders on the Parties They

Decline to Finance, KLUWER ARB. BLOG (Jul. 6, 2015), http://kluwerarbitrationblog.com/blog/

2015/07/06/the-impact-of-third-party-funders-on-the-parties-they-decline-to-finance/

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

176

information about themselves and about their cases in order for the funder to

decide whether to fund the party’s case. Parties not only may share the merits of

the cases with funders, but also they often will share their internal financial data

and documents, trade secrets, business practices, governmental communications,

and other information that may otherwise be protected by applicable privilege

rules in their home jurisdictions.

621

Law firms will most certainly have to share

information about their internal finances as well as information about the

financial status — and perhaps even the likelihood of winning on the merits — of

the cases the law firm is handling in its portfolio of cases.

With respect to individual parties, funders do not accept the vast majority of

potential clients that cross their desks; the average acceptance rate for most

funders hovers between 5% and 20%, with some funders accepting as few as 1% of

the potential clients seeking funding.

622

This means that 80% to 99% of the parties

that share information with funders will not receive funding from that funder, and

those parties are trusting that those funders and their confidentiality agreements

will ensure that the information will continue to be confidential and privileged

beyond the encounter.

623

The estimated acceptance rate for law firm financing

arrangements is unknown, but it is safe to presume that law firms that are declined

financing probably have similar expectations and agreements with funders

regarding confidentiality and privileges. Due to the large amount of sensitive

information shared with funders by funded and non-funded entities alike, third-

party funders have in some sense become de facto custodians of confidential

information in international arbitration. The world will likely never know truly

how much confidential and privileged information they shepherd.

So far, funders have done an exceptional job in maintaining the confidentiality

of their clients’ information and protecting the evidentiary privileges that their

621

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 118.

622

See Victoria Shannon Sahani, The Impact of Third-Party Funders on the Parties They

Decline to Finance, KLUWER ARB. BLOG (Jul. 6, 2015), http://kluwerarbitrationblog.com/blog/

2015/07/06/the-impact-of-third-party-funders-on-the-parties-they-decline-to-finance/;

Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can Cause

Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 112.

623

See Victoria Shannon Sahani, The Impact of Third-Party Funders on the Parties They

Decline to Finance, KLUWER ARB. BLOG (Jul. 6, 2015), http://kluwerarbitrationblog.com/blog/

2015/07/06/the-impact-of-third-party-funders-on-the-parties-they-decline-to-finance/;

Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014).

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

177

clients may hold. This author has yet to hear of an unintended leak or disclosure

of confidential or privileged information by a third-party funder. To maintain this

level of information security, it is a best practice of the industry that third-party

funders enter into a confidentiality agreement with the client or law firm at the

outset of the financing.

624

Some third-party funders take the extra step of

employing a law firm — separate and apart from the law firm representing the

party in the case — to review and handle confidential or privileged information in

order to help preserve any privileges or other evidentiary protections that may

exist. The funder’s law firm would interface with the client’s law firm (or the client

itself, if the client is a law firm); thus, the circle of confidentiality and privilege

remains intact. Funders typically only pay the high cost of employing two separate

law firms — the client’s law firm as well as its own law firm — in cases where the

claimed dollar amount is high enough to justify such expensive measures to

protect evidentiary privileges or where the information is sensitive enough to

justify such expensive measures. As an example, an arbitration involving a patent

or trade secret infringement claim typically involves both high dollar amounts and

sensitive client information, so employing two law firms may be justified.

625

A few funders have advisory boards consisting of prominent attorneys and

arbitrators to help them choose which cases to fund.

626

In those cases, the advice

that the funders are seeking regarding whether the case should be funded relies

upon the expertise of those heavily invested in the field of arbitration.

627

The

funder must then expand the confidentiality and privilege arrangement to include

624

See generally, Chapter 5: Privilege and Professional Secrecy, in TASK FORCE REPORT, supra

note 4 (discussing best practices and principles with respect to preserving client

confidentiality during a third-party funding arrangement); Miller UK Ltd. v. Caterpillar,

Inc., 17 F. Supp. 3d 711 (N.D. Ill. 2014) (discussing the efficacy of confidentiality agreements

between third-party funders and clients in U.S. federal courts); Gary Shaw, Third-Party

Funding in Investment Arbitration: How Non-Disclosure Can Cause Harm for the Sake of

Profit, 33 ARB, INT’L, no. 1, 2017, at 109.

625

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 118.

626

See Sherina Petit, James Rogers & Cara Dowling, Third-Party Funding in Arbitration - the

Funders’ Perspective: A Q&A with Woodsford Litigation Funding, Harbour Litigation

Founding and Burford Capital, NORTON ROSE FULBRIGHT INT’L ARB. REP., no. 7, Sept. 2016, at 11

(on file with author) (“Parties may even benefit from this further analysis of the merits of

their case (in addition to that already conducted by their legal advisors) — particularly

where funders have seasoned arbitrators on their review boards.”) (parentheses in original).

627

See, e.g., Leo Szolnoki, Beechey To Advise Third-Party Funder, GLOB. ARB. REV. (Nov. 5,

2013), http://globalarbitrationreview.com/news/article/32028/.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

178

members of its advisory board, who then become part of the “circle of trust,” as a

certain famous movie character might say.

628

On the one hand, one could argue

that the more people who know a secret, the less of a secret it becomes. On the

other hand, given the extent of information-sharing with third-party funders, the

information security in the third-party funding industry has thus far been

impressively nonporous, which is a credit to third-party funders themselves. No

doubt they all have a shared vested interest in maintaining the necessary veil of

confidentiality and privileges, or else their business models will undoubtedly start

to crumble.

There is a potential dark side to funders having access to this much confidential

information, however. It is possible that a funder may use confidential

information against a party in a subsequent arbitration, even without necessarily

waiving any privileges or violating any confidentiality agreements.

629

While

attorney ethics rules prohibit such use, there is no corresponding prohibition on

funders themselves.

630

As a best practice, the confidentiality agreement between

the funder and the funded party should include a provision prohibiting the funder

from using the client’s confidential information in any way beyond the funding

arrangement itself. In addition, parties seeking funding should enter into a

confidentiality agreement with a potential funder before sharing any information

with that funder, including such a provision prohibiting the funder from using the

client’s confidential information in any way, even if no funding relationship

ensues.

PROACTIVE DISCLOSURE: PREVENTING ARBITRATOR CONFLICTS

OF INTEREST

While some funders may negotiate funding arrangements that allow them to

influence or control the strategy or settlement of the funded party,

631

the clear

628

The movies MEET THE PARENTS (2000) and MEET THE FOCKERS (2004) contain various

references to the “circle of trust,” mostly made by Robert DeNiro’s character, Jack Byrnes.

629

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 119.

630

Id. (indicating that there is no prohibition on a third-party funder using information to

the definition of a former client); cf. MODEL RULES OF PROF’L CONDUCT r. 1.9(c)(1) (AM. BAR

ASS’N 2016) (prohibiting a lawyer from using a former client’s information to the

“disadvantage” of that former client).

631

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 115.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

179

majority of funders know that maintaining an arms-length distance from the day-

to-day management of the dispute is the best way to avoid conflicts of interest or

other procedural indiscretions that may adversely affect the enforceability of the

eventual arbitral award. Nevertheless, procedural problems can spawn from the

mere revelation that a funder is involved in a case. For example, the mere presence

of a funder could potentially create conflicts of interest for arbitrators and

counsel.

632

This is particularly true in investment arbitration in which the

legitimacy of the process is sometimes challenged by states and outsiders.

633

The conflict of interest problem is more prevalent in arbitration than in

litigation because of the nature of the role of the decision-maker. The “double hat”

problem in international arbitration generally — that is, arbitrators serving as

counsel and vice versa — can easily create conflicts of interest when funders are

financing more than one case involving attorneys or arbitrators from the same law

firm or chambers.

634

It is important to note that no arbitration rules impose

disclosure obligations directly on third-party funders, even if they discover

conflicts of interest during the due diligence process.

635

As mentioned earlier in

this article, the existing disclosure rules all put the disclosure obligations on the

parties, the arbitrators, and/or the legal counsel in the case; the rules do not

require third-party funders to participate directly in disclosure. In contrast, in

litigation, judges do not serve as legal counsel or knowingly invest in disputes. In

theory, a financial conflict of interest could arise, however, if a judge owns equity

in a publicly traded litigation funder, for example, in a retirement account or stock

632

See id. at 116.

633

See id. at 115.

634

For an explanation of the double-hat problem, see Dennis H. Hranitzky & Eduardo Silva

Romero, The ‘Double Hat’ Debate in International Arbitration: Should Advocates and

Arbitrators Be in Separate Bars?, N.Y.L.J. (June 14, 2010), https://www.dechert.com/

content/dam/dechert%20files/publication/2010/6/the-double-hat-debate-in-international-

arbitration/070101031Dechert.pdf) (“It is commonplace in international arbitration, as in

most domestic arbitration in the United States, for experienced practitioners who actively

represent parties before arbitral tribunals to serve as arbitrators in other cases. Indeed, it is

not unusual for an individual to represent a party in an arbitration administered by one of

the larger international institutions . . . and at the same time serve as an arbitrator in

another matter administered by the same institution. In recent years, this practice has

come under fire from practitioners and parties alike, resulting in calls for new rules

prohibiting counsel who represent parties in arbitrations from serving as arbitrators in

other cases.”).

635

Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 117.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

180

portfolio. There have been no examples of this, to this author’s knowledge, and in

reality, judges are typically overly cautious to avoid creating financial conflicts of

interest; therefore, it should be obvious to judges that they should not knowingly

invest in litigation funders.

Even if the funder is not directly trying to control or influence the legal

representation or the choice of arbitrator, there may be other ways in which the

funder’s participation may create conflicts of interest or influence the process. For

example, funders may affect the timing and terms of settlement.

636

In addition,

there has been at least one case involving a question of arbitrator bias in favor of

or against a party’s use of third-party funding. The claimant in RSM Production

Corporation v. Saint Lucia challenged arbitrator Dr. Gavin Griffith due to his

controversial statements regarding third-party funding in his Assenting

Opinion.

637

The claimant’s principal grounds for the challenge were as follows:

The description of third-party funders as “mercantile adventurers” and the

association with “gambling” and the “gambler’s Nirvana: Heads I win and Tails I

do not lose” are, in Claimant’s view, radical in tone and negative and prejudge the

question whether a funded claimant will comply with a costs award. Additionally,

Claimant derives from Dr. Griffith’s determinations that his alleged bias against

the funders extends to Claimant as the funded party as well. Claimant contends

that the language used by Dr. Griffith cannot be qualified as a neutral discussion

of the issues or a mere rhetorical emphasis.

638

The other two arbitrators, Prof. Dr. Siegfried H. Elsing (President) and Judge

Edward W. Nottingham (Co-arbitrator), rejected the challenge and articulated the

following reasoning:

The expressions used by Dr. Griffith in his Assenting Reasons, such as

“gambling,” “adventurers” and the reference to the “gambler’s Nirvana” are strong

and figurative metaphors. However, in our view, these expressions primarily serve

the purpose of clarifying and emphasizing the point Dr. Griffith purports to make,

namely the paramount importance, in his opinion, of third-party funding of a

636

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 115.

637

See RSM Production Corp. v. St. Lucia, ICSID Case No ARB/12/10, Decision on Claimant’s

Proposal for the Disqualification of Dr. Gavan Griffith QC (Oct. 23, 2014), IIC 662 (2014).

638

Id. ¶ 42.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

181

party in connection with a request for security for costs. We do not regard it to be

established that these terms reveal any underlying bias against third-party

funders in general or Claimant in particular. The means of expressing a point of

view or articulating an argument may vary from one arbitrator to another, and

different arbitrators possess varied characteristics, including their habits of

drafting decisions and the wording used. As long as such wording does not clearly

reveal any preference for either party, it cannot serve as a ground for a challenge….

As we require an objective standard to be met, Claimant needs to establish facts

indicating Dr. Griffith’s lack of impartiality. However, in this case, the facts

presented are that Dr. Griffith issued his Assenting Reasons with the contents as

described by Claimant. These facts, however, are as such not sufficient to

constitute a lack of impartiality. The underlying arguments, as presented by Dr.

Griffith and the wording, in our view, do not cast reasonable doubt upon Dr.

Griffith’s capacity to issue an independent and impartial judgment in the present

arbitration.

639

While this case is fascinating, this fact scenario is not the norm, because most

arbitrators do not express strong opinions regarding third-party funding in their

written awards or procedural orders.

640

Other procedural mechanisms may be triggered by the presence of a funder. For

example, the mere existence of funding may lead some opposing parties to file an

application for security for costs, which is inappropriate absent additional

circumstances suggesting that the party is impecunious independent of the

funder.

641

Thus, the funder’s participation can influence the assumptions that the

opposing party or the arbitrators may have about the financial situation of the

funded party. Increasingly, however, many solvent parties are using third-party

funding as a risk allocation tool in their business strategy, so arbitrators will

639

See Id. paras. 87, 90.

640

The most recent public information regarding the status of this underlying merits case is

that, on 21 November 2016, RSM applied for annulment of the merits award, which has not

been made public. See RSM Production Corp. v. St. Lucia, ICSID Case No ARB/12/10,

Procedural History (Oct. 23, 2014), IIC 662 (2014).

641

See Alan Redfern & Sam O’Leary, International Arbitration to Embrace Security for Costs,

32 ARB. INT’L, no. 3, 2016, at 407-408; Gary Shaw, Third-Party Funding in Investment

Arbitration: How Non-Disclosure Can Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1,

2017, at 115.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

182

usually not agree with a party’s argument that a funded party is assumed to be a

fiscally challenged party who should be required to post security for costs.

642

Furthermore, arbitrators do not have the power to make orders directly against

third-party funders, because the third-party funders are not signatories to the

arbitral agreement.

643

However, most jurisdictions allow courts to exercise

jurisdiction over non-parties in certain circumstances — such as issuing a

subpoena to a witness — so an arbitral tribunal may consider seeking the

assistance of a court if it decides to make an order against a funder. However, the

court will likely be reluctant to issue such an order against a funder except in an

extreme or unusual circumstance.

It has been suggested that a funder could attempt to fund both sides of a dispute

in order to hedge its investment or gain confidential information about the parties

for use in a future arbitration.

644

Such a practice would be viewed by the

international arbitration community as clearly unethical under customary

international law norms — despite the lack of rules on such a practice — and this

author is not aware of any example of this occurring in any case. By comparison,

attorney ethics rules clearly prohibit attorneys from representing both sides of a

dispute.

645

Finally, as mentioned at the outset, funders have an overarching interest in

ensuring the integrity of the procedure and the enforceability of the arbitral

award, without which the funder will not be paid. Disclosure rules all help to

ensure the integrity of the resulting award in the eyes of the court that might be

asked to enforce the award.

642

See Sherina Petit, James Rogers & Cara Dowling, Third-Party Funding in Arbitration - the

Funders’ Perspective: A Q&A with Woodsford Litigation Funding, Harbour Litigation

Founding and Burford Capital, NORTON ROSE FULBRIGHT INT’L ARB. REP., no. 7, Sept. 2016, at 3

(on file with author).

643

See Alan Redfern & Sam O’Leary, International Arbitration to Embrace Security for Costs,

32 ARB. INT’L, no. 3, 2016, at 409.

644

See Gary Shaw, Third-Party Funding in Investment Arbitration: How Non-Disclosure Can

Cause Harm for the Sake of Profit, 33 ARB, INT’L, no. 1, 2017, at 119-20; Victoria Shannon

Sahani, Judging Third-Party Funding, 63 UCLA L. REV. 388, 427 n.206 (2016).

645

See MODEL RULES OF PROF’L CONDUCT r. 1.7(a) (AM. BAR ASS’N 2016). In that respect,

disputes are treated very differently than transactions. For example, many jurisdictions

allow an attorney to represent parties on opposite sides of a routine transaction, such as the

sale of real estate or an uncontested divorce.

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

183

PUBLIC DISCLOSURE: THE RISING INFLUENCE OF OUTCOME-

MOTIVATED FUNDERS

While the vast majority of funders in international arbitration are for-profit, there

are also many funders for which financial profit is not their primary motivation.

Other motivations may include regulatory changes, precedent-setting, industry

rule-making, or even vengeance. This nascent category of funders may be termed

“not-for-profit funders”

646

or “ideological fund[ers]”

647

or outcome-motivated

funders.

648

These funders are motivated to bring about a certain outcome in the

case or a change in the law, rather than motivated by making a profit. Unlike

traditional for-profit funders, outcome-motivated funders are often very keen to

make their presence known to the tribunal, the opposing side, and sometimes

even the general public or media, in the case, in hopes that the revelation will sway

the outcome of the case.

There are many questions about such outcome-motivated funding that remain

to be answered. Potential justifications for ordering disclosure of such funders

may be similar to the justifications for disclosure of traditional funding, but there

are some unique challenges that have yet to be fully uncovered and analyzed.

Outcome-motivated funding may become more prevalent for respondents,

because a return on investment is not required for this type of funding to be

considered successful. For example, the Bloomberg Foundation and its Campaign

646

See, e.g., Eric De Brabandere & Julia Lepeltak, Third-Party Funding in International

Investment Arbitration, 27 ICSID REV., no. 2, 2012, at 379-98.

647

See, e.g., Eugene Kontorovich, Opinion, Peter Thiel’s funding of Hulk Hogan-Gawker

litigation should not raise concerns, WASH. POST, May 26, 2016,

https://www.washingtonpost.com/news/volokh-conspiracy/wp/2016/05/26/peter-thiels-

funding-of-hulk-hogan-gawker-litigation-should-not-raise-

concerns/?noredirect=on&utm_term=.ff0b69feadb4 (“Anyone who donates to the ACLU or

a Legal Aid fund is basically underwriting third-party litigation. Most recently, private

profit-motivated litigation finance has emerged as an industry in its own right,

unburdened by any concern over the old common law rules . . . . By current standards,

Thiel’s funding should raise no eyebrows — unless one also wants to revisit public interest

litigation, class actions and contingent fees. Critics of Thiel’s role in the Gawker case argue

that it is particularly inappropriate because they think he is motivated by “revenge” over

the gossip site’s earlier publication of stories about his private life. But if the lawsuit is not

frivolous, it is hard to see how the motivations of funders are relevant (or discernible). One

would not say a civil rights organization could not accept donations from philanthropists

angered by a personal experience with discrimination. All Thiel has done is cut out the

middleman. Indeed, Thiel’s conduct fits into the “public interest” or “ideological” litigation

paradigm.”).

648

“Outcome-motivated funders” is a term coined by this author.

DISCLOSURE OF THIRD-PARTY FUNDING IN INTERNATIONAL ARBITRATION

184

for Tobacco-Free Kids provided financial support and technical assistance to the

government of Uruguay for its defense against the tobacco company Philip Morris

in the ICSID case Philip Morris v. Uruguay in which Philip Morris challenged state

regulations requiring plain packaging of tobacco products.

649

In addition, many outcome-motivated funders and the parties they fund are

inclined to voluntarily, and even publicly, announce their involvement in the

case, perhaps to sway public opinion in their favor or to attract additional funding

sources for their cause. For example, Bloomberg Philanthropies and the Bill &

Melinda Gates Foundation have partnered together to create the Anti-Tobacco

Trade Litigation Fund to help low- and middle-income countries finance their

defenses against tobacco companies’ claims under investment treaties.

650

Former

New York City Mayor Michael Bloomberg also appeared in person at the January

2016 Annual Meeting of the Association of American Law Schools and pledged in

his remarks that his foundation would support countries that did not have the

financial means to defend against arbitrations brought by tobacco companies like

Philip Morris.

651

Regardless of the term adopted to describe this new category of funders, arbitral

tribunals, and institutions, the majority of the disclosure rules summarized in this

article incorporate definitions of third-party funding that include disclosure of

these types of funders in addition to traditional for-profit funders in international

arbitration. Hopefully, we may be able to assess the impact of outcome-motivated

funding on international arbitration in the future, once more such cases become

public.

649

See Historic Win for Global Health: Uruguay Defeats Philip Morris Challenge to Its Strong

Tobacco Control Laws, CAMPAIGN FOR TOBACCO-FREE KIDS (July 8, 2016),

http://www.tobaccofreekids.org/press_releases/post/2016_07_08_uruguay; Philip Morris

Brand Sàrl, Philip Morris Products SA, and Abal Hermanos SA v. Oriental Republic of Uru.,

ICSID Case No. ARB/10/7.

650

See The Anti-Tobacco Trade Litigation Fund from Bloomberg Philanthropies and the Bill

& Melinda Gates Foundation, CAMPAIGN FOR TOBACCO-FREE KIDS,

https://www.global.tobaccofreekids.org/what-we-do/global/legal/trade-litigation-fund;

Sabrina Tavernise, New Global Fund to Help Countries Defend Smoking Laws, N.Y. TIMES,

(Mar. 18, 2015), https://www.nytimes.com/2016/03/19/health/new-global-fund-to-help-

countries-defend-smoking-laws.html

651

See Remarks of Michael Bloomberg, Opening Reception, Association of American Law

Schools Annual Meeting, 7 Jan. 2016, https://www.aals.org/aals-newsroom/2016-aals-

annual-meeting-highlights/

MANDATORY DISCLOSURE RULES FOR DISPUTE FINANCING

185

CONCLUSION

As illustrated in this article, disclosure rules relating to third-party funding in

international arbitration are an important step toward dispelling widespread

misconceptions about third-party funders. Because third-party funders do not

directly take part in the international arbitration procedure itself (normally), they

are not visible participants in the process. Yet, their behind-the-scenes influence

makes them substantial, invisible stakeholders. Some observers take the view that

arbitrators, institutions, and opposing parties should not inquire into a party’s

means to pay the costs of arbitration, which could be termed the “none of your

business” approach. Others believe that it would be best for the arbitration system

for third-party funders to expressly join the international arbitration community

rather than exist on the outskirts or in the shadows. Regardless of where one falls

on the spectrum of this debate, the disclosure rules summarized in this article are

aimed at helping the international arbitration community improve its collective

understanding of the complexities and nuances of third-party funders in

international arbitration and ensure the legitimacy of the international

arbitration system.

NOTES