This is the third installment in a series on litigation funding.  The first article provided an overview of litigation funding.  Last month’s installment focused on the legality of litigation funding.  This article concentrates on potential ethical issues associated with litigation funding.

Should Courts Require Disclosure of Litigation Funding Agreements?

There is a growing surge amongst the defense bar and the U.S. Chamber of Commerce, that parties should be required to disclose litigation funding arrangements to defendants and the courts.  In April 2018, Wisconsin became the first state to require litigation funding agreements to be disclosed in certain state court civil litigation proceedings.  The Republican-introduced 2017 Class Action Fairness Act bill in the U.S. House would have also required disclosure of “any person or entity who has a contingent right to receive compensation from any settlement, judgment, or relief obtained in the action.”  A bill was introduced in the U.S. Senate last May called The Litigation Funding Transparency Act of 2018.  However, a number of federal courts already require disclosure of the existence of a litigation funding agreement and the identity of the funder.  None, so far, require production of the litigation funding agreement or its terms, however.

As one of the articles highlighted above discusses, litigation funders argue that disclosure of funding agreements would prejudice plaintiffs because it would reveal a “litigation roadmap” to defendants through the maximum litigation budget, allowing the defendant to come up with a strategy to put financial pressure on the plaintiff.  Moreover, once defendants understand the terms of the agreement, they may be able to reverse-engineer the value the plaintiff places on its claims.

On the other side, defense-oriented commentators argue that plaintiffs should be required to disclose litigation funding agreements because federal procedural rules – as well as many state procedural rules – require disclosure of insurance policies that may provide coverage for the plaintiff’s claims in the litigation.  Another argument is that disclosure guards against litigation funders improperly influencing the litigation strategy.

Are Communications with Litigation Funders Privileged?

Until early 2018, federal courts unanimously held that a litigant’s communications with a funder are protected work product.  But in Acceleration Bay v. Activision Blizzard, the District of Delaware required the plaintiff to disclose its communications with Hamilton Capital, a litigation funder, in connection with Hamilton Capital’s due diligence for funding the litigation.  The district court rejected the plaintiff’s work product argument, finding the primary purpose of the documents prepared for Hamilton Capital were for obtaining a loan, not in aid of future litigation.

Tilting the Scales in Your Favor

Until the appellate courts firmly address the discovery of communications with litigation funders, attorneys and clients should be careful about the manner in which they share information with the funders.