Dive Brief:
- A company using third-party financing to help cover its litigation costs would have to disclose its use of outside money under a Louisiana bill that passed the Senate earlier this month and is making its way through the House. The contract between the company and its funder would have to be made discoverable under the bill as well.
- “It’s flourished in the shadows with very minimal oversight,” the bill’s author, Sen. Barrow Peacock, said of the rise of outside litigation money, Bloomberg Law reported.
- If passed, Louisiana would join New Jersey and Wisconsin in targeting the growing use of outside funding. In addition, U.S. District Court Chief Judge Colm Connolly, who presides in Delaware, issued a standing order last year to require litigants to disclose any third-party funder they’re working with and how much control the funder has over the party’s litigation strategy.
Dive Insight:
One of the big reasons disclosure is needed is the national security risk outside funding poses, according to introductory material in the Louisiana bill.
“Investments are being made by foreign hedge funds, private equity funds, and in some cases, sovereign wealth funds connected to hostile governments,” the bill’s preamble says. “The use of third-party litigation financing by agents of hostile governments can threaten the integrity of our national security by providing access to technologically competitive information, trade secrets, and other confidential information.”
The bill also says outside money can fuel frivolous lawsuits, but litigation funders and their industry group have been pushing back on that assertion for years.
“The concept of encouraging meritless litigation is the argument that seems to always come up, and I’m not sure exactly what people are talking about when they say that,” Christopher Seeger of Seeger Weiss has said.
No litigation funder could stay in business if it pursued frivolous cases, Gary Barnett, executive director of the International Litigation Finance Association, told Legal Dive last year.
“Legal finance companies provide capital on a non-recourse basis over a long period of time,” he said. “They have to be rational actors. They have to be highly selective in the cases that they choose or they risk losing all their capital.”
Nor is the national security argument persuasive, says Adam Mortara, a trial attorney in Nashville and a former clerk to U.S. Supreme Court Justice Clarence Thomas.
“The story goes that, by allowing overseas investors to potentially control litigation funds, those investors will gain access to corporate defendants’ intellectual property,” Mortara said in a Bloomberg Law analysis. But “under the Federal Rules, corporate defendants can protect highly confidential discovery material from unwarranted disclosure through the issuance of a protective order…. I’ve never seen a protective order that allowed a litigation funder to have access to such material, or of a litigation funder even inadvertently getting access to such material.”
The U.S. Chamber of Commerce released a report last year raising the national security issue, but Mortara said the concern is overblown.
“Corporations might not like litigation funding because they generally don’t need it and get sued by the people who use it,” he said. “Fine. But litigation funding isn’t a national security risk.”
A spokesperson for the International Litigation Finance Association emailed the following statement to Legal Dive:
“We have been actively engaged with the Louisiana legislature and look forward to continuing to do so. However, this legislation is based on misinformation and a lack of understanding of commercial legal finance – a pro-business industry that allows companies, small and large, to maintain operating capital and mitigate risk. The alleged threat to national security is reckless and has no basis in fact. It is simply a Trojan horse argument created out of whole cloth by the US Chamber of Commerce, an argument they have admitted is purely speculative, in its attempt to pass universal automatic forced disclosure, a concept that will only harm businesses, in many instances smaller, less-resourced companies.”
