Delaware Judge Mandates The Disclosure of Litigation Funding

In recent times, third-party litigation funding has been gaining traction all over the country. Litigation financing firms provide non-recourse funding to insolvent parties with meritorious claims in an arrangement agreed upon between both. 

Due to these developments in our society, the number of cases filed has witnessed astronomical growth. In the majority of the states in the USA, claimants are not required to disclose any information about their funders. 

However, in recent years, some districts and states have enacted rules to mandate out-of-money plaintiffs to disclose information about financiers funding the claims. 

Some rules for the disclosure of litigation finance

In 2017, the Northern District of California adopted a rule for disclosure of non-recourse legal funding in connection with class actions. 

Last year, District Court Chief Judge Freda Wolfson issued an order amending the local rules to mandate these suffering plaintiffs to disclose information about receiving litigation funding. 

Similarly, on April 18, 2022, the Chief Judge of the District of Delaware, Colm F. Connolly, passed a standing order on the same lining. 

The standing order of the Delaware Judge Connolly provides that the party which has entered into an arrangement with a third-party litigation financier for financing attorney’s fees, or expenses to bring about justice against billion-dollar corporations, which are done on a non-recourse basis (in exchange for a financial interest conditional to the outcome of the litigation or non-monetary result that is not in the nature of a personal loan, bank loan or insurance) is mandated to disclose the following information:

1. The identity, address, and if a legal entity, place of formation of the litigation funders.
2. Whether the approval of the litigation funder is required for the settlement of the issues or the conclusion of the claim. If the answer to this question is affirmative, the concerned party will be obligated to disclose the terms and conditions relating to the approval and the arrangement between the parties.
3. Disclose information about the nature of the financial interest or financial benefit of the litigation funders that they intend to accrue from the agreement.
4. The opposing party is also entitled to claim the disclosure of any additional information about the third-party funder upon showing that the litigation funder has the authority to make a substantial decision relating to the claim and settlement decisions or that there exists a conflict of interest in the arrangement which can be prejudicial to cause of justice.

The standing order provides that litigants must disclose the information within 30 days in cases of new claims and within 45 days in cases of pending lawsuits. 

Although the standing order of the named judge is not a binding precedent for the judges of the District of Delaware, it reflects an unfair trend toward disclosing litigation finance nationally and internationally. 

The disclosure of information about litigation finance firms has been subject to discussion for years. 

The U.S. Chamber of Commerce Institute for Legal Reform has advocated for broad mandatory disclosure since 2014 by recommending an amendment to the Federal Rule 26.

The proponents of this disclosure selectively argue that such exposure to tycoon companies from insolvent claimants will prevent the conflict of interest as, in the majority of the international arbitration tribunals, the arbitrators serve as members in one case and appear as an advocate in other cases. According to them, these disclosures will enable tribunal members to verify that they have no conflict of interest.

Similarly, in domestic settings, the disclosure allegedly promotes the protection of class interests—the class of an impoverished plaintiff versus a mogul defendant.

Opponents of disclose of litigation finance

The opponents of the disclosure argue that it leads to discovery distraction and a source of delay in the settlement cases. That means that claimants can settle their cases for less than what it is worth.

Could this be a blow to the administration of justice since legal finance companies provide funding to people in need with meritorious claims?

The access to information related to the arrangement between the litigant party and their third-party funders may also be prejudicial to their interest and result in undue advantage to the opposing parties, such as insurance companies and very powerful and wealthy organizations. 

For that reason, it is imperative that the courts of law adopt a balancing approach by considering the concerns of all the stakeholders.

Most importantly, a plaintiff should use the freedom of choice of whether to disclose or not disclose the investment in the case as a strategic litigation decision. They should have the right to choose whether or not they want to disclose that information as well as when they would like to disclose it.