In contemporary times, the use of litigation funding has emerged as an essential aspect of the civil justice system. It provides assistance to litigants during the pendency of their lawsuit and ensures that the parties to the lawsuit focus on the subject matter of the case.
The litigation funding is a private arrangement between parties and does not affect the substance of the case; therefore, in the majority of the states, it is not required to disclose litigation funding agreements.
However, the U.S. District Court for the District of New Jersey has proposed a rule demanding the disclosure of third-party litigation funding.
Here, we will discuss the significance of third-party litigation funding and argue that the District Court should abandon the proposed rule.
What is third-party litigation funding?
Third-party litigation funding is a form of non-recourse financing for litigation. A third-party funder provides funding to the party of a lawsuit to pay for financial liabilities at any stage of the claim. They legally agree to a portion of the proceeds in exchange for the non-recourse financing.
According to the arrangement, the third-party non-recourse funder will be entitled to reimbursement only if the claim ends successfully. Therefore, if a party’s claim to a lawsuit fails, he or she is not obliged to pay the payment received from the third-party funding company, and the funder will lose its investment. Moreover, third-party financing is risk-free for the litigants of a lawsuit.
Are they taking plaintiffs for granted?
Lawsuits can take months or years to be finally decided by the courts of law. In cases such as personal injury claims, the plaintiff may not be in a condition to continue his employment. In some cases, a plaintiff has to undergo long-term medical treatment for the injuries caused by the defendant as bills pile up.
In these difficult circumstances, the role of third-parting funding is imperative. A plaintiff can apply for funding at any stage of the lawsuit, and if the application is successful, the plaintiff will receive funding to take care of the financial needs. Lawsuit funding eases a plaintiff’s financial difficulties and ensures that the plaintiff focuses on the lawsuit and his well-being without stressing about the piling bills.
Deciding who benefits from the NJ court’s rule, the insurance company or the plaintiff
Third-party legal funding does not affect the substance of lawsuits, and they are private arrangements between the parties; therefore, it is not a mandatory requirement of law to disclose the terms and conditions of third-party funding agreements.
Nevertheless, the proposed rule of the U.S. District Court of New Jersey mandating the disclosure of the third-party funding is contradictory to the practice of the majority of the courts in the U.S. and the Advisory Committee on Civil Rules, which has rejected the calls from policy groups to amend the Federal Rules of Civil Procedure to mandate disclosure.
New Jersey’s proposed rule imposes a legal obligation on the litigant receiving third patty funding to disclose the terms and conditions of the agreement agreed with the third party. These litigants will have to disclose the identity of the funder, including its name, address, place of formation, and other important details.
In the grand scheme of these rules, the plaintiff has to disclose the role of the funder in the lawsuit, whether the funder has any influence on the substance of the case, and the litigant has to receive the consent of the funder for settlement and also a brief description of the nature of the financial arrangement between the parties.
The rule also enables the opposing parties to seek additional discovery regarding the specific terms of the agreement.
The proposed rule is an invasion into a private arrangement between a financially strained litigant and the third party financing company
The agreement for litigation funding may include confidential information, and the forced disclosure of the personal information unfairly burdens the litigants.
The disclosure of some of the terms and conditions of the agreement may prove to be detrimental for the case of the plaintiff, and the defendant may use the information to exploit the plaintiff. Therefore, this intrusion into the private arrangement between parties should be abandoned.
In order to avail of litigation funding, litigants have to file a request with third-party financiers. They evaluate the merit of the claims and grant funding to the most meritorious claims. Thus, the very nature and practice of litigation funding are fully aligned with the civil justice system’s public policy and overall purpose.
Litigation funding ensures that the most deserving parties with strong and meritorious legal claims receive fair compensation for the loss that occurred to them.
Litigation financing arrangements do not transfer the litigation rights from litigants to funders. Litigants and their counsels have the right and authority to make decisions such as settlement, etc. Litigation funding only provides assistance to the deserving litigants to proceed with their claims without stressing about finances.
Arguments from insurance corporations against financially restrained plaintiffs
The proponents of the proposed rule argued that the rule would ensure transparency and protect the rights of the litigants. They also argue that the rule will prevent malpractice pervasive in the funding business. But none of their arguments make any sense as the rule proposed by the NJ court only benefits insurance giants.
There are laws for ethical conduct that will regulate the operations of funders, and there is no need to enact new rules that hurt plaintiffs. Litigation financing operates in accordance with ethical conduct, and those who violate the just practice can be held accountable under the existing laws.
It is a known fact that third-party litigation funders have no influence on the substance of the case, and the litigants have the authority to make decisions for themselves whether to sign a contract or not. With this said, legal funding arrangements do not affect the substance of any case.
Funding agreements are merely private arrangements between the two parties, ensuring that the most meritorious claims proceed and receive fair compensation.
Whereas, under the proposed rule, the defendant would have insight into the financial constraints of the plaintiff. It is detrimental to cases in which the plaintiff filed a lawsuit against companies, which can exploit the money troubles of the plaintiff.
Insurance companies have the financial resources to pursue a case, and the plaintiff with the most meritorious claim may not be able to pursue their case because they will have to settle for the lowest amount possible. Therefore, the proposed rule should be abandoned. Unjust?