Litigation Finance: Questions Companies Should Consider in Deciding Whether to Pursue Litigation Financing

Litigation finance is a growing industry. Increasing awareness of the ability to finance lawsuits is changing claimants’ analysis of when to bring claims and how to fund their businesses while they do.

In deciding whether to pursue litigation financing, and how to structure such an arrangement, companies should consider how to protect sensitive information and how funding might impact strategic decisions.

What information will be shared with a potential funder?

• Litigation finance companies are making an investment decision and will need to evaluate the likelihood of achieving their desired payoff. Funders often consider information such as the posture of the case, counsel’s experience, decisions on key motions, and their own experience with similar cases.
• They may also consider summaries provided by, or discussions with, counsel to determine whether the investment fits funding criteria.
• Information shared with a potential funder may become discoverable, however, so companies should consider the tradeoffs.

What are the rules on disclosing litigation funding arrangements?

• As litigation funding has become more common, so too have state, local, and judge-specific rules governing disclosure.
• Some courts have adopted the view that funding arrangements are irrelevant to the merits of a case and should not be disclosed. Those courts have denied motions to compel the disclosure of information relating to litigation financing. Other courts, like the District of New Jersey, have taken the opposite approach and instituted local rules requiring disclosure of litigation funding arrangements.
• Several states have passed laws requiring disclosure of litigation funding agreements, though others have rejected similar proposals.

What funding-related information could an adversary obtain through discovery?

• Before sharing non-public information with a potential funder, parties should have a non-disclosure agreement in place. Such an agreement, however, is not an ironclad guarantee against future disclosure of materials shared with a potential funder.
• Courts have reached varying conclusions on whether a third-party funder shares a common interest with the client and whether the attorney work-product doctrine can protect materials shared with a funder.
• Some have analogized litigation funding decisions to other business transactions that are not covered by attorney-client privilege. Thus, a party seeking funding is often assumed to have disclosed only commercial, not privileged, information (and to have waived the privilege over any disclosed privileged information).
• Other courts have been more willing to bring funder communications within the ambit of the work-product doctrine, if not the attorney-client privilege, on the view that those discussions are made confidentially in connection with litigation and are not intended to be shared with adversaries. These determinations are often fact- and court-dependent, so parties seeking funding should prepare for privilege disputes.

How could the funding arrangement impact strategy and settlement decisions?

• Claimants entering litigation funding arrangements should consider provisions concerning control over substantive decisions and their potential impacts on settlement and other resolutions.
• Recent headlines about a dispute between a funder and its client with respect to settlement decisions – in particular, whether the funder could continue the litigation even after the client wished to settle it – have shone a spotlight on questions of where control over settlement decisions really lies, and whether a funder can be substituted as the plaintiff if it wishes to continue the litigation (and therefore seek a higher return on its investment) when the client does not.

Protecting Sensitive Information and Clarifying Control

Litigation funding can provide helpful support for clients seeking to manage the costs of significant litigation or to monetize claims that otherwise might not be pursued.

Given the significant divergence of court approaches to disclosure and privilege, however, companies should consider how best to protect sensitive information. And they should pay close attention to the terms of funding arrangements to ensure that they continue to hold the reins on significant decisions and potential resolutions.