On October 3, over 100 prominent companies, spanning various sectors such as technology, pharmaceuticals, and automotive, urged the U.S. judiciary to implement a nationwide rule mandating the disclosure of third-party litigation funding (TPLF) in lawsuits. The companies, including Amazon, Google, Exxon, Ford, Pfizer, and Zurich, submitted a formal letter to the federal courts’ Advisory Committee on Civil Rules, seeking greater transparency in legal proceedings where external financiers are involved.
Litigation funding, a practice where third-party investors provide financial backing to plaintiffs in exchange for a portion of any eventual settlement or judgment, has rapidly evolved into a multibillion-dollar industry. Despite its growing prevalence, there is currently no unified requirement across the judiciary for disclosing these financial arrangements, though some courts do require it.
The Call for Greater Transparency
The companies’ letter argues that third-party litigation funding can significantly alter the dynamics of legal disputes, influencing whether cases are settled or litigated to conclusion. They contend that disclosure of such financial backing is necessary to allow defendants to make informed decisions about litigation strategy and settlement negotiations.
“Litigation funding fundamentally alters the dynamics and has a major impact on whether the dispute can be resolved through settlement,” the letter stated. The companies are concerned that without full disclosure, defendants may be at a disadvantage when negotiating settlements, as they may not know the financial backing that plaintiffs have access to.
Pushback from Litigation Funders
Not all stakeholders agree with this push for transparency. Christopher Bogart, CEO of Burford Capital, a major player in the litigation funding industry, dismissed the companies’ motivations. Bogart argued that the push for mandatory disclosure aims to maintain a perceived advantage for large corporations in the justice system and to drive up costs for those seeking to hold them accountable.
“What they want is to keep their unfair advantage in the justice system and to drive up costs for anyone who sues them,” said Bogart.
The International Legal Finance Association, a group that advocates for the funding industry, echoed this sentiment, suggesting that the call for disclosure tilts the playing field in favor of defendants by forcing plaintiffs to reveal privileged information.
The Road Ahead for the Judiciary
The Advisory Committee on Civil Rules, which received the companies’ letter, is scheduled to discuss the issue at a meeting on October 10 in Washington, D.C. While no formal proposal is currently up for a vote, the topic of whether court rules should be amended to require disclosure of litigation funding is on the agenda.
The U.S. Chamber of Commerce has been vocal in supporting increased oversight and disclosure requirements for litigation funding. Republican Senators John Cornyn and Thom Tillis have also publicly expressed support for greater transparency in TPLF arrangements.
Insurance Implications of Litigation Funding Disclosure
The debate surrounding third-party litigation funding has significant insurance implications, particularly in the realm of liability insurance. If a nationwide rule requiring disclosure of litigation funding is implemented, insurers will likely adjust their strategies for evaluating and underwriting risk.
- Increased claims costs: Litigation funding can empower plaintiffs to pursue lengthy and expensive lawsuits, potentially leading to higher defense costs for insurers. This may result in higher premiums, particularly in liability lines like Directors & Officers (D&O) insurance, which is often triggered by shareholder or class action lawsuits.
- Impact on settlement negotiations: Knowledge of third-party funding could affect how insurers approach settlements. Funders are often less incentivized to settle early, which could prolong litigation and increase claims costs, further influencing insurers’ reserve practices and policy terms.
- Changes in underwriting: Insurers may begin incorporating third-party funding disclosures into their risk assessments, especially in industries with a high incidence of litigation, such as pharmaceuticals, technology, and automotive. The presence of litigation funding in a claim could lead to increased scrutiny and higher premiums for businesses in these sectors.
In summary, while the discussion on mandatory disclosure of litigation funding is still in its early stages, any changes to the judiciary’s rules could have far-reaching consequences for businesses, litigation funders, and the insurance industry alike. As the push for transparency continues, insurers will need to adapt their strategies to manage the growing complexities of litigation in a funded landscape.