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by Andrew Flake

In a standing order entered this week, the Chief Judge of Delaware’s federal District Court has required all parties in cases before him to disclose at least the existence of any third-party funding (3PF), along with the identity of the funder.

Although this particular order only applies to cases before Judge Connolly, it is modeled on a Local Rule the District Court in New Jersey adopted last year. Like New Jersey’s Local Rule, the Standing Order requires disclosure of:

  1. The identity of the funder(s), including the name, address, and if a legal entity, its place
    of formation;
  2. Whether the funder’s approval is necessary for litigation decisions or settlement decisions
    in the action and if the answer is in the affirmative, the nature of the terms and conditions
    relating to that approval; and
  3. A brief description of the nature of the financial interest.

There are also provisions allowing a party to seek additional discovery of the terms of a funding agreement if the non-party has certain authority to make “material litigation decisions or settlement decisions,” if a conflict of interest exists, and interestingly, if “the interests of parties” or a class “are not being promoted or protected.”

The order is brief, so that we can’t read too much into it, but it is reasonable to surmise it was motivated by the desire to have full visibility, for conflicts purposes, into all of the financial stakeholders in litigation, and to understand, for purposes of accountability to the Court, whether parties other than the litigants are making settlement or case decisions.

I don’t think the Chief Judge’s Standing Order will be the last one like it. In fact, I suspect it is a bellwether. The third-party litigation market is now not only well-established, but growing, and these rules and orders — indeed, the ongoing discussion about whether and to what extent disclosure should be required at all — reflects that reality. In its early days, litigation funding in the U.S. commercial market was viewed by some as an unknown, perhaps unpredictable and a bit exotic, as cryptocurrency still is today. The 3PF market, however, has stabilized and matured, with different funders focusing on different areas of practice and profile of cases. And it has been around long enough for courts to understand some of the possible implications of funding on a case.

One outcome of that more informed understanding are these more regular disclosure rules, though they are only one approach. In fact, very different, and reasonable, positions exist about the need for disclosure at all, and a number of lawyers, judges, and academics would argue against any kind of blanket requirement or rule.

I tend to favor the ability of courts or decision-makers to make a case-by-case decision in many areas. It is fair to ask, for example, whether the existence of financing by itself is too different from information about a party’s general finances, and if anything, I would think disclosure becomes more important if there is input by an outside party, like a funder, on decisions concerning the litigation.

On the settlement side, with involvement of a third-party funder, is the funder’s input on settlement different than the role of an insurer in a coverage case, and if so, how? And when it comes to whether the interests of a funded party are not being “prompted or protected,” particularly outside of the class context, who will have standing to make that argument on a party’s behalf?

These are a few of many important questions around the topic, and it will be interesting to observe and assist our courts in working them out as we move forward. Sometimes, as the pandemic has shown us to the great credit of our judiciary, the legal system’s adaptation to structural changes can be quick. Sometimes, and more often, the adaptation can be slow, and I expect the systemic treatment of 3PF disclosure will fall into that category. In addition to the courts, state legislatures and of course our bar associations and stakeholders in commerce will be part of the discussion. A slower pace in this context is not a bad thing at all. When the process of rule and procedural change occurs, it is based on case experience and the thoughtful deliberation of many judges and practitioners, a definite strength of our common law system. Stay tuned…