A little more than six months ago (June 21, 2021), the United States District Court for the District of New Jersey began enforcing its Local Rule 7.1.1, requiring disclosure of third-party litigation funding. Local Rule 7.1.1 provides:
Within 30 days of filing an initial pleading or transfer of the matter to this district, including the removal of a state action, or promptly after learning of the information to be disclosed, all parties, including intervening parties, shall file a statement (separate from any pleading) containing . . . information regarding any person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance[.]
D.N.J. Loc. R. 7.1.1(a). The specific information to be disclosed is:
- The identity of the funder(s), including the name, address, and if a legal entity, its place of formation;
- 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
- A brief description of the nature of the financial interest.
Under Rule 7.1.1(b), a court finding of “good cause that the non-party has authority to make material litigation decisions or settlement decisions,” justifies “additional discovery of the terms of any such [litigation funding] agreement.” The court may also “order such other relief as may be appropriate. Id. 7.7.7(c).
The timing of the adoption of Local Rule 7.1.1 indicates it was in reaction to the misguided decision in In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Products Liability Litigation, 405 F. Supp.3d 612 (D.N.J. 2019), that rejected the “shifting tide towards disclosure of third-party litigation funding.” Id. at 617. Valsartan distinguished several decisions – all ordering discovery of third-party litigation finding: Acceleration Bay LLC v. Activision Blizzard, Inc., 2018 WL 798731 (D. Del. Feb. 9, 2018); Gbarabe v. Chevron Corp., 2016 WL 4154849 (N.D. Cal. Aug. 5, 2016); In re American Medical Systems, Inc. Pelvic Repair Systems Product Liability Litigation, 2016 WL 3077904 (S.D.W. Va. May 31, 2016); Cobra International, Inc. v. BCNY International, Inc., 2013 WL 11311345 (S.D. Fla. Nov. 4, 2013); and Berger v. Seyfarth Shaw, LLP, 2008 WL 4570687 (N.D. Cal. Oct. 14, 2008) − for various and sundry fact-bound reasons. 405 F. Supp.3d at 618. Obviously, most other New Jersey federal judges disagreed with the Valsartan ruling sufficiently intensely that together they took the relatively unusual step of creating a contrary local rule that applies to all cases in the district (presumably including Valsartan).
According to an article we found online about Rule 7.1.1, two states (Wisconsin and West Virginia) impose disclosure requirements for third-party litigation funding, as do “at least 25% of federal district courts (24 of 94).” Particularly in the MDL context, rampant, secret third-party litigation funding implicates:
- Settlement, since plaintiffs with typically high-interest litigation funding arrangements, have different views on when to seek settlements than those who can afford to wait, and thus allows both sides to evaluate what settlement terms are feasible.
- Allocation of settlements, since heavily indebted plaintiffs (or their counsel) have reason to be more demanding of immediate, as opposed to structured, settlements.
- The adequacy of plaintiff-side leadership, particularly when some leadership firms are significantly more in hock to litigation funders than others.
- Diversity and inclusion – since repeat plaintiff-side players are far better connected to the usually secretive litigation funders than newcomers.
- More transparent litigation funding arrangements may influence decisions by non-leadership plaintiffs’ counsel whether or not to file cases in an MDL, as opposed to some other forum.
- Transparency in third-party litigation funding will allow defendants to refute the “David versus Goliath” trope that plaintiffs almost invariably employ. Cf. Arch v. American Tobacco Co., 175 F.R.D. 469, 497 n.28 (E.D. Pa. 1997) (“what this Court and other courts similarly situated are faced with is ‘Goliath versus Goliath”).
- Transparency in third-party litigation funding will support more accurate assessment of Rule 26 “proportionality” discovery arguments, as well as justifying imposition of a greater share of discovery costs on well-funded plaintiffs.
We also came across a “hair on fire” article by a third-party litigation funding apologist claiming that:
The rule’s burden on civil litigants will be so collectively substantial, and its intrusion into parties’ private commercial matters so severe, that we must question whether the rule serves any valid purpose, much less one justifying these detriments.
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It is not difficult to envision that opposing parties frustrated with the conduct of settlement negotiations, or even just the tactics of the attorneys themselves, will weaponize this provision against parties who employ litigation financing. Alter your settlement demands, they will argue, or we will petition the court to force disclosure of your otherwise private financing arrangements.
Not surprisingly, nothing is cited in support of these speculative statements.
So we took a look. Rule 7.1.1 has now been in effect for over seven months. Are parties using Rule 7.1.1 as some sort of litigation cudgel? If so, such widespread motion practice would be producing opinions by New Jersey federal courts citing Rule 7.1.1. It’s not hard to run Lexis and Westlaw searches looking for citations to the rule. The result of our searches:
Zero, zilch, nada, nil.
Not a single available New Jersey decision since the effective date of Rule 7.1.1 so much as cites the Rule. If you don’t believe us, run your own searches. It took us less than five minutes to douse that author’s hair. Obviously Rule 7.1.1 is not being used in any sort of broadly abusive fashion. Indeed, as the backlash-prompting Valsartan decision demonstrates, there was more litigation about disclosure of third-party litigation funding in the New Jersey federal courts before Rule 7.1.1 was adopted than afterwards.
We hope that other court systems, state and federal, follow the example of the District of New Jersey and adopt similar rules.