Follow the Money?

Lead Article From The Practice September/October 2019
A proposed approach for disclosure of litigation finance agreements

The complete version of this article can be found in the UC Davis Law Review. You may also find a full version on SSRN here.

Both critics and proponents agree that the newly emergent phenomenon of litigation finance is likely the most important development in civil justice of our times. Litigation finance is the practice by which a nonparty funds a plaintiff’s litigation either for profit or for some other motivation. Last year, some estimates placed the size of the litigation finance market between $50 billion and $100 billion. This market in legal claims has attracted specialist firms, private equity, hedge funds, wealthy individuals, the public (through crowdfunding platforms), and sovereign wealth funds, among others who are looking for high-risk, high-reward investments or for a cause célèbre. The high-profile funding of Hulk Hogan’s lawsuit against Gawker has created a firestorm of public and regulatory interest. The funding of the concussion litigation, the #MeToo cases, and Stormy Daniels’s lawsuit—to name but a few more recent examples—have dominated headlines and conferences.

The ability to bring a suit—an expensive enterprise under the best of circumstances—implicates constitutional, human, and civil rights.

While these cases grab headlines, they also reflect a more fundamental shift. Litigation finance is transforming civil litigation at the case level as well as, incrementally, at the level of the civil justice system as a whole. It is beginning to transform the way law firms are doing business and will increasingly shape the careers of civil litigators at firms small and large. It is unsurprising, therefore, that litigation finance is of interest to legislatures and the courts. With so much at play and the stakes so high—at the state and federal level, in the judiciary, in the legislatures, and at bar associations—the question of the day is whether and how to regulate litigation finance. That debate focuses specifically on regulation around the disclosure of financing.

This article argues that the quest for a bright-line rule to regulate disclosure of litigation funding is fundamentally misguided because it fails to account for the near-infinite variability of funding scenarios that implicate widely different interests, pose different risks, and affect different constituencies in varying degrees. In other words, rules are a legal technology that simply cannot capture or address the nuance, versatility, and context specificity inherent in litigation finance. Instead of a bright-line rule, this article proposes that legislatures and courts shift to a standard-based approach and adopt a balancing test. Balancing tests, including the one offered herein, allow judges broad discretion to weigh competing factors and interests in a context-specific manner. It is therefore the appropriate approach to litigation funding, which is characterized by a high variability of funding schemes and implicates a long list of factors and interests.

What’s at stake?

Litigation finance has generated significant interest among academics, lawyers, legislatures, the judiciary, the media, and the investment community. The following points underpin why the practice has attracted the attention of such diverse stakeholders.

Foundational questions of civil justice. The primary import of the litigation finance industry is its propensity to increase the number of cases brought. Depending on whether one focuses on the potential to increase access to justice for deserving but underresourced plaintiffs or on the potential to increase nonmeritorious litigation, this might be viewed as a positive or a negative. An associated concern, relating to systemic effects on the courts, is what effects the availability of funding and liquidity of legal claims might have on how quickly cases settle. But peel away this level of the debate and other, possibly even more profound, implications arise.

The funding of the concussion litigation, the #MeToo cases, and Stormy Daniels’s lawsuit have dominated headlines and conferences.

Constitutional, human rights, and civil rights implications. The ability to bring a suit—an expensive enterprise under the best of circumstances—implicates constitutional, human, and civil rights. Access to justice, as legal scholar Francesco Francioni has written, is a human right, “guaranteed as a legal right in virtually all universal and regional human rights instruments since the 1948 Universal Declaration, as well as in many national constitutions.” In the United States, the right to bring a suit is often further described as a form of free speech, and participation in certain types of cases is understood to be an aspect of democratic participation. Tellingly, the last time a vigorous debate erupted around “champerty” and “maintenance”—the traditional doctrines that barred, with some exceptions, the funding of a suit by a nonparty—was when civil rights organizations took on civil rights cases, including school integration cases, pro bono. And, for defendants, the questions of who funds the plaintiffs’ cases, the motivation behind the funding, and whether or not the defendants get to request discovery from the funders or even join them as parties, are often framed as questions of defendants’ due process rights.

Implication for the organizational structure of law firms and competitive landscape for legal services. Litigation finance, especially with the very recent advent of “portfolio funding”funding provided directly to law firms and tied to the performance of a portfolio of cases rather than the financing of single casesis changing the competitive landscape of law firms and is poised to change their organization, governance, and finance. For example, startup and boutique firms are now able to effectively compete with so-called Big Law and with established plaintiffs’ firms for high-end work, including work that may require investment by the firm (for example, contingency and qui tam cases). The availability of outside financing also vitiates the traditional workaround, developed when law firms had a monopoly over litigation finance, whereby law firms created consortia of firms, where only one or some provide lawyering and the others are brought onboard solely to provide financing. These changes will have cascading effects on how law firms finance and govern themselves.

Spillover effects to criminal defense finance. The financing of civil litigation, especially the modalities it takes, appears to have inspired modes of criminal defense funding. For example, following the development of crowdfunding of litigation funding, criminal defendants have followed suit with similar crowdfunding efforts—for example, Michael Cohen famously established a GoFundMe page for his legal fees. One may surmise that through sensitizing the public to litigation funding in the civil justice arena, with its attendant host of conflicts and other ethical challenges, conflict-ridden modes of funding in the criminal defense realm may become more palatable than they otherwise would have been.

The urgency of all these implications is amplified by the explosive growth of the industry, both nationally and globally; projections of further future growth; and anticipated expansion into new areas. Third-party funding, which until the beginning of this century was near-universally considered a crime, a tort, or at least an ethical violation, has erupted into the mainstream and has become a significant economic force to be reckoned with. Given the growing awareness around litigation finance, the fact that many areas of litigation, such as class and mass actions in the United States, have not yet been unlocked as “asset subclasses”—and the fact that various jurisdictions have only recently or not yet legalized the practice—by all estimates, litigation finance is poised to continue seeing robust growth in coming years.

Current regulatory developments

Overlapping but incohesive and undertheorized discourses on whether and in what way to require disclosure of litigation finance are taking place at the federal, state, and international levels. At the federal level, two battlegrounds over regulation of litigation funding are currently being waged: legislation that would target complex (class and mass) litigation at one level, and a possible change to the Federal Rules of Civil Procedure on the other. Various actors are taking part in this debate, including Congress and the federal courts. At the state level, legislatures and courts have also increasingly taken up the issue of litigation finance regulation. Unlike federal regulation, which tends to come up in the context of commercial litigation funding or in class and mass litigation, the focus at the state level is on consumer litigation funding. Finally, questions about how to regulate litigation finance are playing out internationally, including in places like Australia and the United Kingdom, which have formally legalized litigation finance, as well as in international arbitration. For a full treatment of these issues, see my full article here.

The variability of litigation finance scenarios

In addition to the many stakes at play, it is also important to understand the wide array of practices that fall under the rubric of “litigation finance” and the colorful cast of characters  involved. Ultimately, the variability of litigation finance scenarios militates against a bright-line rule approach and in favor of a balancing test.

The range of funding scenarios is both vast and variable.

In 2016 litigation finance exploded into the public consciousness when billionaire Peter Thiel’s funding of Hulk Hogan’s lawsuit against Gawker became public. Hogan (whose legal name is Terry Bollea), a retired professional wrestler, sued Gawker for, inter alia, invasion of privacy for publishing a video showing him having sex with a friend’s wife. In May 2016 reports surfaced that Thiel, a Silicon Valley mogul, funded the case. Reporting suggested specifically that he did so to satisfy a personal vendetta: Gawker had “outed” him as gay a decade earlier. Bankrolling Hogan’s claim was, according to news reports, his “revenge.” Revenge is indeed a dish best served cold—careful canvassing for a “good” plaintiff ultimately yielded a $140 million judgment in favor of Hogan. The large judgment pushed Gawker into bankruptcy. Because the funding in this case felled a news outlet, journalists’ interest was heightened and the case generated significant coverage in the press, which, in turn, led to increased calls to regulate the nascent but fast-growing litigation finance industry. Specifically, the case drew attention to the issue of whether the existence of funding agreements, the terms of any agreement, and/or the identity of any funders should be public information. And, to add even more complexity and intrigue to this example, according to Forbes magazine, Gawker executives “agree[d] to sell a minority stake in the company to Russian billionaire Viktor Vekselberg and his company . . . [T]he money was used, in part, to defend itself from ongoing litigation.” In other words, litigation finance was utilized on both sides of the “v.” with questionable funding sources and motivations on both cases.

Other ripped-from-the-headlines examples of funded litigations include Stormy Daniels’s crowdfunded litigation, the NFL concussion cases, and the #MeToo cases. Predatory lending practices on the consumer litigation finance part of the industry, often deployed when individuals of limited means have suffered a bodily injury and are seeking to finance personal injury cases, have also been in the news. In the international and transnational realm, attention grabbers include funding in the bet-the-company and bet-the-region mass torts litigation between thousands of Ecuadorian residents of the Amazon and the oil giant Chevron, or the atypical funding of the Anti-Tobacco Trade Litigation Fund by Bloomberg Philanthropies and the Bill and Melinda Gates Foundation, which funded low- and middle-income countries that were defendants in the international investment arbitration against tobacco companies. A domestic corollary can be seen in the funding by Iowa agricultural groups of the defense of three state counties against pollution charges:

In March of 2016, documents revealed … that agricultural groups—including the Iowa Farm Bureau Federation, the Iowa Soybean Association, the Iowa Corn Growers Association (ICGA) and the Iowa Drainage District Association—secretly funded the defense of the Iowa lawsuit through a 501(c)3 nonprofit, the Agricultural Legal Defense Fund. According to Internal Revenue Service documents … fertilizer and other agricultural company officials make up the bulk of the nonprofit’s officers and directors, including representatives from Smith Fertilizer, Monsanto Co., Growmark, Cargill, Koch Agronomics, DuPont Pioneer and the United Services Association.

The list goes on and on, but the key takeaway is that the range of funding scenarios is both vast and variable. Therefore, drafting disclosure rules is hard. For example, our legal system arguably should treat providing access to justice very differently than it does using the courts as a vehicle for revenge. Similarly, average Joes and Janes should receive more protection (which may require disclosure to courts) than sophisticated funded parties. And foreign governments and their agents acting as financiers may require a different level of scrutiny than a commercial entity, especially if the cases they invest in have national security or foreign relations implications.

Variables such as the motivation of the funding, type of funder, type of funded party, type of defendant, subject matter of the case, and forum all matter.

Similarly, companies who are funding cases against their competitors should be treated differently than professional funding firms funding similar cases for a monetary profit. Politically motivated funding, while distasteful to many, should be considered in light of First Amendment concerns not necessarily present in other types of cases. The consideration for disclosure in arbitration—generally a confidential forum, but also one where the decision makers are selected ad hoc by the parties—is different from courts that, in rule-of-law societies, are transparent and wherein judges are not jostling for their next appointment. And it appears as though the public may regard a news outlet as different from other types of defendants, especially if the litigation threatens to drive it out of business.

In other words, variables such as the motivation (and likely effects) of the funding, type of funder, type of funded party, type of defendant, subject matter of the case, and forum all matter. As such, simply classifying the funding by type does not dispose of the inquiry as to what manner and amount of disclosure, if any, is appropriate. For example, arbitrators, who usually have a private practice and serve clients when they’re not serving on a tribunal, may be more likely to have a conflict of interest than a judge, pointing in the direction of more disclosure in arbitration. However, arbitrators, unlike judges, are not empowered to protect the general public and are not expected or empowered to consider policy implications to the same extent as judges are, pointing in the direction of less disclosure.

Even in international arbitration, one size does not fit all. The funding of a commercial claim brought by a commercial party does not, on its face, suggest transparency of funding is warranted. But the funding of an international arbitration involving, say, a boundary dispute or exploration rights does call for transparency as to who is pulling the purse strings because of the public interest involved in such matters. At the beginning of the international arbitration process, disclosure of the identity of the funder aimed only at the tribunal may be all that is needed for conflicts-check purposes. Conversely, at the end of a case, when a panel needs to decide whether and to what extent to shift the cost of the proceeding to the losing party, disclosure of the funding terms to both the tribunal and the opposing party may be warranted.

The dizzying array of variables and variation suggests that (1) judges and arbitrators should be empowered to inquire into funding and (2) the extent and form of this important inquiry should be left to the discretion of the individual decision maker so she can engage in a thoughtful weighing of the intricate considerations as they pertain to the facts before her.

The proposal: A balancing test

Given all this complexity, to properly account for the role of litigation finance in proceedings before them, judges and arbitrators should be given broad discretion to undertake a contextual analysis and should not be hamstrung by the kinds of all-or-nothing or otherwise bright-line rules currently contemplated in many jurisdictions. Nor should they be left totally without guidance—even though, at present, it is understood that decision makers such as judges or arbitrators have the authority to order disclosure. In short, the proper approach of whether and what to disclose is a balancing test.

The main advantage of rules is their predictability. The main advantage of standards is fairness through context specificity.

To simplify a vast debate in legal philosophy, the distinction between rules and standards is as follows. Rules are rigid and constraining: “Once a rule has been interpreted and the facts have been found, then the application of the rule to the facts decides the issue to which it is relevant.” Conversely, standards provide discretion. They seek to guide rather than dictate an outcome. Further clarifying this distinction, Pierre Schlag writes:

In one torts casebook, for instance, Oliver Wendell Holmes and Benjamin Cardozo find themselves on opposite sides of a railroad crossing dispute. They disagree about what standard of conduct should define the obligations of a driver who comes to an unguarded railroad crossing. Holmes offers a rule: The driver must stop and look. Cardozo rejects the rule and instead offers a standard: The driver must act with reasonable caution.

There are tradeoffs when choosing one approach over the other, but a standard is ultimately preferable to a rule in this context. The main advantage of rules is their predictability. The main advantage of standards is fairness through context specificity. This is because rules give law content ex ante, whereas standards do so ex post. Further, as Louis Kaplow notes, “[r]ules typically are more costly than standards to create, whereas standards tend to be more costly for individuals to interpret when deciding how to act and for an adjudicator to apply to past conduct. . . . [W]hen individuals can determine the application of rules to their contemplated acts more cheaply, conduct is more likely to reflect the content of previously promulgated rules than of standards that will be given content only after individuals act.” A standard, therefore, will provide less guidance to litigation financiers, attorneys, and parties than a rule would and, in that sense, could create costly uncertainty. The lack of a rule could even allow for undesirable behavior as actors explore, through trial (no pun intended) and error, what is and is not permissible.

Notwithstanding the costs of uncertainty and potentially undesirable behavior, a standard is the right approach to litigation finance disclosure because the sector and its best practices are still evolving. Moreover, and more important, no single rule would be able to encompass the vast array of scenarios falling under the increasingly stretched definition of litigation finance. What rule, for instance, could adequately account for the difference between a corporate plaintiff whose legal costs are partially covered by a sophisticated investor who has arranged with the corporation’s law firm to fund a portfolio of cases, on the one hand, and, on the other, a fired factory worker whose civil rights case is funded by a small startup focused on algorithm-driven investments in claims worth less than $1 million? And yet both of those are examples of litigation funding.

A standard, and more specifically, a particular kind of standard, is therefore called for: a balancing test. A balancing test recognizes that, normatively speaking, litigation funding is, ex ante, neither “good” nor “bad,” nor is its regulation (here, in the form of disclosure) “good” nor “bad.” It is context specific. This pragmatism, inherent to the judicial activity of balancing, is the reason why, while this legal technique has its detractors, as Lawrence Solum has blogged, “[b]alancing tests are ubiquitous in American law. From the Due Process Clause to the Freedom of Speech and from the federal joinder rules to personal jurisdiction, U.S. law makes the outcome of legal disputes dependent on the balancing of various interests and factors.”


Whether and how a litigation is funded implicates public and private interests. Specifically, the public has an interest in such matters as access to justice, the development of the law, the cost of civil justice, the level of litigation in society, whether the “haves” systemically come out ahead in litigation, the length of time litigation takes, the extent of discovery the parties can afford/inflict, and the purposes for which the public good that is the justice system is being used (for example, justice, compensation, third-party profits, revenge, politics, policy, and so forth). A special subset of public interest is the interests of the forum itself—usually, judicial economy. Because the manner in which effects on the courts often feature in policy debates surrounding litigation finance, and due to the prevalence of arbitration funding, which raises a separate set of concerns, I treat forum interests as a separate category. Finally, the private litigants, both the funded plaintiffs and the defendants who face them, have private interests that must be weighed as well. Some of those overlap with the public interests mentioned above—plaintiffs, for instance, have a stake in improved access to justice, and plaintiffs and defendants both have an interest in efficient proceedings—but others exist independently. Any test relating to a component of litigation—its finance—should weigh all these categories of interests.

A balancing test recognizes that, normatively speaking, litigation funding is, ex ante, neither “good” nor “bad.”

Public interests. The extremely high cost of litigation, which puts justice out of reach for most average Joes and Janes, is the starting point for many a course in first-year civil procedure. The public has an interest in reducing barriers to accessing the courts. Indeed, the global litigation finance industry first took hold in Australia and the United Kingdom when each jurisdiction legalized the practice as part of national access-to-justice reforms (see “A Brief History of Litigation Finance”). Disclosure requirements that are too cumbersome may depress the level of available funding, raise its costs, or both, diminishing the benefits litigation finance contributes to access to justice.

The expense of litigation imposes an additional cost—by increasing the homogeneity of parties, it also increases the homogeneity of the issues presented to the courts. This means that some areas of the law get more judicial attention than others and consequently benefit from more iterative and nuanced development. The public has an interest in access to justice generally, as well as an independent interest in the development of areas of law that may be less keenly pursued by the deep-pocketed litigants who can best afford to go to court. Litigation finance has the potential to add significant diversity to the pool of those able to afford to litigate and, therefore, to increase the diversity of issues before the courts.

But it holds the potential to do more than that. As I have argued elsewhere, by aligning structurally weak social players who make infrequent use of the courts (one-shotters) with powerful funders who make repeated use of the court system (repeat players), litigation funding may alter the bargaining dynamics between the litigating parties in favor of disempowered parties. It may thereby enable the litigation process to serve as a redistributive tool by society’s have-nots as opposed to a (perhaps unwitting) guardian of the status quo in favor of society’s haves. It may, in other words, allow these traditionally disempowered parties to “play for rules”—to affect the content of legal rules determined by the courts.

In addition to the general barrier to access to justice imposed by excessively expensive litigation, the high cost of particular parts of the process, especially discovery, opens the door to gamesmanship. The party with more resources has considerable leeway to decide whether, for instance, to “bury” the opposing party with document production or to overwhelm it with discovery requests. Over time, this has contributed to the assessment that the better-resourced party has an undeservedly higher chance of prevailing in any given case, undermining the strong public interest in having courts that offer a level playing field. Litigation finance can redress that imbalance by equalizing the resources of parties, thus making gamesmanship around costs a less effective strategy.

Litigation funding may alter the bargaining dynamics between the litigating parties in favor of disempowered parties.

Not all public interests go the way of litigation finance, however. For instance, courts should be a place for the resolution of disputes, not a source of business profit. This is not to say that plaintiffs with legitimate claims should not be able to secure financial settlements or damages awards just because they need to pay financing costs to do so. (In this sense, financing litigation is the same as financing education, health care, and so forth through various forms of financing that carry fees). But it does mean that if in any single case, portfolio of cases, or category of cases, most of the recovery ultimately goes to the financiers (be they lawyers or third-party funders) rather than to compensate injured parties, deter bad behavior, or promote the traditional goals of the public good that is the civil justice system, judges can and should be able to take such factors into consideration, as they already do—for instance, when supervising class action settlements. And this, in turn, may mean looking into the funding arrangements, including the financial terms, and if need be, determining who is the real party in interest in the case.

In the same vein, litigation finance may, in any given case, stretch the already lengthy timeline of litigation. The efficiency of the justice system is of considerable public interest. If financed parties use the resources available to them to draw out a case that might otherwise have been withdrawn or settled in order to extract more profit, especially when a finance agreement allows a funder to “vote” against settlement, the system risks becoming more inefficient and expensive for everyone. In other countries, especially those with civil law systems, judges have much more discretion than do American judges, constrained as they are by the Seventh Amendment, to throw out a case at almost any stage of the proceedings. The lesser discretion enjoyed in that regard by U.S. judges increases the danger that funded parties and those backing them could impose inefficiencies on the process in their quest for profits.

Another, less obvious element of this analysis is the public interest in data about this brand-new game-changing practice. As Eric Helland et al. have written, in the early days of the contingency fee in the 1920s:

[T]he bar and bench in New York City became increasingly concerned about the conduct of contingent fee lawyers. In 1928, the bar associations for New York City, Manhattan, and the Bronx petitioned the Appellate Division of the First Judicial Department of the New York Supreme Court, which had supervisory powers over state courts in Manhattan and the Bronx, to conduct an investigation. The Appellate Division ordered Justice Wasservogel to produce a report.

The findings of this report, quoted in Helland et al., led to a recommendation that attorneys be required to file “a copy of the retainer by which the attorney for the plaintiff was engaged, and also an affidavit by such attorney stating that the case was not solicited directly or indirectly, and setting forth how the retainer was obtained.”

The efficiency of the justice system is also of considerable public interest.

The First Department implemented some of the report’s recommendations, among them a requirement that plaintiffs’ lawyers file so-called retainer statements that set out the terms of the attorney’s compensation. Fast-forward to 1955, and Justice Isidore Wasservogel was once again commissioned to produce a report on contingent fee practices and consider capping such fees.This second report was based on the retainer statements mandated by the 1929 regulations, which were mined and resulted in a finding that 60 percent of retainers specified that 50 percent of any recovery went to the lawyers. The ultimate policy outcomes of this second, data-based report were that the First Department issued regulations that capped contingency fees in actions for personal injury or wrongful death at one-third. The new regulations further required “that lawyers file with the court a ‘closing statement’ within fifteen days of receiving any money on behalf of a client, whether in judgment or settlement.” The closing statement records “[t]he gross amount of the recovery, . . . [t]he taxable costs and disbursements, . . . [t]he net amount of the recovery actually received by the client, . . . [t]he amount of the compensation actually received or retained by the attorney.”

In other words, what is now a core tenet of contingency fee practice in personal injury cases (at least in New York), namely a cap on attorney fees, was a direct outcome of data gathering and data-based policymaking. The need for data in the context of litigation funding is particularly acute because of a feature of the commercial litigation funding industry universally overlooked in the disclosure debate: funding agreements almost always contain arbitration clauses. This means that the public—be it consumers or legislatures—has no way to understand the reality of the practice and engage in fact-based consumerism, negotiation, and regulation.

With this nonexhaustive list of public interests in place, let us turn to look at some of the private interests at play. Here, too, the discussion is not meant to be exhaustive.

Private interests. The private parties to consider are the litigating parties—including individual plaintiffs, classes, and defendants—and the funders. (As a side note, another potential category of possible private parties whose interest should be weighed but are beyond the scope of this article are the investors who invest in litigation finance. These increasingly include pension funds, university endowments, and sovereign wealth funds.)

Plaintiffs’ interests include access to justice and the wherewithal to withstand the long and expensive process that is litigation on the individual-case level (as distinct from the overall access-to-justice and average-litigation-length public concerns discussed in the previous section). Plaintiffs’ interests also include an interest in privacy as it relates to their finances. As I like to tell my students to illustrate this point, whether my mother-in-law is funding my slip-and-fall case and what kind of strings she attaches to such funding has never been considered relevant in a litigation. That status quo is a good place to start the analysis, with deviations requiring affirmative justification.

Judges and arbitrators should not be left to consider in the abstract whether disclosure increases access to justice or diversity in legal issues.

Of course, defendants have countervailing interests, such as being able to peruse avenues reasonably calculated to lead to material information that may help expeditiously and fairly resolve the dispute and a right to know, and confront, the real party in interest in the case they are defending.

Finally, funders’ interests should also weigh in the balance. These include intellectual property in the financial products they produce and a desire to keep the costs of doing business, assuming a for-profit funder, low. The latter means a legitimate concern in avoiding being dragged into the discovery process, being joined as a party, or otherwise being the target of strategic satellite litigation.

Forum interests. In addition to avoiding conflicts of interest on the part of the judges, which is a basic tenet of the rule of law, core concerns for the courts and the judicial system as a whole include the efficient resolution of disputes and the overall integrity of the system. These, too, may point toward limiting satellite litigation relating to litigation funding in the form of seeking discovery from funders or joining them as codefendants for purely tactical reasons, practices that may unnecessarily complicate and raise the cost of litigation. But it also includes empowering judges to figure out, through disclosure, whether the funding terms inappropriately incentivize lengthening the litigation timeline as well as whether the funding arrangement (for example, the composition of a portfolio) incentivizes the filing of prima facie nonmeritorious claims. Indeed, some market participants have suggested that some law firms and/or corporations are asking financiers to accept weak cases as part of a portfolio if they wish to obtain the right to finance the entire portfolio (or, in other words, if they wish to do the functional equivalent of taking an equity stake in the firm). In the same vein, the judicial system has an interest in preventing arrangement types—such as highly synthetic derivatives backed by contingent (or even speculative) litigation proceeds—that are likely to flood the courts with nonmeritorious cases.


Each of the interests discussed above can be mapped onto one or more concrete factors in any given litigation or arbitration. This is important because judges and arbitrators should not be left to consider in the abstract whether disclosure, as a general concept, increases access to justice or diversity in legal issues, for example. Instead, judges should be provided with guidance for how those interests might play out in specific litigation scenarios depending on their profile as understood in light of the variables described above. The following subsections describe these specific factors.

The profile of the plaintiffs and their motive for seeking funding. A plaintiff’s profile and reasons for seeking funding are important because they bear on the extent to which interests such as access to justice are at stake. Funded plaintiffs may be consumers, startup companies, established corporations, developing and developed nations, a lead plaintiff in a class action, or the class itself, to name but a few examples. The degree to which disclosure-based court involvement and the rigors of the adversarial system should be brought to bear may differ on the basis of such characteristics of the funded plaintiffs.

For good and bad, commercial funders are not likely to be concerned with promoting the public interest.

To further elaborate, an established corporation might seek litigation funding as a form of corporate finance. In this scenario, one might imagine a sophisticated corporation using third-party litigation funding as a way to shift litigation risk, to manage its balance sheet, or to obtain operating capital during a time when litigation otherwise limits access to capital. Conversely, parties who might otherwise lack the resources to withstand long and expensive trials, or even to bring their claims at all, may seek financing in order to be able to access the civil justice system. These cases should not be treated alike for regulatory purposes. Further, consumers are generally understood to require a higher level of protection than sophisticated entities. Similarly, members of a class are understood to need more court protection than, perhaps, both of the preceding categories.

Funder’s profile and motivation. Dispassionate for-profit litigation finance firms, secretive hedge funds, wealthy individuals, family members, nonprofits, law firms providing pro bono services, political action committees (PACs), foreign governments (through sovereign wealth funds or otherwise), and “crowds” via crowdfunding platforms are all examples of litigation funders active in today’s market. These descriptors hint at the wide variety of possible motivations for funding: making a profit, affecting rule-change for ideological or commercial reasons, assisting the indigent or a family member, hindering the competition, furthering foreign policy, opening up the courts to underrepresented claims or claimants, privately enforcing the law—these and more may all be motivations for funding. Some motivations are, arguably, more worthy of protection than others. To take an extreme example, consider the firestorm that followed the Gawker case, where Hogan’s backer seemed to be interested, troublingly, chiefly in revenge and where his target was a member of the Fourth Estate.

To make explicit what the foregoing illustration highlights, the type-of-funder factor overlaps, but is not coextensive with, the funders’ motivation. The commercial funder envisioned in the previous paragraph will most likely be somewhat constrained by reputational considerations, wanting to be known for screening and backing good cases and providing decent funding terms. It is also likely to be interested in profitable cases that will usually correlate with meritorious ones and will most likely be uninterested in vendettas, politics, foreign relations, and the like. For good and bad, it will also not be concerned with promoting the public interest.

Conversely, not-for-profit funders may be concerned with (their version of) the public interest, but, of course, what constitutes and furthers the public’s interest is often a contested matter. A sovereign wealth fund or a foreign government may seek to advance foreign policy or military goals. A one-shot funder may be interested in profit, the hindrance of a competitor, revenge, fame, or politics. A PAC or politically motivated wealthy individual will probably wish to advance a political agenda. A “crowd” may be a group of people motivated by justice, politics, or profit. Interestingly, as the reaction to the Gawker case illustrates, maintenance—funding without a profit motivation—may be more problematic than champerty—funding for a profit—even though much of the contemporary consternation around the rise of litigation finance focuses on “profiteering” from others’ claims and from the justice system.

We should leave it to the discretion of the judge whether suspicion or evidence of certain motivations should factor into the decision of whether and how much to disclose of the funding arrangement. Similarly, the weight to be given to the type of funder, which inter alia hints at motivation, is also a factor to weigh in the balance.

The case type and the forum. Individual litigation, class actions, mass actions, or arbitration (whether domestic or international, and in the latter case, of the commercial or investment law variety) implicate completely different issues that may call for court supervision and public interest–based transparency as to how a case is funded, by whom, in what manner, and for what goal. For example, class and mass cases, wherein the lawyers rather than the clients drive and control the case, are very different from individual claims. In the class action context, in particular, members of the class are unnamed and may even be unknown. Traditionally, courts exercise more supervision over such litigation, including, critically, settlements, because of the myriad conflicts they entail and the scale of threat they present to defendants. The presence of third-party funding, in lieu of or in combination with attorney funding, is likely to exacerbate conflicts of interest in this context, so court involvement should be heightened as compared with individual cases.

Repeat players like corporations, insurance companies, and third-party funders can and do “play for rules.”

In another example, arbitration (excluding of public international law disputes) is a private process conducted in a private forum. By its very essence, private adjudication behind closed doors involves less transparency than litigation in open courts. Further, arbitrators—privately appointed ad hoc to resolve a specific dispute based on the parties’ agreement that they do so—are not an arm of the government entrusted with and required to safeguard the public interest in the same manner judges are. Arbitrators, therefore, may need to be more circumspect with the goals they wish to further in imposing disclosure. But even here, more granularity and nuance are required than simply identifying the case type or the forum. For example, it is understood that international investment arbitration, in which a foreign investor sues a government for violation of a bilateral investment treaty, is a form of private adjudication of public disputes and as such arbitrators sitting in such matters must hew more closely toward both transparency and safeguarding public interests.

The subject matter. Funders have shown interest in cases spanning areas such as contracts, torts, antitrust, intellectual property, consumer protection, qui tam, individual and mass torts, human and civil rights, divorce, and international commercial and investment law—to name some common examples. The degree of disclosure desirable in these disparate areas of law is arguably different.

One can easily argue, for example, that transparency with respect to those controlling funding, influencing legal argumentation, strategy, settlement, and precedent making, is much more important in international investment disputes, which are governed by public international law, involve the distribution of public money into private hands, and often adjudicate the validity of the conformity of regulation and legislation in the areas of environmental protection, workers’ rights, consumer protection, with sovereigns’ international obligation than it is in international commercial arbitration involving contracts between private parties. Similarly, divorce often implicates the third-party interests of minors. Therefore, who influences the course of such litigation and its outcome, and the court’s ability to bring such potentially real party in interest forth, is different than in, say, contract or even tort disputes.

Potential effect on the development of the law. Famously, repeat players like corporations, insurance companies, and third-party funders can and do “play for rules,” as legal scholar Marc Galanter has written. As I have argued elsewhere, “While rule change is a public good, it may be profitable for litigation funders to invest in rule change. This is because they manage a portfolio of litigation and, in particular, because they invest repeatedly and sequentially in certain categories of cases.” Investing in precedent, in other words, is as valuable for repeat players as is lobbying for legislative change.

Not every case has the potential to set precedent and change the course of the law. But when a judge believes the case before her is of such nature, it is reasonable to suggest he or she takes that factor under consideration when deciding whether, to what extent, and to whom disclosure is warranted. Under such circumstances, probing, for example, who controls the litigation—whether it is the client or the funder—takes on a heightened significance.

The public interest in transparency could be one goal of disclosure.

The structure of the financing. The way financing is structured is, perhaps surprisingly, also an important factor to consider when deciding what degree of involvement by the decision maker is warranted—for example, one may invest in a case passively or actively. A funder may never get involved after initially vetting a case, requiring only to be informed of material developments. On the other end of the spectrum, a funder may be very involved, including in selecting the lawyers, dictating strategy, and controlling settlement decisions. Historically, the greater the control by the funder, the greater the suspicion and protection exercised by courts (through the intricacies of champerty).

By the same token, the funding of individual cases involves different considerations than does the rapidly growing funding of portfolios of cases. In the latter investment structure, the funders often contract directly with the law firm, and the plaintiffs may not even be aware that their cases are being funded. They may therefore not be aware of resulting conflicts of interests, such as how the interest formula may affect lawyers’ recommendation on whether, when, and for how much to settle.

Here is yet another example from this more obscure and less self-evident factor: whether a funder is reserving the right to create derivatives tied to the litigation proceeds may have systemic effects on the courts and may therefore implicate a public interest that is otherwise not common with respect to how one finances her case. To understand whether such a securitization prospect exists, decision makers may need to see whether certain terms—such as a right to assign the claim or a portfolio of claims—are included in the funding agreement, especially if the agreement is a standard form developed by funders.

More broadly, certain structuring may render a litigation contract a security. In such a scenario, a whole host of securities regulations may come to bear. And there may be additional crossover regulation implicated in other funding scenarios, such as when a litigation is crowdfunded, since crowdfunding is subject to its own set of regulations.

The foregoing highlights the fact that various regulators (not only courts) may have an interest in the terms under which litigation is funded, the structure that funding takes, and the systemic effects those might have on the civil justice system as a whole as well as on the investing public.

The purpose of the contemplated disclosure. The purpose for which disclosure is sought—which may evolve and change over the course of the litigation—can and should also affect not only whether disclosure is warranted and to whom but especially which part of a funding agreement should be disclosed.

If the purpose of disclosure is for a judge or arbitrator to check for conflicts, disclosing the identity of the funder (and possibly its parent entities) may suffice and could potentially be done in camera. If the purpose is to determine whether the funder is a real party in interest, which the court might wish to subject to its authority, or a party that should be granted a right to intervene, then the level of control obtained by the funder—which may be embedded in a host of provisions in the funding agreement—may be relevant. In another example, if a party (for example, a member of a class) or the court suspects a funder is engaged in the unauthorized practice of law, disclosure of the role afforded to the funder in the funding agreement will legitimately be in question and may possibly come up through a so-called intervention. When supervision of a settlement is in question, both the degree of control and the funding formula may be fair game for scrutiny by a judge or members of a class. Financial terms may also be relevant to determination of late-stage issues such as whether and how many fees to shift at the end of a case.

The proposed balancing test may be deployed at any stage of the litigation or arbitration.

The public interest in transparency with respect to understanding the scope and nature of the new, growing, and game-changing phenomenon of litigation finance could be another goal of disclosure. The purpose of requesting disclosure may be of an altogether different nature: abusive disclosure. In this case, requests for disclosure aimed at dragging a funder into discovery disputes or even into the main litigation as a party in order to prolong the litigation and raise its costs; to seek to find out the plaintiff’s “reservation point,” at which it will settle not on the merits but because funding has been exhausted or for some other, non-merit-based reason; and to glean the type of proprietary financial products a funder has developed for competitive reasons that have nothing to do with the case at hand.

The procedural posture of the case. The purpose for which disclosure is sought, as the discussion in the preceding subsection implicates, bleeds into another factor: the procedural posture of a case. Funders have been known to step in and invest in a case before it is filed, after filing but before trial, after trial but before appeal, and after a final judgment or award has been rendered at the enforcement or collection stage. The procedural posture can and should affect disclosure decisions. For example, at the enforcement or collection stage, financial or control terms, which may have been relevant earlier in the proceedings, may not seem to be of any relevance anymore; still, the nature of the case and of the parties may continue to be relevant. And in another hypothetical, the very fact of funding, but nothing more, may be all that is needed when deciding whether a contender for the role of class counsel is “adequate” as required by Rule 23 of the Federal Rules of Civil Procedure.

An iterative inquiry

The proposed balancing test may be deployed, with appropriate modifications for timing and context and with due regard to cost, at any stage of the litigation or arbitration. The analysis could even be repeated at different stages of the litigation because, as the preceding section explains, the applicable factors may be different leading to a different result as to whether, to what extent, and in what form to order any disclosure.

Disclosure is a process, not an event.

For instance, in an international arbitration, the fact and identity of the funding alone may be sufficient because the question at hand for a tribunal to decide is whether conflicts of interests exist. But at the end of the process, if the case has not settled, the tribunal may need to see the financial and control terms in order to decide whether and how much of the fees to shift under the “loser pay” convention. Financial provision—for example, how much funding has been committed and what formula is used to divide the litigation proceeds—is regarded as especially sensitive by many plaintiffs and funders and particularly open to strategic gaming by defendants who can “game” the litigation, aiming to spend down the committed amount or trigger acceleration of interest. The option to reevaluate can help prevent overdisclosure early on, which may prove unnecessary if a case settles early.

Disclosure calibration tools

It should be evident that disclosure is a process, not an event, and that decision makers are faced with a spectrum of options, not with a “zero-sum” decision. At one end of the spectrum, a judge or an arbitrator may require disclosure in camera of the existence of funding only, with or without the mere identity of the funder included. At the other end of the spectrum is the disclosure to the court and the opposing party, and filing for the public record of the entire agreement. In the middle of the spectrum are such tools as the disclosure of certain provisions only and the redaction of others or the filing of a short, check-the-box closing statement. A decision maker can create further gradations by either declining a disclosure without prejudice so that the matter can be revisited as the litigation progresses or, conversely, imposing a continuing duty to disclose so that if the existence of funding or the identity of funders changes throughout the life of the litigation, a plaintiff is under an obligation to so disclose.

In addition to regarding the disclosure decision as one that can be revisited later in the process, as suggested above, decision makers can make use of in camera and/or ex parte submissions, redactions, “attorney’s eyes only” designations, the filing of all or parts of the funding agreement under seal, or requests of attorneys to certify representations about what an undisclosed agreement does or does not contain. In short, the basic tools generally available to moderate undesirable effects of discovery are all available in this context as well.

The order regarding third-party contingent litigation financing in re: national prescription opiate litigation

A commendable example of a nuanced judicial approach that appears to have taken into account the type of case, the funded parties, the procedural posture, and the possible deal structure (and its effects on conflicts of interest), and that made use of tools such ex parte submissions and certification by the attorneys, is an order by Judge Dan A. Polster of the U.S. Northern District of Ohio, presiding over a multidistrict litigation (MDL) case.

Preliminarily, it should be noted that Judge Polster both broadly defined “third-party contingent litigation financing” as “any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of an MDL Case, by settlement, judgment, or otherwise” and “surgically” exacted that the term does not include “subrogation interests, such as the rights of medical insurers to recover from a successful personal-injury plaintiff.”

Next is the disclosure regime tailored by Judge Polster to the case at bar. “Absent extraordinary circumstances,” he ordered that “the Court will not allow discovery into [third-party contingent litigation] financing” but “any attorney in any MDL Case that has obtained 3PCL financing shall:

  • share a copy of this Order with any lender or potential lender.
  • submit to the Court ex parte, for in camera review, the following:

(A) a letter identifying and briefly describing the 3PCL financing; and

(B) two sworn affirmations—one from counsel and one from the lender—that the 3PCL financing does not:

  1. create any conflict of interest for counsel,
  2. undermine counsel’s obligation of vigorous advocacy,
  3. affect counsel’s independent professional judgment,
  4. give to the lender any control over litigation strategy or settlement decisions, or
  5. affect party control of settlement.”

In so ordering, without handing defendants an informational windfall, the court thus placed the burden of safeguarding legal ethics despite the complications of third-party funding, and the potential liability in case of a failure to meet it, on the gatekeepers with the best view of whether problems exist or arise. And it also placed the lawyers, existing funders, and potential funders on notice that the watchful eye of the court is upon them.


In sum, the quest for a disclosure rule has set policymakers on a wild goose chase that has led some to avoid or punt on the issue all together, while leading others to propose disclosure regimes that are either over- or underprotective of the multiple stakeholders in this regulatory debate—namely, plaintiffs, defendants, funders, the public, and the courts—and their varying complex and shifting interests. By reminding the legal community of the availabilities of standards, especially balancing tests, and by fleshing out the specifics of what such a balancing test might consist of in this context, I have endeavored to break the Gordian knot of the difficult question of whether and how to structure a disclosure regime for litigation finance.

Maya Steinitz is a professor of law and Bouma Family Fellow of Law at the University of Iowa College of Law and an international arbitrator.