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Judge Shira A. Scheindlin Delivers the Keynote Address at LF Dealmakers

The LF Dealmakers conference kicked off this morning with a keynote address from Judge Shira A. Scheindlin. The address was titled “Litigation Finance: Survey of a Shifting Landscape,” and covered four main issues: ethics, fee sharing, disclosure regulations and privileged communications between funder and attorneys.

Judge Scheindlin began on the topic of ethical issues, the three most common of which boil down to competence, confidentiality and truthfulness. She explained the common pitfalls that funders need to be aware of, including how different states treat confidentiality issues, for example. Scheindlin asserted that the ethical concerns most have about the industry do not pose any serious threat to its future growth potential.

In terms of fee sharing, Scheindlin pointed out how bar associations play a critical role in drafting and interpreting codes of conduct, which are then adopted by the states. She noted the New York bar’s opinion on Rule 5.4, which found that litigation funding violates the fee sharing restriction. This was a controversial opinion, for obvious reasons. In fact, there was such an outcry, that the city bar created a working group around litigation funding, to make recommendations around ethics and principles. The working group addressed the realities of litigation funding, and whether disclosure of funding should be required in litigation and arbitration.

In the end, the working group offered two proposals. The first being that the funder can share fees with the client, provided that the funder remains independent and does not influence case decisions by participating in the claim. The second being that the funder can participate in the claim, if it benefits the client. And the client can provide informed consent to disclose confidential information to the funder (Scheindlin noted that she favors the second proposal).

Neither proposal has yet been adopted, though Judge Scheindlin believes Rule 5.4 regarding fee sharing will be modified in NY, based on these recommendations. It remains to be seen which proposal will win out.

On the issue of control, which is related to fee sharing, Scheindlin explained that many funding agreements give the funder the right to approve the selection of counsel.  Some may view this as control, but really the funders just want to ensure the counsel is adequate to handle the claim.

In terms of disclosure, Scheindlin pointed out how 12 states have passed legislation on litigation funding, with another 11 proposing legislation. Most involve consumer funding. Only Wisconsin specifically includes financing of commercial claims. So it’s clear the focus is on consumer cases, but no one knows where this will go.  There is a robust debate on the subject of disclosure, with many industry opponents pushing to reveal the identity of the funder, as well as the terms of the funding agreement. There is a lot of disagreement on the various avenues that can be taken regarding the issue of disclosure, so it will be interesting to see how this issue will develop.

On privilege, Scheindlin noted the common interest exception in regard to sharing privileged information, and how courts are split as to whether this applies to litigation funders. Is a shared commercial interest the same as a common legal interest? This is the question at hand.  However, most courts have found that privileged documents are protected by work product, where a funder is concerned. Ultimately, though, an NDA or confidentiality agreement is likely needed here to ensure that work product applies.

So while there are plenty of minefields, in terms of issues that could upend TPLF, Judge Scheindlin feels confident that funding will prevail in the end. To quote Judge Scheindlin: “There are always those who will oppose new ways of doing things.  Those who seek to restrict TPLF… are in my opinion, merely afraid of the level playing field that such funding creates. I don’t think they will succeed. TPLF is now an accepted part of the legal landscape, and is here to stay.”

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Announcements Commercial Regulatory Issues

More Than 100 Companies Sign Letter Urging Third-Party Litigation Funding Disclosure Rule for Federal Courts Ahead of October Judicial Rules Meeting

By Harry Moran |

In the most significant demonstration of concern for secretive third-party litigation funding (TPLF) to date, 124 companies, including industry leaders in healthcare, technology, financial services, insurance, energy, transportation, automotive and other sectors today sent a letter to the Advisory Committee on Civil Rules urging creation of a new rule that would require a uniform process for the disclosure of TPLF in federal cases nationwide. The Advisory Committee on Civil Rules will meet on October 10 and plans to discuss whether to move ahead with the development of a new rule addressing TPLF.

The letter, organized by Lawyers for Civil Justice (LCJ), comes at a time when TPLF has grown into a 15 billion dollar industry and invests funding in an increasing number of cases which, in turn, has triggered a growing number of requests from litigants asking courts to order the disclosure of funding agreements in their cases. The letter contends that courts are responding to these requests with a “variety of approaches and inconsistent practices [that] is creating a fragmented and incoherent procedural landscape in the federal courts.” It states that a rule is “particularly needed to supersede the misplaced reliance on ex parte conversations; ex parte communications are strongly disfavored by the Code of Conduct for U.S. Judges because they are both ineffective in educating courts and highly unfair to the parties who are excluded.”

Reflecting the growing concern with undisclosed TPLF and its impact on the justice system, LCJ and the Institute for Legal Reform (ILR) submitted a separate detailed comment letter to the Advisory Committee that also advocates for a “simple and predictable rule for TPLF disclosure.”

Alex Dahl, LCJ’s General Counsel said: “The Advisory Committee should propose a straightforward, uniform rule for TPLF disclosure. Absent such a rule, the continued uncertainty and court-endorsed secrecy of non-party funding will further unfairly skew federal civil litigation. The support from 124 companies reflects both the importance of a uniform disclosure rule and the urgent need for action.”

The corporate letter advances a number of additional reasons why TPLF disclosure is needed in federal courts:

Control: The letter argues that parties “cannot make informed decisions without knowing the stakeholders who control the litigation… and cannot understand the control features of a TPLF agreement without reading the agreement.” While many funding agreements state that the funder does not control the litigation strategy, companies are increasingly concerned that they use their growing financial leverage to exercise improper influence.

Procedural safeguards: The companies maintain that the safeguards embodied in the Federal Rules of Civil Procedure (FRCP) cannot work without disclosure of TPLF.  One example is that courts and parties today are largely unaware of and unable to address conflicts between witnesses, the court, and parties on the one hand, and non-parties on the other, when these funding agreements and the financial interests behind them remain largely secret.

Appraisal of the case: Finally, the letter reasons that the FRCP already require the disclosure of corporate insurance policies which the Advisory Committee explained in 1970 “will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The companies maintain that this very same logic should also require the disclosure of TPLF given its growing role and impact on federal civil litigation.

Besides the corporate letter and joint comment, LCJ is intensifying its efforts to rally companies and practitioners to Ask About TPLF in their cases, and to press for a uniform federal rule to require disclosure. LCJ will be launching a new Ask About TPLF website that will serve as a hub for its new campaign later this month.

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Commercial People Moves

Mesh Capital Hires Augusto Delarco to Bolster Litigation Finance Practice

By Harry Moran |

In a post on LinkedIn, Mesh Capital announced the hiring of Augusto Delarco who has joined the Brazilian firm as a Senior Associate, bringing a “solid and distinguished track record in complex litigation and innovative financial solutions” to help develop Mesh Capital’s Litigation Finance and Special Situations practices. 

The announcement highlighted the experience Delarco would bring to the team, noting that throughout his career “he has advised clients, investors, and asset managers on strategic cases and the structuring of investments involving judicial assets.”

Delarco joins Mesh Capital from Padis Mattars Lawyers where he served as an associate lawyer, having previously spent six years at Tepedino, Migliore, Berezowski and Poppa Laywers.

Mesh Capital is based out of São Paulo and specialises in special situations, legal claims and distressed assets. Within litigation finance, Mesh Capital focuses on “the acquisition, sale and structuring of legal claims, covering private, public and court-ordered credit rights.”

Case Developments Commercial

Delaware Court Denies Target’s Discovery Request for Funding Documents in Copyright Infringement Case

By Harry Moran |

A recent court opinion in a copyright infringement cases has once again demonstrated that judges are hesitant to force plaintiffs and their funders to hand over information that is not relevant to the claim at hand, as the judge denied the defendant’s discovery request for documents sent by the plaintiff to its litigation funder.

In an article on E-Discovery LLC, Michael Berman analyses a ruling handed down by Judge Stephanos Bibas in the United States District Court for the District of Delaware, in the case of Design With Friends, Inc. v. Target Corporation. Design has brought a claim of copyright infringement and breach of contract, and received funding to pursue the case from Validity Finance. As part of its defense, Target had sought documents from the funder relating to its involvement in the case, but Judge Bibas ruled that Target’s request was both “too burdensome to disclose” and was seeking “information that is attorney work product”.

Target’s broad subpoena contained five requests for information including Validity’s valuations of the lawsuit, communications between the funder and plaintiff prior to the funding agreement being signed, and information about the relationship between the two parties.

With regards to the valuations, Judge Bibas wrote that “while those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover,” which in the court’s opinion constitutes “legal analysis done for a legal purpose”. He went on to say that “if the work-product doctrine did not protect these records,” then the forced disclosure of these documents “would chill lawyers from discussing a pending case frankly.”

Regarding the requests for information about the relationship between Design and Validity, Judge Bibas was clear in his opinion that these requests were disproportionately burdensome. The opinion lays out clear the clear reasoning that “Target already knows that Validity is funding the suit and that it does not need to approve a settlement”, and with this information already available “Further minutiae about Validity are hardly relevant to whether Target infringed a copyright or breached a contract years before Validity entered the picture.”The full opinion from Judge Bibas can be read here.