At a two-day litigation finance conference in Houston this week, organizers were quick to explain the importance and purpose of the gathering: promoting the best practices for a young industry that currently has little oversight or regulation.
Mani Walia of Siltstone Capital gave opening remarks at the second annual LITFINCON Wednesday, telling the crowd — comprised of representatives from 127 companies and nine countries — that stakeholders need to work together to ensure “no bad apples impede our mission, which is improving access to justice.”
He credited his mentor and former colleague, the late Steve Susman of Susman Godfrey, as having invented “the concept of investing in litigation.” Walia quoted advice he said Susman had offered to the industry in 2019, that all stakeholders are responsible for ensuring third-party financing promotes access to justice “regardless of gains, profits or wins.”
Some panel discussions during the conference focused on the economics of litigation finance and how to better educate law firms about the opportunities the industry can provide.
But others, including a panel of judges and another of law professors, dove into the ethics of litigation finance, the courtroom impact it has and what growth in the industry means for the legal profession. A lack of case law on the topic meant the conversation veered into the philosophical among both the jurists and the academics.
A judicial panel — featuring U.S. District Judges Alan Albright and Charles Eskridge, retired U.S. District Judge Nancy Atlas and Harris County District Court Judge Michael Engelhart — focused on ethical issues and the responsibilities judges have in discovery fights over the disclosure of funding arrangements.
The judges confessed they had little or no firsthand courtroom experience with litigation funding, but Judge Atlas discussed her participation on a task force that issued a 2020 report for the American Bar Association regarding best practices for third-party litigation funding.
“Be very careful not to be greedy,” she said, recounting the key advice. “And be very careful not to overstep into the realm of control and management of the suit.”
The panelists delved into what type of regulations could be coming for the industry, noting that in 2021 the Litigation Funding Transparency Act was filed in congress. The bill failed to pass but would have required plaintiff’s lawyers disclose litigation funding arrangements and the funders in class actions and multidistrict litigation.
A standing order in the Northern District of California requires disclosure of third-party funding agreements in class actions.
Speakers also referenced a standing order from Chief U.S. District Judge Colm F. Connolly of the District of Delaware requiring disclosure when third-party entities are funding some or all of the attorney fees or expenses to litigate in exchange for a financial interest contingent on the result of the case. The order also mandates disclosure of whether the funder’s approval is required for making “litigation 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.”
Judge Albright, who manages one of the busiest patent dockets in the nation, said he hasn’t felt compelled to make the same decision as Judge Connolly.
“I understand the ABA’s concern, but as a trial judge I’ve yet to have a situation where, in my opinion, any of this is relevant,” he said. “So far, after the number of patent trials I’ve had, I can’t think of an instance where I’ve thought … ‘I should have allowed that discovery’ and it would have had any role in the trials I’ve had.”
Judge Atlas said litigation funding arrangements could be relevant in cases where the court is concerned about usury or that the individual plaintiff no longer retains control over decisions to settle or to go to trial.
Discovery of such agreements is something best handled on a case-by-case basis, Judge Eskridge said, and could be useful in instances where the agreement could potentially “distort the case on the merits.”
“And I could see control by someone who’s not the actual client, you want to know who that is because when they’re on the witness stand they might be swinging for the fences in a way they wouldn’t otherwise,” he said.
Discovery or disclosure of litigation funding agreements could help increase the disposition rate of cases, Judge Engelhart said.
“If I’m a defendant in a case and I know the plaintiff is funded and can go all the way in a lawsuit, that’s valuable to know,” he said. “I think from a pragmatic, administrative standpoint there can be value in having that information disclosed.”
Harris County District Judge Lauren Reeder moderated an academic panel discussion Thursday that featured Professor Tom Baker of the University of Pennsylvania, Professor Brad Wendel of Cornell Law School and Jim Hawkins, a former professor at University of Houston Law Center and current partner at trial firm Daniels & Tredennick.
Academic research into litigation finance is important for two reasons, Hawkins said.
“One reason is because I think sometimes academic literature is like a barometer, or predictor, of what state regulators might do in the area,” he said. “The other thing is … it’s a way to get before clients information that could help. Some studies show litigation funding could decrease all litigation costs. So, it’s a way to advocate your position as a funder.”
Some of the fear surrounding what the proliferation of litigation finance will do to the legal landscape is overblown, Baker said, arguing that a form of third-party funding — liability insurance — has been around for 150 years.
Allaying those lingering fears by educating regulators and lawmakers that litigation finance arrangements aren’t loans because of the nonrecourse feature is important, Hawkins said.
“To me, there’s a lot of work for people like me and other lawyers to be looking at in this area,” he said.
There was discussion among the professors about the need for more education in general on the topic, including for judges, law students and the public at large. Judge Reeder said because judges aren’t necessarily specialists, they will need to rely on lawyers to guide them on the law governing this space.
“All it takes is one bad case, one bad apple, to change the body of law for everyone,” she said. “So, it’s incumbent on folks to stay ahead of this and make good law and good regulations.”