Federal Court in Delaware Requiring Disclosure of Litigation Funding Agreements

By | April 22, 2022

The standing order issued on Monday by Chief Judge Colm F. Connolly is not unique — several other federal courts have adopted similar rules — but this decree was made in an extremely influential district. More than half of publicly traded US corporations are incorporated in Delaware and its laws often govern contracts between businesses.

The American Property Casualty Insurance Association issued a press release Wednesday saying that the court’s standing order will bring some long-needed transparency to the litigation funding industry.

“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” stated Stef Zielezienski, APCIA’s executive vice president and chief legal officer. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”

Stef Zielezienski

Litigation funders pay attorney fees, and sometimes living expenses, for litigants who cannot afford to sue on their own in exchange for a share of any award. APCIA said the industry has grown rapidly since its inception two decades ago and now takes in $11 to $12 billion annually in the United States.

Insurance groups and the US Chamber of Commerce say litigation funding, also known as third-party litigation financing, needs more rules to prevent abuses of the legal system and to protect consumers who often pay exorbitant interest rates on money they borrow to pay legal expenses.

In March, four Republican US senators introduced a bill backed by the Chamber that would require parties to disclose if a third party had provided funding and to state what control that party has over any settlement decision. A similar bill passed the House of Representatives in 2017, but was not taken up by the Senate.

The standing order issued by Connolly at the US District Court in Delaware has requirements similar to those bills. In addition to disclosing the name and address of any third-party funder, parties to any case before Connolly must also disclose whether approval by the funder is necessary for settlement decisions and if so, the terms and conditions relating to that approval.

Parties must also provide a brief description of the nature of the funder’s financial interest. In addition, the standing order allows parties to seek additional discovery if the third-party funder has authority to make material litigation decisions.

The standing order was among several that Connolly imposed this month, after taking office last July 1. It impacts cases only in his courtroom. None of the other three district court judges in Delaware have issued similar standing orders.

Rules on litigation funding are not unusual however. US District Courts in California, New Jersey and Ohio have adopted disclosure requirements, although they vary in scope.

APCIA said more jurisdictions should adopt such “common sense reforms.”

“Transparency in third-party litigation financing can help end lawsuit abuse and bring balance to the civil justice system,” Zielezienski said.

Topics Lawsuits Mergers & Acquisitions Delaware

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