As even a cursory perusal of the legal press will confirm, litigation finance is growing. Research on litigation finance shows that its use by law firms grew four-fold between 2013 and 2016; three-quarters of GCs surveyed say it will continue to grow in the next five years.
Although the majority accept litigation finance, it has a few critics, notably the U.S. Chamber of Commerce, which remains a vocal opponent (despite the apparent contradiction of a business lobbying group decrying a market-based solution to a demand-driven need). Among the key concerns that the Chamber raises is the question of transparency and whether the fact of financing and the identity and terms of the financier should be disclosed in litigation.
“Transparency” sounds like a righteous goal, and it is almost a cliché aspiration in our business culture. But it is worth defining the purpose of disclosure in litigation and the standard for requiring it. In doing so, it becomes clear that transparency is already provided for under various court rules. Litigation finance does not merit a special set of rules, nor should it be held to a different standard.
Disclosure requirements for legal finance area is a topic that merits extended consideration not only because a vocal minority have advocated that special new rules are required for legal finance, but also because these attempts have generated quite a few headlines in the legal press. One could get the impression from those headlines that special disclosure requirements for legal finance are advancing, so a review of the facts is in order.
In litigation, the standard for disclosure is quite simple: It is fair to ask what disclosure will add that is relevant to the matter at hand. How is it relevant to know in a commercial litigation matter that there is an external provider of finance or who that provider of finance is? How is it relevant what the terms of the financing arrangement are?
In almost any litigation matter, these matters are rightly deemed entirely irrelevant to the elements of the claim. Courts have not found disclosure of litigation finance to be relevant or necessary. They do not inquire as to these factors, nor should they feel the need to—just as they do not inquire into all the various business relationships that litigants have, and the pressures that they might be experiencing due to those arrangements. If these business and financial relationships are deemed irrelevant to the ultimate disposition of claims when they are called something other than “legal finance”, urging a new and special standard of disclosure based on the semantics of a category descriptor seems patently unfair. The courts have not felt such a special standard necessary.
In the US, the standard by which financial conflicts of interests must be disclosed is settled and clearly defined. The Rules of the Supreme Court, the Federal Rules of Appellate Procedure, and Federal Rules of Civil Procedure all require the identification of a party’s parent corporations and any public shareholder owning more than 10% of the party’s stock. Providers of financing to a party or a case—whether specialist financiers or banks —are not required to be disclosed.
Disclosure is a much-debated topic in international arbitration, but it pertains to arbitrators, not providers of finance. The disclosure of potential conflict of interests is indeed one of the arbitrator’s fundamental duties, and all of the major arbitral institutions’ rules require arbitrators to disclose relationships with interested parties. The International Bar Association (IBA) has, however, recommended expanding required disclosure to encompass any non-party’s financial interest in an arbitration matter, including not only specialist finance but other forms of funding, broadly defined. The inclination toward increased disclosure exemplified by the IBA is misguided. Broad financial disclosures may lead to disqualification of capable arbitrators with tenuous connections to the matter at bar, or, more likely, to more burdensome, time-consuming and expensive disclosure processes, in exchange for marginal gain. This cuts against one of the major benefits of using arbitration, which is its more streamlined process compared to commercial litigation.
A much-discussed recent rule change by the US District Court for the Northern District of California mandates an incremental but narrow form of disclosure: It requires plaintiffs in any proposed class, collective, or representative action to disclose “any person or entity that is funding the prosecution of any claim or counter-claim” at the discovery conference. Notably, the Northern District rejected a much broader disclosure provision proposed by special interest groups, among them the Chamber of Commerce. And the Northern District already requires the disclosure of “any persons [with] (i) a financial interest of any kind in the subject matter in controversy or in a party to the proceeding; or (ii) any other kind of interest that could be substantially affected by the outcome of the proceeding”. Although the court is clearly interested in learning more about financing arrangements that might be in place in certain types of cases, judges in the Northern District will ultimately find that it is commonplace for law firms to obtain funding from many types of third parties—including banks and “litigation funders”.
Proponents of forced disclosure argue that it is necessary to achieve greater transparency, but arguably, requiring additional special rules to disclose litigation finance would create more confusion than clarity. It is commonplace for litigants to obtain funding from third parties, and many third parties have significant interests attached to the outcome of litigation. These include banks with outstanding general recourse debt to a company whose health is dependent on a litigation judgment or settlement, and law firms that have taken cases on contingent fee and have their near-term or long-term firm health riding on the outcome. Such arrangements are not deemed relevant to the ultimate disposition of claims, and are not required to be disclosed. As a practical matter, adding a special “legal finance disclosure rule” therefore seems both absurdly specific and broadly unnecessary, given that courts have operated for decades without inquiring into the (usually irrelevant) financial health of the litigation parties and their counsel. Setting aside why courts would deem such a move necessary, how would they carry it out? Would they require disclosure only of financiers that call themselves “litigation funders”? Or would they begin requiring disclosure of all such arrangements? That sounds like a very opaque dynamic indeed—and, fortunately, entirely unnecessary.
Ensuring that courts know who “controls” litigation is another reason sometimes cited by proponents of special disclosure requirements for legal finance. Yet this is a specious argument: If there is concern that “control parties” must be known to the court but are going undisclosed, then the proper remedy is to adjust the real-party-in-interest standard or to propose new disclosures regarding “control,” as opposed to rules specifically requiring disclosure of litigation finance. Furthermore, it should be noted that Burford expressly disclaims any control of the matters in which it invests and does not in any way affect existing attorney-client relationships.
Conflict of interest is sometimes cited as a rationale for new disclosure rules specific to litigation finance. Here, too, there is more than adequate infrastructure to protect against conflict.
The ultimate irony is that those advocating special disclosure requirements for “litigation finance” are likely to achieve the opposite of transparency—and perhaps purposely so. Anyone who has spent any time in courtrooms litigating high-stakes commercial matters has encountered demands for disclosure of irrelevant information as a mechanism of delay—as “frolic and detour” that adds to the extraordinary cost of litigation and slows down an already overburdened justice system. Insisting on unnecessary disclosure requirements for a special class of finance providers reveals precisely this impulse writ large.
Litigants have been seeking and getting financing from a variety of sources for a very long time; the emergence of specialist providers of such finance does not create a fundamentally new set of circumstances and should not be subject to a new set of rules. Fundamental fairness and logical consistency preclude defining a subset of financial interests and then promulgating rules for that subset.
 See Sup. Ct. R. 29.6; Fed. R. App. P. 26.1; Fed. R. CIv. P. 7.1.
 Some argue an equivalence between litigation funders and insurers, the latter being subject to disclosure under Fed. R. Civ. P. 26(a)(1). The comparison is flawed: Insurers play a different role than funders, and insurers are explicitly protected from deeper discovery in various ways. See, e.g., Jonathan T. Molot, A Market in Litigation Risk, 76 U. Chi. L. Rev. 367, 421-22 (2009).
 IBA Guidelines on Conflicts of Interest in International Arbitration (23 October 2014).
 Compare N.D. Cal. Civ. R. 3-15(a)(1) with Fed. R. Civ. P. 7.1(a)(1).