New Jersey to require disclosure of third-party funding

The United States District Court for the District of New Jersey recently amended its local rules to require disclosures about third-party litigation funding in cases before the Court.

On June 22, 2021, the Court adopted Local Civil Rule 7.1.1, which requires all parties to disclose certain information regarding “any person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.” (L.Civ.R. 7.1.1(a))

The party must disclose the following information: (1) the funder’s identity; (2) “[w]hether the funder’s approval is necessary for litigation decisions or settlement decisions in the action,” and, if so, “the nature of the terms and conditions relating to that approval;” and (3) “[a] brief description of the nature of the financial interest.” (L.Civ.R. 7.1.1(a))

These mandatory disclosures are somewhat ambiguous. First, it is not clear whether a contingency fee arrangement between a party and their attorney must be disclosed. Unlike other jurisdictions requiring some form of mandatory disclosure (discussed further below), the Court did not specifically exempt contingency arrangements from disclosure. Second, the Court did not specify the level of detail it expects a party to provide about “the nature of the [funder’s] financial interest.”

In addition to the mandatory disclosures, Rule 7.1.1 provides parties with the opportunity to “seek additional discovery of the terms of any such [funding] agreement” in limited circumstances. Namely, a party must make “a showing of good cause” that (1) the funder “has authority to make material litigation decisions or settlement decisions,” (2) “the interests of parties or the class (if applicable) are not being promoted or protected,” (3) “conflicts of interest exist,” or (4) “disclosure is necessary to any issue in the case.” (L.Civ.R. 7.1.1(b))

Rule 7.1.1 is effective immediately and applies to all pending cases before the Court. Parties currently before the Court must make the required disclosure by August 5, 2021 (45 days from the rule’s effective date). (Local Civil Rule 7.1.1(d))

Federal Court Rules

Rule 7.1.1 is one of the broadest disclosure requirements adopted by a federal court. As of February 2020, approximately half of federal circuit courts and one-quarter of federal district courts had adopted local rules requiring the disclosure of the identity of any non-parties with a financial interest in the outcome of a litigation. (Report to the President by the New York City Bar Association Working Group on Litigation Funding, Feb. 28, 2020, at 47-48.) However, as these disclosure requirements are intended to enable judges to evaluate potential conflicts of interest, they are limited to the identity of the funder and do not require the disclosure of funding terms. (Id.)

Absent such a local rule, federal courts have largely held that the existence of a litigation funding arrangement and the identity of the funder is irrelevant and therefore not discoverable without a showing of special circumstances. (Id. at 49-50.) In jurisdictions where parties must disclose the identity of a funder, courts generally do not require disclosure of the details of funding arrangements. (Id. at 45.) Further, parties have successfully argued that the work product doctrine protects litigation funding agreements from disclosure. (Id. at 52-54.)

Legislative Landscape

The District of New Jersey joins a limited number of other jurisdictions that require disclosure of third-party litigation funding information.

In 2018, Wisconsin passed a law requiring parties to provide any agreement under which any person “has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise” to the other parties to a litigation. (See 2017 Wisconsin Act 235 § 12; Wis. Stat. § 804.01(2)(bg).) Unlike Rule 7.1.1, the Wisconsin law clearly excludes contingency fee arrangements between parties and their attorneys from this requirement. (Id.) West Virginia has also passed legislation requiring disclosure of third-party funding agreements, but this only applies to consumer (not commercial) litigation funding arrangements and similarly carves out contingent fee arrangements. (See W. Va. Code Ann. §§ 46A-6N-6; 46A-6N-1.)

Other states and Congress have considered similar legislation, but at this time no other laws have been passed that would require disclosure of third-party funding arrangements.

References

Local Civil Rule 7.1.1, available at https://www.njd.uscourts.gov/sites/njd/files/Order7.1.1%28signed%29.pdf

Report to the President by the New York City Bar Association Working Group on Litigation Funding, Feb. 28, 2020, available at https://s3.amazonaws.com/documents.nycbar.org/files/Report_to_the_President_by_Litigation_Funding_Working_Group.pdf

Wis. Stat. § 804.01, available at https://docs.legis.wisconsin.gov/statutes/statutes/804/01/2