On April 5, 2017, United States District Court Judge James Donato of the Northern District of California continued a highly contentious computer hacking/trade secrets trial between local app maker Telesocial, Inc. and French telecom company Orange, S.A., 3:14-cv-03985-JD (N.D. Cal). While trial continuances are common, Judge Donato’s order was unprecedented: he granted the continuance so that Telesocial could seek and obtain litigation funding. Although it largely went unnoticed, Judge Donato’s order highlighted a new, undeniable reality: litigation funding has become an indispensable part of the legal system.
As Telesocial v. Orange showed, in years to come, 2017 will be viewed as the year when litigation funding established itself as a necessary fixture in the commercial litigation landscape. Coming off the heels of some competitor consolidation, the litigation funding industry experienced rapid growth over the past twelve months. Capital continued to flow into the space, as new funders emerged and many established funders such as Bentham IMF raised new funds. As litigation costs continually increase, and more litigants are forced to seek outside financing and alternative-fee arrangements to vindicate their rights, this trend will surely continue for the foreseeable future.
With this rapid expansion into the global legal system, litigation funding saw a mixture of legal decisions that displayed the judiciary’s still-evolving understanding and handling of various litigation finance issues. In most respects, courts’ rulings evinced a favorable view of litigation funding, recognizing its crucial role in granting access to justice to claimants who otherwise would be denied. This reality was no better exemplified than in the Aziz v. Trump case in January 2017. But legal questions involving mandated disclosure of funding and the enforcement of litigation funding agreements continued to percolate in various jurisdictions throughout the year.
Courts consistently held in 2017, as they have in years past, that disclosure of litigation funding agreements is unwarranted, as such disclosure typically bears no relevance to the merits of the case and, in most cases, would only cause a discovery sideshow, wasting court and party resources. One notable example occurred in April 2017 in the patent case AVM Technologies, LLC v. Intel Corporation, 15-33-RGA, in the United States District Court of Delaware. Defendant Intel sought to introduce testimony regarding plaintiff’s litigation funding agreements to establish evidence relating to a hypothetical negotiation in the context of damages. On plaintiff’s motion, the court excluded the testimony as to the funding agreements because the court found that the agreements were “so far removed from the hypothetical negotiation that they ha[d] no relevance.” Furthermore, even if the funding agreements were relevant, the court would have excluded them under Federal Rule of Evidence 403, because any probative value would have been “more than substantially outweighed by the danger of unfair prejudice to [plaintiff] and of confusing the issues, as their introduction would just invite a sideshow on the economics of patent litigation.” Courts overseas adopted this same approach. For example, in November 2017, the English High Court in In the Matter of Edwardian Group Limited  EWHC 2806 (Ch), held that the terms of a litigation funding agreement were privileged, and even the disclosure of the identity of the litigation funder should not occur. The same result occurred in Viamedia, Inc. v. Comcast Corp., et al., 1:16-cv-05486 (N.D. Ill. June 30, 2017).
On the issue of the enforceability of funding agreements, however, the results were mixed, but for good reason. When dealing with commercial litigation funding agreements between two sophisticated parties, the courts enforced the contracts and demanded that both claimants and funders abide by their terms. For example, in Kirby McInerney LLP v. Lee Medical, Inc., 17-cv-4760 (KBF) (S.D.N.Y.), defendant sought to litigate claims against its litigation funder in Tennessee state court. The funding agreement had a clear arbitration provision, however, requiring that any dispute between the parties be resolved through arbitration in New York. Pursuant to the arbitration provision in the funding agreement, the court compelled arbitration in New York.
But in two separate cases in Minnesota and Kentucky against the same consumer legal funder, Prospect Funding Partners, LLC, the courts refused to enforce litigation funding agreements based on the principle forbidding champerty, a legal doctrine from feudal times (but still enforced in a minority of US jurisdictions). See Maslowski v. Prospect Funding Partners LLC, No. A16-0770, 2017 WL 562532 (Minn. Ct. App. Feb. 13, 2017) and Boling v. Prospect Funding Holdings, LLC, 1:14-CV-00081-GNS-HBB (W.D. Ky.). In both cases, the funder unsuccessfully attempted to enforce the funding agreement’s forum selection clause that would have required the case to be litigated in New Jersey and New York, respectively, where prohibitions of champerty do not exist. Maslowski and Boling epitomized the adage: “bad facts make bad law.”
Both cases involved seemingly unsophisticated individuals who had suffered significant physical injuries and had agreed to unfair funding terms given the circumstances, i.e., borrowing $6,000 at annual interest rate of 60% in Maslowski, and in Boiling borrowing $30,000 at an annual interest rate of 80%, which resulted in plaintiff owing close to $1.5 million at the time of the court’s opinion. Furthermore, both claimants lived, and their injuries occurred, in one of the very few jurisdictions that continue to enforce laws against champerty. There was also virtually no connection to the chosen forum in the funding agreements. Given these facts, the courts had little choice but to set aside the funding agreements.
Indeed, it is not surprising that courts, when faced with situations involving possible predatory consumer lending, err on the side of protecting the consumer. But the recent NFL Concussion case was an instance where a court may have gone too far in that noble pursuit. Just last week, at the behest of class counsel, the federal district court in Philadelphia handling the case voided funding agreements between certain former professional football players and various consumer legal funders. As the players awaited their respective payouts from a $1 billion settlement agreement with the NFL, they, like many claimants, faced the harsh reality that any potential payout was at the mercy of a painfully slow and opaque court process that could result in them waiting months if not years before receiving a single dollar. To mitigate that risk and delay, some players obtained outside funding in exchange for rights to a portion of their prospective settlement payments.
In voiding the agreements, the court cited an anti-assignment provision in the settlement agreement that forbade class members from assigning any portion of their monetary claims. The court also stressed that the class members were “by definition, cognitively impaired,” and a “Third-Party funder . . . would obviously know that simple fact.” In other words, even though none of the individual players appeared to have contested the funding agreements, the agreements could be perceived as predatory in principle, and so the court simply voided all the agreements out of an abundance of caution.
Whether that was the right decision is debatable. Regardless, even though it occurred in the consumer context, the NFL Concussion case served as an important reminder to all litigation funders to consider carefully the external optics of any funding deal before entering into it, even when the economics are fair and the deal is desired by and beneficial for the claimant. As the commercial litigation funding industry continues to grow, the key to sustainability in 2018 and beyond will be to adhere to a code of best practices that rests on fairness and transparency. This will ensure that cases like Maslowski, Boiling, and NFL Concussion remain the exception and not the rule.