Seyfarth Synopsis: American and international courts have been debating the tentative legality of disclosing third-party litigation funding. In this vlog video, Seyfarth Shaw Associate Alex Karasik sits down with class action litigator Jerry Maatman to discuss what third-party litigation is, what it means for businesses, and the tactics that businesses can use to get in front of this phenomenon.

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Background

A recent trend has emerged in the class action landscape whereby a third-party funder pays the owner of a civil claim an up-front monetary payment in return for the claim owner’s promise to convey a portion of the potential recovery. Class action plaintiffs’ attorneys and third-party funders are incentivized under this approach through tax advantages, whereby the attorneys can defer tax liability on the monetary advancement until the claim pays off while the funders can deduct their expenses and pay tax on any profit at the lower capital-gains rate. Predictably, many of the third-party funders enter into such agreements with plaintiffs’ attorneys confidentially for varying business or personal reasons.

In a novel decision that will profoundly impact the practice of third-party funding of class actions, Judge Illston of the U.S. District Court for the Northern District of California recently granted defendant’s (“Chevron”) motion to compel plaintiff to reveal the identity of who was funding its proposed class action regarding a gas explosion off the coast of Nigeria in Gbarabe v. Chevron Corp., No. 14-CV-173 (N.D. Cal. Aug. 5, 2016). This ruling provides businesses facing class actions, including employers facing workplace class actions, a blueprint as to how to compel plaintiffs to identify stakeholders in class action lawsuits against their companies.

Implications For Employers

A business confronted with class action litigation absolutely would want to know if someone other than the plaintiffs themselves have a financial interest in a “bet-the-company” case. The ruling in Gbarabe arms employers with a potential strategy to unmask third-party funders that may have an interest in seeing their financial demise as a class action defendant. Given that this ruling stemmed from internationally-based class action litigation involving solo practitioners, businesses should be cautioned that courts may not always find litigation funding agreements to be relevant in determining the adequacy of plaintiffs’ counsel. Nonetheless, the arguments presented by Chevron are instructive in showing class action defendants how they can attempt to figure out who is bankrolling litigation battles against them. Finally, this ruling should serve as a cautionary tale to those third-party funders who desire anonymity, and ideally result in a chilling effect of this practice that amounts to tax-incentivized gambling on class action litigation. Workplace class actions can expect to see similar challenges to the adequacy of class counsel with motions to compel the production of litigation funding agreements in the very near future.