The United States is a federal system, with overlapping federal and state jurisdictions, including 96 federal judicial districts and 50 individual US states. As such, attorneys and parties contemplating commercial litigation finance transactions here must pay particular attention to the many potential jurisdictions that may be implicated by a single particular transaction – including the governing law of the litigation finance agreement, the location of the parties, the venue of the particular litigation, and the jurisdiction in which a judgment may eventually need to be enforced. Further, because litigation finance remains relatively new, and the law is still in development, those considering a litigation funding transaction in one jurisdiction would be well advised to consider the applicability of precedents from other jurisdictions.

This brief addendum is not intended to be a comprehensive guide to litigation finance in the US outside New York. Rather, it endeavours to highlight some of the notable rules and precedents in a few important jurisdictions beyond New York, which have developed recently as litigation finance has become more common in the United States. The focus is largely on permissibility of commercial litigation finance generally, and any rules regarding disclosure of funding and the scope of protection afforded communication with funders; consumer litigation finance transactions may implicate other regulations that are beyond the scope of this addendum.

Covid-19

The covid-19 pandemic has caused significant uncertainty in the litigation space during 2020. Parties to litigation are unsure whether their current capital and revenue streams are sufficient to support the expense of drawn-out legal battles; lawyers are navigating the difficulties of collecting and reviewing discovery from clients who may not have access to their files during periods of lockdown, and courts grapple with keeping juries and litigants safe while attempting to keep the doors of justice open. Indeed, most US jurisdictions have moved to motion hearings by video conference, and trials have been postponed by several months, if not indefinitely. Nearly all active cases have experienced covid-related delays to their schedules. In this time of uncertainty and capital conservation, many prospective plaintiffs are looking to hedge their risk through litigation funding.

US Federal

Because litigation funding related issues typically involve state law matters (eg, state bar rules, contract law, status of champerty provisions) or procedural matters governed by local practice, some of which are discussed below in the state summaries, there is little purely federal law on funding. However, the US Congress reintroduced the Litigation Funding Transparency Act of 2019, which, if enacted, would require disclosure of funding (and a copy of the funding agreement) in any federal class action or federal multi-district litigation (MDL) proceeding. The proposed law was put forward without success in 2018 and reintroduced in early 2019. It is in consideration with the Senate Judiciary Committee, so it remains to be seen whether the law will eventually be amended or enacted. Additionally, similar laws have been discussed at the state level, including in New York State (Assembly Bill 6866), Florida (House Bill 7041) and Utah, which have recently introduced bills to regulate litigation funding locally, but none has yet moved out of committee.

There is no general affirmative obligation to disclose litigation funding in federal court, though as noted below, some district courts in particular states have mandated disclosure in limited circumstances. Fed. R. Civ. P. 7.1 does not require the automatic disclosure of litigation funders in the corporate disclosure statements required at the beginning of an action. However, litigants should be aware that many jurisdictions have supplemented Rule 7.1 with their own corporate disclosure requirements, which are generally broader than their federal counterparts. These regional requirements have been enacted to identify court-related conflicts, but some ambiguity exists regarding whether litigation funders should be encompassed, and such ambiguity will need to be resolved on a per-jurisdiction basis. For example, while the Northern District of California requires disclosure in the particular context of class actions, at least one court has rejected an argument that Rule 3-15 (the local version of Rule 7.1) generally requires affirmative disclosure of a funder in other non-class contexts. MLC Intellectual Prop., LLC v Micron Tech., Inc., No. 14-CV-03657-SI, 2019 WL 118595, at *2 (N.D. Cal. 7 January 2019).

Some courts do require disclosure of the presence of a litigation funder for class action lawsuits and multi-district litigations. For example, N.D. Cal. Standing Order ¶ 19 (1 November 2018). However, these disclosures have only been required to be made in camera.  See, for example, In re Nat’l Prescription Opiate Litig., 2018 WL 2127807, at *1 (N.D. Ohio 7 May 2018) (ordering in camera submissions relating to financing terms).

California

In California, litigation finance is generally permitted by state law. Indeed, unlike many eastern states, the doctrines of champerty and maintenance were never adopted into the state’s laws. (See In re Cohen’s Estate, 152 P.2d 485 (Cal. Dist. Ct. App. 1944); Abbot Ford, Inc v Superior Court, 43 Cal. 3d 858, 885 n.26 (Cal. 1987) (‘California . . . has never adopted the common law doctrines of champerty and maintenance.’).)

Practicing attorneys in California, as in all states, are guided by rules of professional conduct and, importantly, such rules do not prohibit litigation finance transactions. (See LA County Bar Association Ethics Committee Formal Opinion No. 500 (1999), discussing the permissibility of funding arrangement under California law and legal ethics regime.) Importantly, the California State Bar established a Task Force on Access Through Innovation of Legal Services, which recently published several alternate proposed revisions to the ethical rules that would, if adopted, either allow limited non-attorney ownership in law practices or largely do away with the traditional restrictions on fee-sharing. The proposed amendments remain subject to public comment and approval by the California Supreme Court. While it is still too early to predict whether either amendment will be adopted, it nevertheless suggests the state bar authorities recognise the important role litigation funding can play in promoting access to justice.

Regarding disclosure, there is no rule requiring disclosure of a party’s funded status. However, for class action litigation in the federal courts, the Northern District of California recently revised its Standing Orders to require the disclosure of ‘any person or entity that is funding the prosecution’ of ‘any proposed class, collective, or representative action’. N.D. Cal. Standing Order No. 19 (17 January 2017). Accordingly, for class or collective matters in the Northern District, a party’s funded status should be disclosed at the initial stages pursuant to Rule 3–15, or, if arising later, in connection with a party’s Case Management Statement. For all other matters, there is no general obligation of affirmative disclosure under the local rules. (See MLC Intellectual Prop, LLC v Micron Tech, Inc, No. 14–CV-03657, 2019 WL 118595, at *2 (N.D. Cal. 7 January 2019), rejecting the argument that a funded plaintiff had failed to comply with local rules by failing to identify the litigation funder.)

Importantly, communications with a litigation funder have been shielded from disclosure and, where subject to a properly executed non-disclosure agreement, should not result in a waiver. This is consistent with the general trend in most US jurisdictions. (See Odyssey Wireless, Inc v Samsung Electronics Co, 2016 WL 7665898, at *5–*6 (S.D. Cal. 20 September 2016); see also Space Data Corporation v Google LLC, No. 16–CV–03260, 2018 WL 3054797, at *1 (N.D. Cal. 11 June 2018) (communications with potential funders are not relevant).)

Delaware

Litigation finance is generally permitted in Delaware. However, the doctrines of champerty and maintenance remain applicable. See Charge Injection Technologies, Inc v EI DuPont de Nemours and Co, 2016 WL 937400, at *3 (Del. Super. Ct. 9 March 2016). As such, outright assignments of claims may be regarded as champertous and any funding transaction should be clear that the funding entity does not control the litigation (see id at *4–*5).

Regarding disclosure, there is no general rule requiring disclosure of a party’s funded status. Moreover, one Delaware federal court has concluded that, in at least some contexts, litigation funding agreements are not relevant and potentially confusing and prejudicial. (See AVM Technologies LLC v Intel Corporation, 2017 WL 1787562, at *3 (D. Del. 1 May 2017).)

Delaware has held that litigation funding materials are not automatically relevant under Fed. R. Civ. P. 26, and a party seeking production of such documents must first establish that the discovery sought is relevant to their particular causes-of-action. See United Access Techs., LLC v AT&T Corp, No. CV 11-338-LPS, 2020 WL 3128269, at *2 (D. Del. 12 June 2020). (‘As AT&T has failed to carry its burden on relevance [of litigation funding materials], the Court need not, and does not, address the parties’ various additional disputes relating to work-product doctrine, attorney-client privilege, common interest, parent-child privilege, and spousal privilege.’)

With regard to privilege, both state and federal courts in Delaware have held communications with litigation funders are protected from discovery. As Delaware’s Court of Chancery has remarked, there is ‘[n]o persuasive reason . . . why litigants should lose work product protection simply because they lack the financial means to press their claims on their own’. (See Carlyle Investment Management v Moonmouth Co, 2015 WL 778846, at *9 (Del. Ch. 24 February 2015); see also Walker Digital, LLC v Google, Inc, 2013 WL 9600775, at *1 (D. Del. 12 February 2013) (claimant and funder share a common legal interest and communications are protected as both attorney client privilege and work product); but see Leader Technologies Inc v Facebook Inc, 719 F. Supp. 2d 373, 377 (D. Del. 2010) (no common interest inapplicable); Acceleration Bay v Activision Blizzard, 2018 WL 798731 (D. Del. 2018) (ordering disclosure where in the absence of signed non-disclosure agreement and using a ‘but for’ standard for work product).).

Texas

In general, Texas common law never incorporated the doctrine of champerty. See Bentinck v Franklin, 38 Tex. 458, 468 (1873). Texas courts have reviewed commercial litigation funding agreements and found them not to be champertous or otherwise a violation of public policy. See Anglo-Dutch Petroleum International v Haskell, 193 S.W.3d 87, 105 (Tex. App. 2006). However, the funding of certain categories of claims – for example, malpractice actions – may present public policy issues. See id. Further, lawyers or law firms contemplating litigation funding transactions should ensure that the contemplated structure does not misalign incentives or undermine the primary duty to their clients. (See Texas Bar Opinion No. 576 (concluding that proposed arrangement was ‘tantamount to fee splitting’).)

Regarding privilege, several federal courts in Texas have concluded that litigation funding information should be protected as work product and a non-disclosure agreement obviates waiver. (See US v Ocwen Loan Servicing, 2016 WL 1031157, at *6 (E.D. Tex. 15 March 2016); Mondis Technology Ltd v LG Electronics, Inc, 2011 WL 1714304, at *3 (E.D. Tex. 4 May 2011).)

Further, while there is no rule requiring disclosure of a party’s funded status, one court has ordered the disclosure of the identity of a litigation funder, while simultaneously holding that communications with that funder remained confidential. (See US v Homeward Residential Inc, 2016 WL 1031154, at *5 (E.D. Tex. 15 March 2016).)

New Jersey

New Jersey courts have long rejected common law prohibitions on champerty and maintenance. See Schomp v Schenck, 40 N.J.L. 195, 206 (Sup. Ct. 1878). More recently, New Jersey’s state bar offered guidance permitting plaintiff factoring of a contingent interest in a potential judgment. See New Jersey Advisory Committee on Professional Ethics, Opinion 691 (2001).

At the federal level, at least one New Jersey district court recently concluded that discovery into litigation funding was not relevant and that communications would likely be protected as work product. (See In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Products Liability Litigation, No. CV 19–2875, 2019 WL 4485702, at *7 (D.N.J. 18 September 2019) (collecting cases from a number of jurisdictions).)

Illinois

Litigation finance is permitted in Illinois. While the common law prohibition of champerty has been abolished, there remains a statutory prohibition. See 720 Illinois Criminal Code 5/32–12. However, as set forth in a well-reasoned and comprehensive discussion in Miller UK v Caterpillar, 17 F. Supp. 3d 711 (N.D. Ill. 2014), an ordinary commercial litigation finance transaction would not be problematic.

Regarding privilege, several federal courts have concluded that funding agreements, and communications with a litigation funder pursuant to a non-disclosure agreement remain protected from disclosure. See Art Akaine LLC, v Art & Soulworks LLC, No. 19 C 2952, 2020 WL 5593242, at *6 (N.D. Ill. 18 September 2020) (finding litigation funding discovery irrelevant and potentially harmful to the plaintiff); Fulton v Foley, 2019 WL 6609298, at *2 (N.D. Ill. 5 December 2019); Viamedia, Inc v Comcast Corporation, 2017 WL 2834535, at *3 (N.D. Ill. 30 June 2017); Miller UK Ltd v Caterpillar, Inc, 17 F. Supp. 3d 711, 739 (N.D. Ill. 2014).

Wisconsin

Litigation finance is permitted in Wisconsin. However, in early 2018, Wisconsin passed Wisconsin Act 235, which, among other things, requires disclosure of all funding agreements in civil litigation. Specifically, the Act mandates that:

[A] party shall, without awaiting a discovery request, provide to the other parties any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.

Ohio

In Ohio, litigation finance is permitted and it is regulated by statute. See Ohio Rev. Code section 1349.55 (2008). The statue requires specific wording and disclaimers to be made for the finance agreements to be valid. The statute was promulgated in response to an Ohio Supreme Court decision that had previously invalidated a funding agreement on champerty grounds. (See Rancman v Interim Settlement Funding Corporation, 789 N.E.2d 217 (Ohio 2003).)

In a decision that is likely more relevant to federal practice – and in particular – multi-district litigation than Ohio specifically, a recent district court ordered any funding be disclosed to the court in camera but made clear that any such disclosures should not be subject of ancillary litigation or discovery. (See In re National Prescription Opiate Litigation, 17–MD–2804, Dkt. No. 383 (7 May 2018).)

Pennsylvania

In Pennsylvania, Clark v Cambria County Board of Assessment Appeals, 747 A.2d 1242, 1245 (Pa Cmwlth. 2000) saw champerty defined as a:

[A] bargain by a stranger with a party to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if successful, a part of the proceeds or subject to be recovered.

Under certain circumstances, litigation finance may not be permitted in Pennsylvania. For example, in WFIC, LLC v LaBarre, 148 A.3d 812, 820 (Pa. Super. 2016), the court found that a funding agreement governed by Pennsylvania law was invalid because it met the requisite elements of champerty. (See Riffin v Consolidated Rail Corp, 363 F. Supp. 3d 569, 576 (E.D. Pa. 2019) (assignment of claims is invalid as champertous).)

Nevertheless, regarding disclosure, federal courts in Pennsylvania have concluded, consistent with other districts, that communications with a litigation funder are protected as work product. (See Lambeth Magnetic Structures, LLC v Seagate Technology (US) Holding, Inc, 16–CV–0538, 2018 WL 466045, at *5 (W.D. Pa. 18 January 2018).)

Minnesota

Litigation funding is no longer against public policy in the state of Minnesota. Although its highest court held for over a century that litigation funding is champertous, it recently overturned its precedent in Maslowski v Prospect Funding Partners LLC, 944 N.W.2d 235, 241 (Minn. 2020), completely abolishing Minnesota’s common law champerty doctrine. The opinion acknowledges that courts may still scrutinise litigation funding agreements, and in particular ensure that such agreements do not provide the litigation funder with control over the litigation. Id.

Arizona

Champerty is not recognised in the state of Arizona. See Landi v Arkules, 172 Ariz. 126, 132, 835 P.2d 458, 464 (Ct. App. 1992). 

The District of Arizona has held that litigation funding agreements fit within the 9th Circuit’s standard of ‘created because of litigation’ and, therefore, are protected under the work product doctrine. This protection was held to extend to situations where a plaintiff is receiving both financing from a third-party funder to support both litigation and operating expenses, where litigation is the scope of operation for that business. See Cont'l Circuits LLC v Intel Corp, 435 F. Supp. 3d 1014, 1021 (D. Ariz. 2020). However, disclosure of the identity of the litigation funder itself was not protectable information. Id.

Kentucky

Litigation funding is generally not permitted in Kentucky, which recognises the doctrine of champerty by statute. KRS § 372.060. Federal courts in Kentucky, affirmed by the 6th Circuit, have also found that litigation financing is contrary to public policy, and such contracts are void. See Boling v Prospect Funding Holdings, LLC, 771 F. App’x 562, 582 (6th Cir. 2019) (‘the [litigation funding] Agreements violate Ky. Rev. Stat. § 372.060, and that the Agreements are inconsistent with Kentucky’s public policy’); Charles v Phillips, 252 S.W.2d 920, 921-22 (Ky. 1952) (setting aside a deed as champertous in violation of KRS 372.060 where it was given in consideration of sums advanced to prosecute a divorce action).

Utah

Utah became one of the latest states to regulate litigation funding when its governor signed the Maintenance Funding Practice Act (HB 312). The Act requires litigation funders to register with the state, imposes reporting requirements on litigation funders, and sets forth required funding contract terms and disclosures.

North Carolina

The common law prohibition on champerty and maintenance remains in effect in North Carolina with such agreements considered to be both void and against public policy. See Charlotte-Mecklenburg Hospital Aut. v First of Ga. Ins Co, 340 N.C. 88,91 (1995). While North Carolina courts have found litigation funding agreement to be acceptable in very limited circumstances, many provisions common in third-party funder agreements are not permissible. Compare Odell v Legal Bucks, LLC, 192 N.C. App. 298 (2008) with In re: DesignLine USA, LLC, 565 B.R. 341 (W.D. N.C. 2017).

United States Tax Court

As of May 2020, litigation funding payments structured as loans, but including non-recourse contingent payments are considered ‘income’ rather than a ‘loan’ for tax purposes. In Novoselsky v Comm'r of Internal Revenue, 119 T.C.M. (CCH) 1474 (T.C. 2020), the court applied a seven-factor test, and found that because there was generally no obligation to repay the loaned money unless the litigation was successful (which the court considered the most important factor), the advanced funds were more akin to advance payments for legal services rather than loans, and thus were includible in the receiver’s income for tax purposes. Lawyers and litigants considering litigation funding transactions should consider the potential tax and accounting implications and litigation funding agreements may be structured to suit the particular circumstances.      

transactions should consider the potential tax and accounting implications and litigation funding agreements may be structured to suit the particular circumstances.