- In commercial litigation, discovery has become a war of attrition in which the better-resourced party has an almost insuperable advantage.
- Recently, deep-pocketed litigants have treated the growing use of litigation finance as a pretext to draw out the discovery process by seeking disclosure of confidential financing arrangements.
- Allowing such discovery is irrelevant to the merits of the case, and unduly burdens both courts and those litigants who avail themselves of financing.
- Courts across the country are increasingly refusing to permit discovery of litigation financing documents, describing the use of financing as “a side issue at best.”
- The Eastern District of New York is the latest court to weigh in on the issue, in a case called Benitez v. Lopez.
The Unbearable Burden of Discovery
Commercial litigation in the US takes too long and costs too much.
A typical complex case lasts between 1.5 and 3 years from filing to resolution. Legal fees can easily run into the hundreds of thousands or even millions of dollars. A Duke Law School survey of Fortune 200 companies found that in 2008 companies spent between $115 million and $140 million on outside litigation costs, with costs increasing between 2-9% annually.
The discovery process drives much of the expense and length of litigation. The same Duke survey found that, on average, a whopping 5 million documents were produced in cases that went to trial. Of the approximately 5 million documents produced, fewer than 5,000 were marked as trial exhibits. For complex litigation, survey respondents reported discovery costs between $600,000 and nearly $2.5 million per case.
The takeaway? Discovery is often wasteful, expensive and burdensome. For parties litigating against deep-pocketed adversaries, discovery can quickly morph into an un-winnable war of attrition—regardless of the merits of the case.
Litigation finance is available to both plaintiffs and defendants who find themselves in the position of financial underdog. Used effectively, legal finance helps neutralize the resource asymmetry between parties and permits resolution of a case on its merits. Unfortunately, deep-pocketed litigants have begun treating litigation finance as a pretext to engage in yet more discovery—often seeking disclosure of both the existence and confidential terms of litigation finance agreements, as well as communications between the funded party, that party’s counsel, and the funder.
The U.S. Chamber of Commerce backs the efforts of these moneyed litigants, and has engaged in a multi-year lobbying campaign to require mandatory disclosure of private financing contracts.
Permitting such discovery unfairly disadvantages the under-resourced party by increasing the costs, length, and burden of litigation with discovery disputes that are not germane to the core issues in the case. Further, allowing one party to scrutinize the other’s private financing arrangements threatens to reveal that party’s financial capacity to pursue the case, how it values the case, and even aspects of its litigation strategy.
However, more and more courts are holding that litigation finance agreements are generally not relevant to the litigation and should not be discoverable.
The U.S. District Court for the Eastern District of New York, in Benitez v. Lopez, is the most recent court to rebuff efforts to discover financing terms. No. 17-cv-3827, 2019 WL 1578167 (E.D.N.Y Mar. 14, 2019).
The Relevance Inquiry in Benitez
FRCP Rule 26(b)(1) limits discovery to information that is “relevant to any party’s claim or defense,” taking into account “whether the burden or expense of the proposed discovery outweighs its likely benefit.” Conversely, information and documents that are not relevant to the issues in the case are not discoverable.
The fight over relevance can be fierce, and courts have generally interpreted relevance expansively. A wide swath of information is relevant and discoverable, including written communications, contracts, policies and witness testimony. Relevancy is evaluated in light of the nature of the claims and defenses raised in the case. To be discoverable, the information requested must be reasonably calculated to lead to the discovery of admissible evidence.
Recently, a number of courts have concluded that the existence and terms of a litigation financing agreement are not relevant to the litigation and, therefore, not discoverable.
In Benitez v. Lopez, a recent civil rights case against the City of New York and some of its employees, Magistrate Judge Sanket Bulsara denied the defendants’ motion for discovery relating to the plaintiff’s acquisition of litigation financing. The defendants had argued they needed access to the funding agreement in order to understand “the motives behind it”, and claimed that the existence of the agreement went “directly to plaintiff’s credibility and [was] grounds for impeachment at trial.” [Link to full text of decision.]
In denying the motion, the court stated: “In this case, the financial backing of a litigation funder is as irrelevant to credibility as the Plaintiff’s personal financial wealth, credit history, or indebtedness. That a person has received litigation funding does not assist the fact finder in determining whether or not the witness is telling the truth.”
The court noted that the outcome might be different where a funder is a party to the case and its financial interest could “shade its credibility” when testifying, or where there is evidence of the misuse of litigation funding. Absent such a showing, the Court cautioned that the “real issues [in the litigation] will be obscured.”
The defendants had further argued that they were entitled to see the plaintiff’s funding agreement in order to understand the funder’s ability to intervene, or to influence the legal strategies or settlement decisions in the case. Dismissing these arguments too, the court found that “a defendant is not entitled to learn any of these things in any case, absent some special need or showing. One party to litigation is not entitled—absent some contractual or other relationship like an indemnification agreement—to know why the adverse party chooses to make certain strategic decisions in a case or avoid settlement. Many such considerations are privileged; and if they are not, they are irrelevant and outside the scope of what a party needs to defend or prosecute its case.”
The Emerging Consensus
In issuing the Benitez decision, the Eastern District of New York joins a growing number of other jurisdictions declaring litigation financing agreements undiscoverable pursuant to FRCP Rule 26.
For example, in 2015, the Western District of Washington refused to permit discovery of a litigation financing agreement absent special circumstances, concluding that “[w]hether plaintiff is funding this litigation through savings, insurance proceeds, a kickstarter campaign, or contributions from the union is not relevant to any claim or defense at issue.” Yousefi v. Delta Elec. Motors, Inc., No. 13-CV-1632, 2015 WL 11217257, at *2 (W.D. Wash. May 11, 2015).
In 2016, the same court denied another defendant’s motion for discovery into the plaintiff’s litigation financing arrangements on the ground that the defendant had proffered only hypothetical scenarios—unsupported by evidence—in which litigation financing could be relevant to the litigation. The court concluded that permitting discovery of the financing arrangement would be “minimally important in resolving the issues, and unduly burdensome.” VHT, Inc. v. Zillow Group, Inc., 15-cv-1096, 2016 WL 7077235, at *1 (W.D. Wash. Sept. 8, 2016).
Similarly, the Southern District of New York denied the defendants’ motion to compel production of the plaintiff’s litigation funding agreement and associated documents because the defendants were unable to demonstrate that the documents were relevant to any party’s claim or defense in a shareholder suit, and the defendants’ stated justifications for the discovery were merely speculative. Kaplan v. SAC Capital Advisors LP, 12-cv-9350, 2015 WL 5730101, at *5 (S.D.N.Y. Sept. 10, 2015).
Likewise, in 2017, the Northern District of New York refused to allow discovery of the plaintiff’s retainer agreements with counsel and litigation funding contracts, admonishing that the court would “not allow this already contentious case to now travel down an unfruitful path in pursuit of “litigation motivation.” Mackenzie Architects PC v. VLG Real Estate Developers LLC, 15-cv-1105, 2017 WL 4898743, at *3 (N.D.N.Y. March 3, 2017). As another court put it, the existence of litigation funding “is a side issue at best.” See Space Data Corp. v. Google LLC, No. 16-cv-03260, 2018 WL 3054797, at *1 (N.D. Cal. June 11, 2018).
The emerging consensus appears to be that, absent special circumstances, litigation financing arrangements are irrelevant to the litigation and thus not discoverable. Courts are loathe to burden either themselves or litigants with discovery into a matter that is so tangential to the issues being litigated.
Judges have, appropriately, used the relevance inquiry required by FRCP Rule 26 to anchor their decisions on the question of discoverability.
To borrow the words of Georgetown law professor J. Maria Glover in a closely related context: “These decisions thus arguably reflect a recognition that permitting discovery into [financing arrangements] effectively constitutes a tax on the plaintiffs' use of litigation funding. They recognize that permitting discovery of these materials may in fact so sap the plaintiffs' resources that the defendant may achieve indirectly what the litigation funding arrangement was meant to solve in the first place, by undermining the level playing field that litigation finance was meant to provide.”
Professor Glover was discussing courts’ application of the work product doctrine to protect litigation financing materials from disclosure, but her assessment of the values underlying those decisions are just as applicable to courts’ instinct to protect litigants’ rights to privately contract for funding.