The Growing Importance of Transparency in Litigation Funding: A Piecemeal Approach

A Step Toward Greater Transparency

A U.S. District Court judge in Delaware recently made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him. This move is a significant step toward greater transparency with regard to third-party litigation funding, although it currently only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. However, the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state's laws often govern contracts between businesses.

A Booming Global Industry

Funding of lawsuits by international hedge funds and other financial third parties has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg. Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to 'social inflation': increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

Efforts at Transparency

Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019. At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021. Panelists at Triple-I's Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.

For readers, it's important to stay informed about the developments in litigation funding transparency. Understanding the implications of third-party funding can help in making more informed decisions in legal matters. Additionally, keeping an eye on legislative changes at both state and federal levels can provide insights into the evolving landscape of litigation funding.