The past several years have seen federal courts across the country ruling uniformly on the issue of litigation finance discovery. Barring the existence of exceptional circumstances, federal courts have been consistently rejecting parties’ motions to investigate the details of litigation financing agreements held between opposing parties and third-party funders with a vested interest in a case.
As a financial mechanism, litigation funding allows parties with fewer resources to meet wealthier opponents on a level playing field. Since litigation can (and often does) drag on for years and can rack up thousands of dollars in legal fees in the process, more sparsely funded parties are almost always at a disadvantage from the outset. Litigation financing agreements can provide financial relief for those burdened by looming litigation costs, while simultaneously providing attractive investment opportunities for third-parties hoping to profit off of potential legal financial awards. Overall, these private financing agreements help to minimize the role wealth plays in litigation so that the outcome of the case relies more heavily on merit.
Litigation funding, however, has itself become a target in the crosshairs of well-resourced litigants wishing to drag out a case and protract the discovery process. Wealthier parties will often request permission to conduct discovery into the nature of an opposing party’s private funding agreement e.g., the identity of the third-party funder, the terms of the agreement, the total funds being provided, etc. Pursuing this additional line of discovery not only usurps time and money from the courts, but also creates more financial burden on the party that the funding was originally meant to assist. The benefits of litigation funding are therefore counteracted if its implementation consistently results in increased discovery costs for the party that uses it.
The principal precedent limiting discovery into litigation funding was set in 2014 by Magistrate Judge Jeffrey Cole in a court opinion issued in Miller UK Ltd. v. Caterpillar Inc. Miller, an industrial equipment designer and manufacturer, utilized third-party funding in a case against construction equipment giant Caterpillar regarding misappropriation of trade secrets. When Caterpillar requested access to the details of Miller’s litigation funding agreement, Miller refused, stating that those documents were irrelevant and thus undiscoverable. After an in-camera review of the documents in question, Judge Cole ruled that they were undiscoverable under Rule 26 of the Federal Rules of Civil Procedure.
Despite the relatively broad legal parameters of discovery, Rule 26(b)(1) clearly states that information must be relevant to the claims or defenses of a case in order to be eligible for discovery. Unless the party seeking discovery can prove that its request is “reasonably calculated to lead to the discovery of admissible evidence,” the courts will not allow it. Hypothetical relevance doesn’t cut it—parties have to prove that discovery is actually likely to yield relevant evidence.
The specifics of litigation financing agreements have been continually deemed by courts as gratuitous, unrelated information. The terms of these funding agreements usually bear very little–if any–relevance to the facts and claims that are central to a case. In most instances, the benefits of pursuing such extraneous avenues of discovery would be minimal compared to the time and expense wasted in the process. When Judge Cole made his 2014 ruling, he provided the following observations:
“Protracted discovery is expensive and is a drain on the parties’ resources. Where a defendant enjoys substantial economic superiority, it can, if it chooses, embark on a scorched earth policy and overwhelm its opponent…But even where a case is not conducted with an ulterior purpose, the costs inherent in major litigation can be crippling, and a plaintiff, lacking the resources to sustain a long fight, may be forced to abandon the case or settle on distinctly disadvantageous terms…[Discovery rules] were never intended to be an excursion ticket to an unlimited exploration of every conceivable matter that captures an attorney’s interest.”
The precedent set by this ruling has continually been upheld by numerous courts encountering the same situation. The cases MLC Intellectual Property, LLC v. Micron Technology, Inc. (January 2019) and Benitez v. Lopez (March 2019) are two recent examples in which courts found litigation funding details to be tangential to the case at hand, while deeming claims of relevancy to be merely speculative.
Further cementing the courts’ position was the Advisory Committee on Civil Rules’ recent rejection of the U.S. Chamber of Commerce’s proposed changes to Rule 26 that would force all parties to automatically disclose litigation funding agreements at the outset of the case. The Advisory Committee rejected the amendment on the grounds that “relevance forms the backbone of discoverability.” Unless parties can explicitly prove that relevance exists in their particular set of circumstances, litigation funding agreements will continue to be off limits.
If you have any questions regarding discovery as it pertains to commercial litigation, please contact Roger E. Barton.