Wisconsin’s litigation funding disclosure law may backfire

The U.S. Chamber of Commerce, the biggest-spending lobbying and campaign-financing group in the country, has just cashed in on its spending in Wisconsin. The Republican-controlled legislature and Republican governor have enacted a law drafted by the chamber's Institute for Legal Reform purportedly requiring the disclosure of litigation funding agreements in civil cases in Wisconsin state courts.

While such funding-disclosure laws are proposed in the name of "transparency," their intent and effect are all too transparent. They will give defendants in funded cases an advantage over plaintiffs by revealing at the outset of the case when the plaintiff's money will run out. This advantage will be compounded as the disclosure of litigation funding will inevitably lead to follow-on discovery disputes which will make the funded litigation even more expensive, and therefore even more difficult for the plaintiff to sustain. Worst of all, automatic disclosure laws will further overburden the courts, which will be stuck having to adjudicate these disputes in the context of a growing body of case law applying the attorney work-product protection and the common-interest doctrine to communications with funders, and at a time when the courts are trying to limit rather than expand discovery.

There are reasons to think that the Chamber of Commerce's celebration of this victory in the Badger State is overblown, and even short-sighted.

First, the language of the new statute is narrower than the chamber's press releases suggest. The statute provides in pertinent part that, "Except as otherwise stipulated or ordered by the court, 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." (Emphasis added.)

The use of the term "compensation" is puzzling. The legislature could have used a broader term like "payment." That language would clearly have applied to the typical litigation funding agreement, which gives the funder the right to receive payment that is "contingent on and sourced from" the litigation proceeds. But I've never heard any party to a litigation funding agreement describe the funder's investment return as "compensation." In the context of who gets paid what out of the proceeds of a litigation, the term "compensation" only seems appropriate to describe payments to the attorneys, but such payments are expressly excepted from the statute. The task of interpreting and applying the "plain language" of this statute will put Wisconsin judges to an interesting test.

Second, the new Wisconsin law is not likely to have much of an impact on commercial litigation funders, since America's Dairyland has never been a welcoming forum for litigation funding. To some extent, the state still preserves the old common law prohibitions of maintenance and champerty. The Wisconsin Supreme Court in Gelo v. Pfister & Vogel Leather Company, 132 Wis. 575, 579 (1907), defined "maintenance" as "an officious intermeddling in a suit that no way belongs to one, by maintaining or assisting either party, with money or otherwise, to prosecute or defend it," and defined "champerty" as "the unlawful maintenance of a suit, in consideration of some bargain to have part of the thing in dispute, or some profit out of it." In Wisconsin's early days, maintenance and champerty served as affirmative defenses that could be raised in a funded case to defeat the funded plaintiff's suit. This changed in the middle of the 20th century with the passage of Wisconsin Statute Section 895.375, which provides to this day that "no action, special proceeding, cross complaint or counterclaim in any court shall be dismissed on the ground that a party to the action is a party to a contract savoring of champerty or maintenance unless the contract is the basis of the claim pleaded." [Footnote: It's worth noting that other courts have decided that, where the affirmative defenses of champerty and maintenance don't apply, there is likely no relevance to the existence or terms of a litigation funding agreement, and it is therefore not discoverable. See, e.g., Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 724-26 (N.D. Ill. 2014).] But this mid-century Wisconsin statute leaves open the possibility that a funded plaintiff might attempt to avoid paying the funder its agreed-upon investment return by claiming the funding agreement is champertous and therefore unenforceable. As a result, it has always been the case that experienced funders proceed cautiously, if at all, in funding cases in Wisconsin.

Third, outside the state, this Wisconsin law does not appear likely to have much influence. As Ben Hancock reports, it "came together amid a unique set of circumstances on the ground in Madison, making a national domino effect unlikely for now." ("For Chamber, Replicating Wisconsin Win on Litigation Funding Transparency Won't Be Easy," April 11, 2018). Indeed, the Wisconsin law is at least as likely to be cited as a reason against passing copycat legislation anytime soon. Other states and the federal government could and should decide to take a "wait and see" approach before following in Wisconsin's footsteps. Justice Louis Brandeis described how a "state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." As these words imply, not every experiment conducted in the states' "laboratories of democracy" turns out well.

The Wisconsin experiment that the Chamber of Commerce has set in motion may prove to be weird science, and if it goes viral, the chamber may find that it has created a monster. Automatic disclosure laws ironically may be good for litigation funders and bad for the chamber's members. Such laws could help funders by increasing the demand for funding, as automatic disclosure will lead to an increased awareness and acceptance of funding, as well as an increased need for funding in funded cases (to deal with inevitable motion practice that will follow automatic disclosure). Such laws will be bad for the chamber's members because they will see their own legal fees increase as their defense lawyers spend countless billable hours on funding-related disputes. Moreover, perhaps unbeknownst to the chamber, more and more of its own members are themselves beginning to use third-party financing for their own plaintiff-side claims. The chamber's automatic-disclosure campaign will cause its own members to pay more for litigation no matter which side of the "v" they find themselves on in a funded case.