The upsides and risks of litigation funding may vary by jurisdiction

In recent years, third-party litigation funding ("funders") has increased in popularity, particularly in patent litigation as investors recognize the value of funding patent suits.

Agreements with funders are discoverable in some jurisdictions, while undiscoverable in others. Some districts also specifically order disclosure of third-party funders. Recently, Chief Judge Colm F. Connolly of the District of Delaware ("D. Del.") issued a standing order requiring disclosure of the existence of and identity of any third-party funders, a description of their financial stake in the case, and the extent to which they control litigation and settlement decisions. Parties may seek further discovery on a showing of good cause. An almost identical order exists in the District of New Jersey ("D.N.J."), while the Northern District of California ("N.D. Cal.") requires that in any class, collective, or representative action, the parties disclose "any person or entity that is funding the prosecution of any claim or counterclaim." N.D. Cal., and several other districts, do have local rules ordering disclosure of the name of entities with financial interest in the parties or proceeding, but do not require the disclosure of the agreement itself or the extent to which they control the litigation or settlement.

Judge Connolly in D. Del., however, has been active in enforcing his funder disclosure order. Last November he ordered several plaintiffs to appear for evidentiary hearings regarding the accuracy of their disclosures. Following the hearings, Judge Connolly ordered the plaintiffs to disclose detailed financial and communication records regarding their ties to third-party funders. Judge Connolly issued a lengthy memorandum in support of his order, detailing the ways that various plaintiffs, patents, and attorneys who were appearing before him all seemed to be linked to a few specific third-party funders. The plaintiffs filed a writ of mandamus to the Federal Circuit challenging the disclosures, but the writ was denied. The plaintiffs filed a petition for rehearing en banc in December, and that petition remains pending as of the date of this article.

These funder disclosures have a parallel in the insurance disclosure requirements of Rule 26, which compel parties to turn over their liability insurance agreements. These disclosures were justified by the Advisory Committee in a 1970 note: "Disclosure of insurance coverage will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation." The Committee further noted that permitting disclosure of insurance coverage was reasonable "because the insurance company ordinarily controls the litigation."

While funder and insurance disclosures do share some similarities in that both provide an injection of funds from outside the named parties, they are not analogous in their function. Insurance indemnifies a defendant, while funders provide money for a plaintiff to bring suit. Further, the amount of control exerted on the litigation is different: insurers always hold settlement authority while third-party funders may not. Insurance also covers a defendant generally, against general categories of suits, while a funder is specific, funding particular suits. This specificity is relevant for purposes of attorney-client privilege, discussed further below.

In October 2021, the Advisory Committee on Civil Rules reviewed the arguments for and against mandating disclosure of funder agreements, and declined to recommend a rule requiring disclosure of funder agreements. The Committee did not close the door on a future rule, but noted that "a very large amount of fact-gathering would be necessary to fashion a disclosure rule addressing [funders]."

Finally, disclosure of funder agreements increases the potential that litigants seek otherwise privileged communications shared with a litigation funder.

The funder disclosure rules in D. Del., D.N.J., and N.D. Cal. do not, on their face, necessarily implicate attorney-client privilege and work product issues, but as shown by Judge Connolly's investigation into certain plaintiffs, running afoul of the rules may open your client to further probing. The Federal Circuit's decision on the en banc petition to prevent Judge Connolly's further inquiries is worth following as funder agreements continue their trend towards ubiquity.