The United States District Court for the District of New Jersey recently amended Rule 7.1.1 of the Local Civil Rules to require parties that use third-party litigation financing to file a disclosure statement (the Amended Rule).[1]
Under the Amended Rule, parties are required to disclose the existence of “any person or entity that is not a party and is providing funding for some or all of the attorneys’ fees and expenses for the litigation on a non-recourse basis in exchange for (1) a contingent financial interest based upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal or bank loan, or insurance.”[2]
The statement must contain the following information:
- the identity of the funder(s), including the name, address, and if a legal entity, its place of formation;
- whether the funder’s approval is necessary for litigation decisions or settlement decisions in the action and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval; and
- a brief description of the nature of the financial interest.[3]
The Amended Rule, which took effect on June 21, also provides for additional discovery into a third-party litigation financing arrangement upon a showing of good cause. Specifically, the rule states:
The parties may seek additional discovery of the terms of any such agreement upon a showing of good cause that the non-party has authority to make material litigation decisions or settlement decisions, the interests of parties or the class (if applicable) are not being promoted or protected, or conflicts of interest exist, or such other disclosure is necessary to any issue in the case.[4]
For new cases, the disclosure must be filed within 30 days after the filing of the initial pleading, the transfer of the matter to the district, or "promptly after learning of the information to be disclosed.”[5] For cases that were already pending on June 21, it must be filed by August 5, 2021.
In a Notice to the Bar dated July 29, the District of New Jersey clarified that a party does not need to file a disclosure statement if no third-party litigation funding exists in the case.[6]
With the dramatic rise in the use of third-party litigation funding in recent years, the bench and bar have faced difficult questions concerning the legal and ethical implications of such arrangements. Increasingly, issues concerning the disclosure of third-party litigation funding have been at the forefront of the debate.
Wisconsin was the first state to enact a litigation financing disclosure requirement.[7] Wisconsin Act 235 of 2017,[8] which was enacted on April 3, 2018, creates a new Wisconsin Stat. § 804.01(2)(bg), which states:
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.[9]
The District of New Jersey’s Amended Rule differs from Wisconsin’s disclosure law in that Wisconsin’s law explicitly carves out attorneys representing parties on a contingency-fee basis, whereas the District of New Jersey’s Amended Rule does not expressly contain this exemption.
The Amended Rule is based on Rule 7.1 of the Federal Rules of Civil Procedure. Another example of a local rule that is based on Rule 7.1 is the Central District of California’s Local Rule 7.1-1. That rule requires counsel for all non-governmental parties to file a Notice of Interested Parties with their first appearance, in which they must disclose the identity of third parties with a financial interest in the outcome of the case.[10]
It is important to note that these third-party funding related variations of Rule 7.1 do not incorporate Rule 7.1’s concept of proportionality. Whereas disclosure under Rule 7.1 is limited to corporations owning 10% or more of the party’s stock, the litigation funding disclosure rules apply regardless of the amount or percentage of financing that the funder is providing.
Other courts have implemented standing orders to address the disclosure of litigation funders. For example, the Northern District of California adopted a standing order in 2017 requiring parties to disclose the existence of third-party litigation financing in any proposed class, collective, or representative action.[11] This standing order is unique in that it is the only local order or rule to specifically require disclosure of litigation funding in class action lawsuits. This approach is noteworthy because it focuses on the types of cases that tend to have the highest amounts in controversy and are perhaps the most likely to involve litigation financing.
It will be interesting to see how New Jersey’s Amended Rule is interpreted in light of confidentiality and non-disclosure agreements and whether this type of disclosure requirement will be extended to other fora.
[3] Id. at 7.1.1(a)(1)-(3).
[4] Id. at 7.1.1(b).
[5] D. N.J. L.R. 7.1.1(a).
[6] Notice to the Bar, (D. N.J. July 29, 2021), https://www.njd.uscourts.gov/sites/njd/files/NoticetoBarreL.Civ_.R.7.1.1clarification_0.pdf.
[7] Jamie Hwang, Wisconsin Law Requires all litigation Funding Arrangements to be Disclosed, ABA Journal, April 8, 2010, https://www.abajournal.com/news/article/wisconsin_law_requires_all_litigation_funding_arrangements_to_be_disclosed.
[8] 2017 Wisconsin Act 235, https://docs.legis.wisconsin.gov/2017/related/acts/235.
[9] Wisconsin Stat. § 804.01(2)(bg), https://docs.legis.wisconsin.gov/statutes/statutes/804/01/2/bg.
[10] C.D. Ca. L.R. 7.1-1, https://www.cacd.uscourts.gov/sites/default/files/documents/LocalRules_Chap1.pdf
[11] Standing Order for all Judges of the Northern District of California, Contents of the Joint Case Management Statement (adopted January 23, 2017), paragraph 19, https://www.cand.uscourts.gov/wp-content/uploads/judges/Standing_Order_All_Judges_11.1.2018.pdf.
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