Risk Update

Litigation Funding — Renewed Spotlight on Law Firm Risks, Rules and Revelations

Russian Use of Litigation Finance Needs Scrutiny, Treasury Says” —

  • “The Treasury Department needs to look into the use of the litigation finance in the US by foreign actors, Deputy Secretary Wally Adeyemo said.”
  • “His comments came after Sen. Bob Menendez (D-N.J.) asked whether he believed the lack of transparency in the litigation finance industry could create a gap in sanctions enforcement. Menendez referenced a Bloomberg Law investigation that found a firm established by Russian billionaires tied to Russian President Vladimir Putin has backed lawsuits in New York and London both before and after three of its founders were sanctioned following the 2022 invasion of Ukraine.”
  • “Menendez also referenced a Government Accountability Office report from 2022, which found sovereign wealth funds may be investing in litigation finance, and he raised the issue of patent litigation being financed by foreign companies.”
  • “The Senate Committee on Banking, Housing, and Urban Affairs held the hearing to get an update on efforts to counter illicit finance, terrorism, and sanctions evasion from the Treasury Department. Menendez was indicted last year by federal prosecutors in Manhattan for allegedly providing sensitive US government information and taking steps that secretly aided Egypt. He is a senior member of the banking committee.”
  • “Last year, House Speaker Mike Johnson (R-La.), Sen. John Kennedy (R-La.), and Sen. Joe Manchin (D-W.V.) introduced legislation that would regulate foreign entities’ ability to fund litigation. The proposed Protecting our Courts from Foreign Manipulation Act, which has not been heard in committee, would require disclosure of any foreign agents or investors financing a suit. It also would ban sovereign wealth funds and foreign governments from funding US litigation.”

The General Counsel of Unified Patents weighs in: “As Litigation Funders Skirt Sanctions, It’s Time for Disclosure” —

  • “Unsurprisingly, the US government doesn’t like being in the dark. But they appear to be when it comes to Russian sanctions and litigation financing. That’s in part due to the nature of the litigation financing industry, and lack of laws requiring transparency about who or what is funding the litigation.”
  • “It’s high time that litigation financing be held to similar mandatory disclosure standards that courts already require for insurers and publicly traded investors.”
  • “At times, they will themselves create shell companies, hide their identities, and sue; more often, they will fund others’ cases and do so without transparency. These deals can be for hundreds of millions, and are sometimes worth billions. Yet they claim these private, undisclosed deals worth billions offer them no control. Sure.”
  • “While information is undisclosed and thus scarce, investments in US litigation are a multibillion-dollar industry, comprising a growing share of some types of commercial litigation.”
  • “Class actions, bankruptcy, and patent cases seem to attract much of it, though insurance, workers’ comp, and even high-profile divorces have been financed.”
  • “Unlike buying a house or trading stocks or even private equity investing, litigation funders generally don’t disclose their terms, their involvement, or who their investors might be to anyone—the government, the courts, even the people they’re suing. Right now, the law doesn’t require it.”
  • “If no one is aware it’s happening, couldn’t foreign governments, money launderers, or other bad actors take advantage? What about judicial conflicts? Or companies funding suits against strategic competitors or key industries?”
  • “And if there were some fraud upon the court, how would it ever be identified? The Judicial Conference, the self-governing body of the US Federal Courts—which reports to the Supreme Court—began considering modest disclosure requirements as far back as 2014.”
  • “Funders responded vociferously to these modest calls for transparency, arguing such concerns were overblown, irrelevant, or some kind of sideshow.”
  • “They rejoined that funding cases increased access to justice, so the risk was worth it. And they argued that conflicts of interest would be rare—that there were other, better ways for others to interfere in industry, and there were no national security concerns. They wrote dozens of letters to the Judicial Conference arguing against disclosure.”
  • “So it should no surprise that just last month, investigative reporters revealed that sanctioned Russian oligarchs have been using litigation funding to evade US sanctions in US courts.”
  • “Notably, less than two years ago, some forward-thinking judges began requiring modest disclosures (as others had before them), and soon, it revealed Chinese investors were backing US patent suits against US companies in US courts. And recent government reports showed some of the biggest investors in litigation funds are as-yet-undisclosed sovereign nation wealth funds.”
  • “As it turns out, allowing billions of dollars a year to flow through completely undisclosed, much less unregulated, financial products invites investors seeking to avoid scrutiny.”
  • “The Judicial Conference, which represents all federal judges and makes recommendations on rules changes, has since 2017 been considering mandatory disclosure akin to what courts already require for insurers and publicly traded investors.”
  • “It would be nothing more than a long-overdue tweak to existing Rules 7.1 and 26 of the Federal Rules of Civil Procedure, something the judiciary itself can implement. But they have been characteristically slow to act, giving the issue due consideration over the past seven years.”

Litigation Funders Set to Prosper in Proposed NY Rule Change” —

  • “A New York City bar committee is pushing to change state rules to allow law firms to assign or pledge fees in exchange for outside financing.”
  • “Funding to law firms tied to the results of specific cases should be permitted, the New York City Bar Association’s Professional Responsibility Committee proposed last week in two amendments to Rule 5.4(a). The rule bans lawyers and law firms from sharing fees with nonlawyers.”
  • “If adopted, the amendments would resolve uncertainty over litigation funding deals in New York. Litigation finance has grown to a $13.5 billion industry in which investors fund lawsuits and take a portion of any successful awards.”
  • “The proposed amendments reiterate that lawyers must not allow their judgment be impaired by the relationship with a financial provider. It also would require law firms to notify clients of financial arrangements that could impact the representation of the client and field questions about it.”
  • “The rule has been modified in recent years in some states, which positioned looser restrictions as a way to increase access to legal services for lower and middle income populations. Litigation funders have also benefited from the relaxing of these rules.”
  • “In New York, litigation funding for law firms was stymied by a 2018 opinion issued by the City Bar Committee on Professional Ethics that concluded funding agreements with law firms would violate Rule 5.4.”
  • “The 2018 opinion caused a stir in the litigation funding community and prompted the NYC Bar president to form the Litigation Funding Working Group later the same year. The goal of the group, which consisted of 25 lawyers, academics and funders, was to study litigation finance and provide a report with recommendations regarding its practices.”
  • “Their 90-page report, which was released in March 2020, presented two amendments to Rule 5.4. A separate Professional Responsibility Committee rejected the proposals as too complicated and overly broad.”
  • “‘You get to the same point, but I think we get there in a more straightforward and simpler fashion,’ said Aegis Frumento, former chair of the Professional Responsibility Committee, of the recent amendments.”
  • “The proposed amendments will now go the State Bar Association of New York, which if they agree, will then submit them for approval to the four appellate divisions of the New York State Supreme Court for adoption to the rules of professional conduct.”