In the high-stakes arena of legal battles, a $5 billion industry has emerged in the United States that seeks to level the playing field for those seeking their day in court.[1] Third-party litigation funding has become a pivotal financial mechanism, reshaping the dynamics of litigation. What exactly is it though?

Third-party litigation funding broadly refers to the practice of offering financial support to a party (usually the plaintiff) in a prospective lawsuit, in exchange for a share of any damages award or settlement. Essentially, funders share in the claimant’s risk by providing financial aid in return for a stake in the “winnings.” This process enables claimants to hire their preferred counsel without experiencing financial hardship. However, it can be controversial. When third parties “invest” in a lawsuit, there is the unequivocal risk that the third party may have a detrimental influence on the strategy of the case.[2] For example, say the plaintiff wants to settle, but the third-party funder has a greater interest in taking it to trial or pushing for more money.

This conundrum has led to defense firms inquiring about these financial arrangements in discovery and questioning whether disclosure of the funding is required by law. Wisconsin became the first state to pass legislation regulating the disclosure of third-party litigation funding.[3] 2017 Wisconsin Act 235 states in relevant part:

“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.”[4]

(emphasis added). Simply stated, Wisconsin now requires attorneys to disclose any third-party litigation funding deals to clients and to the other parties in a case, excluding contingency fee agreements.[5] Wisconsin defense attorneys can breathe a sigh of relief, as we are now mandatorily privy to plaintiffs’ third-party litigation funding relationships. That being said, how exactly should the discoverability of litigation finance be handled from the defense perspective in states that have yet to join Wisconsin’s rank?

Third-party litigation funding imposes legal, ethical, and professional issues that all defense attorneys should be aware of. However, historically, third-party finance companies tend to target personal injury and medical malpractice plaintiffs; thus, defense attorneys in these fields should especially have their guard up.[6] It is pragmatic to investigate the funding arrangement at play in each matter, even after third-party funding materials have been obtained via discovery. Prudent defense attorneys should send interrogatories requesting the identification of litigation financing companies, and requests for production of documents, seeking agreements and terms of the relationship at the outset.[7] This due diligence provides defense attorneys the opportunity to discover, for example, the potential funder’s involvement in the medical care and treatment of a medical malpractice plaintiff.

It is also important for defense counsel to understand the most common arguments made for and against disclosing third-party funding information: relevance, witness bias, collateral source, and work product doctrine. In cases where discovery reveals that funders have entered into agreements with the plaintiff’s medical providers, the evidence may be admitted to show bias on the part of the medical provider and would certainly be discoverable.[8] However, courts have almost unanimously held that documents and communications sent from plaintiff’s counsel to third-party funders for the purpose of obtaining financing is protected by the work product doctrine.[9] Arguments from defense counsel that these communications are not privileged or have been waived have been rejected.[10] All is not lost though. Defense counsel should still push to obtain documents and communications from plaintiff’s counsel to third-party funders that are fact-based. For example, factual statements from the plaintiff to the funder, disclosure of possible witnesses, or documents expanding on the allegations in the complaint.[11] This information is great for impeachment purposes.

Defense attorneys must take an offensive approach when it comes to third-party litigation funding relationships. When defending cases, it is essential to consistently examine the funding arrangement and remain well-informed about the various challenges that may arise from the use of litigation funding. Especially since this industry only seems to be growing.

[1] Hall, E. John, Jr., et al, Modern Litigation: The Effect and Discoverability of Third-Party Litigation Funding (Part 1 of 2), For the Defense, https://digitaleditions.walsworth.com/publication/?m=55594&i=699708&view=articleBrowser&article_id=3971350&ver=html5 (March 2021).

[2] Tung, R. Jonathan, Esq, Why You Should Discuss Litigation Financing with Clients, FindLaw, https://www.findlaw.com/legalblogs/strategist/why-you-should-discuss-litigation-financing-with-clients/ (Updated March 21, 2019).

[3] Billings, M. Ryan, et al, Sweeping Changes to Rules of Civil Procedure, Wisconsin Lawyer, https://www.wisbar.org/NewsPublications/WisconsinLawyer/Pages/Article.aspx?ArticleID=26396#:~:text=Wisconsin%20has%20become%20the%20first%20state,whether%20this%20becomes%20a%20broader%20trend.&text=Wisconsin%20has%20become%20the,becomes%20a%20broader%20trend.&text=become%20the%20first%20state,whether%20this%20becomes%20a (June 1, 2018).

[4] 2017 Wisconsin Act 235, Section 12, § 804.01(2)(bg).

[5] Vogele, William, Esq, New Law: All Third-Party Litigation Funding Must be Disclosed in Wisconsin, FindLaw, https://www.findlaw.com/legalblogs/strategist/new-law-all-third-party-litigation-funding-must-be-disclosed-in-wisconsin/#:~:text=Wisconsin%20now%20requires%20attorneys%20to%20disclose%20any%20third-party,litigation%20finance%20to%20swing%20at%20the%20big%20ones (April 11, 2018).

[6] Hall, E. John, Jr., et al, Modern Litigation: The Effect and Discoverability of Third-Party Litigation Funding (Part 2 of 2), For the Defense, https://digitaleditions.walsworth.com/publication/?i=704195&article_id=4001620&view=articleBrowser (April 2021).

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.