Litigation Funding In Arbitrations And Class Actions

In terms of important trends in the legal industry, the rise of litigation finance and the rise of arbitration stand out as two of the most notable. So it should come as no surprise that these trends are intersecting, with a significant portion of litigation funding going to support arbitrations, both domestic and international.

Lake Whillans Litigation Finance, a litigation funder that invests in litigations in the U.S. and Canada and arbitrations globally, reports that a significant portion of the opportunities it sees are domestic and international arbitrations. Claimholders in arbitrations increasingly recognize that litigation finance is a valuable tool for enforcing their rights.

At the Litigation Funding Forum earlier this month, I attended a thought-provoking “fireside chat” focused on litigation funding in arbitrations and class actions, featuring two speakers: Lisa Richman, a partner at McDermott Will & Emery who focuses on international dispute resolution (especially international commercial arbitration), and J. Richard Supple Jr., a partner at Hinshaw & Culbertson who has been involved in the funding world for several years.

Richman speaks four languages — English, French, German, and Spanish — and these language skills drew her into the world of international arbitration early in her career, giving her a front-row seat to the rise of arbitration over the past two decades. In terms of her involvement with litigation finance, she both helps her clients obtain funding and does second-opinion work for funders interested in getting another take on the viability of a case.

What distinguishes litigation funding in the arbitration context from how it plays out in other fields? Richman identified two key concepts. The first is the “seat” of the arbitration, the legal place for the proceedings. When a contract contains an arbitration clause providing that any and all disputes shall be arbitrated, it will specify the set of rules that will govern the arbitration and the arbitral seat where any arbitration will take place. The identity of the arbitral seat affects not just the procedural aspects of an arbitration but also the body of law related to litigation funding — so when entering into a funding arrangement, the parties need to consider the designated seat and how it regulates litigation finance.

The second concept Richman mentioned: privacy/confidentiality. Arbitration takes place in private, meaning that unless everyone has agreed to a different arrangement, it doesn’t take place in open court. But arbitration is not necessarily confidential, unless the parties have so agreed. In the absence of a confidentiality agreement, the parties are at liberty to share information about the arbitration — including prospective funders.

In recent years, there has been a push for greater transparency or disclosure of funding arrangements, at least in terms of the fact of the funding and the identity of the funder, to avoid potential conflicts of interest involving the arbitrators. But this has generally not extended to the specific terms of details of funding arrangements (which are not necessary for purposes of avoiding conflicts).

Momentum for greater disclosure of funding has also been growing in the class-action space, as Rick Supple explained. The Northern District of California now has a rule requiring disclosure of funding in class actions, and similar rules are under consideration in Congress and by the Advisory Committee for the Federal Rules of Civil Procedure.

What does this mean for claimholders and funders in class actions? Supple said that both funders and parties should at least consider, at the outset of a possible arrangement, the possibility that some disclosure could eventually be required.

One concern cited by supporters of disclosure is that outsiders like funders not be allowed to interfere with the professional judgment of the lawyers to the claimant. Of course, as pointed out by Supple (who represents lawyers in many professional-ethics matters), lawyers already have this ethical obligation. But it’s possible that judges might start requiring disclosure of the identity of the funder and some affirmation by the funder and the party that the plaintiff and its counsel, not the funder, will control the course of the litigation.

This issue of disclosure intersects in interesting ways with the selection of class counsel in a class action. Summarizing the case law, Supple urged funders who are interested in the class-action space to think carefully about the qualifications of proposed class counsel. If the lawyers under consideration have a strong track record when it comes to class actions, the court is less likely to require disclosure of funding. On the other hand, if the proposed lawyers do not have extensive experience with class actions, the court is more likely to be interested in the existence and nature of any funding arrangements, to ensure that the interests of the class are adequately protected.

Having to disclose the fact of funding and the identity of the funder is not, by itself, a major problem for litigation funders. In fact, it can sometimes accelerate the settlement of a case, letting the defendant know that the plaintiff has resources and can’t just be ground down in a war of attrition. So while required disclosures might increase, at least in specific areas like class actions, this development is unlikely to stop the continued expansion of the litigation finance industry.

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David Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.