Disclosure of Consumer Legal Funding

In recent years, individual plaintiffs have increasingly utilized consumer legal funding (“Consumer Funding)” in connection with their personal injury claims. Consumer Funding provides money to individuals who are pursuing those claims and who need cash in the meantime to pay basic living expenses. In exchange, the funding companies receive an interest in any proceeds that individuals may recover on their claims.

In response to this increase in Consumer Funding, defendants have sought disclosure regarding such funding arrangements during pre-trial discovery proceedings. To promote those efforts, defendants have proposed legislation in several states that would mandate such disclosure, regardless of what the normal litigation discovery rules would provide. This discussion reviews the numerous reasons why disclosure should not be legislatively mandated.

The Pre-Trial Discovery Rules Do Not Support Mandatory Disclosure

Disclosure of information through the pre-trial discovery process is governed by the federal or state rules of civil procedure. Generally speaking, those procedural rules allow discovery of information is relevant to any party’s claim or defense. Relevancy is in turn defined by whether the information is “probative;” that is, whether the information would make a fact at issue in the case more or less probable than it would be without the evidence. In other words, the procedural rules permit discovery of information if it could be important in proving, or rebutting, the merits of a legal claim.

Thus, in a personal injury case, the merits of a plaintiff’s claim turn on whether the plaintiff can prove that: (a) the defendant owed a legal duty of care, (b) the defendant breached that duty of care, and (c) that breach of a duty of care proximately caused damage to the plaintiff. Information that is not directed towards proving or rebutting these merits of a plaintiff’s legal claim is generally not relevant, and thus is not discoverable.

Applying these very well-established rules to Consumer Funding shows that the existence and details of the funding arrangements should not be subject to disclosure on pre-trial proceedings in personal injury cases. As noted, Consumer Funding provides financial support to individuals for their household, medical, or other expenses while they are pursuing a legal claim. Such information regarding how a plaintiff is arranging to pay his or her bills generally has no probative value in determining the merits of the personal injury claim. In particular, whether and how plaintiffs are able to pay living expenses usually does not make it more or less likely that the defendant had a legal duty of care, that the defendant breached that duty, and that the breach caused damage to the plaintiff, which are the relevant questions on which pre-trial discovery is permitted. Numerous courts have agreed that this is the correct conclusion.

See RiseandShine Corp. v. PepsiCo Inc., 2022 WL 1118890, at *2 (S.D.N.Y. Apr. 14, 2022); United Access Techs., LLC v. AT&T Corp., 2020 WL 3128269, at *1 (D. Del. June 12, 2020) (determining that both communications with funders who “did a deal,” and funders who did not, were not relevant to any claim or defense); Benitez v. Lopez, 17-CV-3827-SJSJB, 2019 WL 1578167, at *1 (E.D.N.Y. March 14, 2019) (litigation funding documents not relevant to any party’s claims or defense); Space Data Corp. v. Google LLC, Case No. 16-cv-03260 BLF (NC), 2018 WL 3054797, at *1 (N.D. Ca. June 11, 2018) (court not persuaded that the litigation funding materials sought are relevant to any party’s claim); MLC Intellectual Property LLC v. Micron Technology, Inc., Case No. 14-cv-3657-SI, 2019 WL 118595, at *2 (N.D. Ca. Jan. 7, 2019) (litigation funding discovery is not relevant); V5 Techs. v. Switch, Ltd. Case No.: 2:17-cv-02349 (D. Nev. December 20, 2019); AVM Techs., LLC v. Intel Corp., 2017 WL 1787562, at *3 (D. Del. May 1, 2017) (denying discovery of funding agreement).

Kaplan v. S.A.C. Capital Advisors, L.P., S.A.C., No. 12-CV9350 (VM)(KNF), 2015 WL 5730101, at *5 (S.D.N.Y. Sept. 10, 2015), aff’d, 141 F. Supp. 3d 246 (S.D.N.Y. 2015) (defendants’ request for plaintiffs’ litigation funding documents on the ground not shown to be relevant to any party’s claim or defense); Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp.3d 711, 742 (N.D. I11. 2014) (the amount of money sought or received by the plaintiff, the details of the agreement with the funder, or how much the funder will receive if the plaintiff wins the case are irrelevant); VHT, Inc. v. Zillow Group, Inc., Case No. C15-1096 JLR (W.D. Wash. Sept. 8, 2016); Yousefi v. Delta Electric Motors, Inc., No. 13-CV-1632 RSL, 2015 WL 11217257, at *2 (W.D. Wash. May 11, 2015) (funding that a plaintiff receives in connection with litigation is not relevant to any claim or defense at issue); Fulton v. Foley, 2019 WL 6609298, at *2 (N.D. Ill., Dec. 5, 2019) (emphasis added). In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prods. Liab. Litig., 405 F.Supp.3d 612, 615 (D.N.J. Sept. 18, 2019) (“The Court agrees with the plethora of authority that holds that discovery directed to a plaintiff’s litigation funding is irrelevant.”) (emphasis added) (citing numerous cases).

Worldview Entertainment Holdings, Inc. v. Woodrow, 2022-02891 Index No. 159948/14, 204 A.D.3d 629, 630 (App. Div. 1st Dept April 28, 2022) (defendant failed to explain how discovery about litigation financing would support or undermine any particular claim or defense). Compare Acceleration Bay LLC v. Activision Blizzard, Inc., 2018 WL 798731 (D. Del. Feb. 9, 2018).

Any broad legislative or local court rule mandating disclosure Consumer Funding in all personal injury cases would be directly inconsistent with the normal discovery rules governing disclosure of only relevant information. At most, disclosure of Consumer Funding should be decided on a case-by-case basis according to the normal rules. See In re: American Medical Systems, Inc. Pelvic Repair Systems Product Liability Litigation, MDL No. 2325, at 12-14 (S.D.W. Va. May 31, 2016).

Similarly, whether the plaintiff has the financial ability to pay his or her bills has no probative value on the amount of damage that the plaintiff has suffered, and the amount that a plaintiff should recover as a result. The plaintiff should be entitled to recover the same damages regardless of whether and how they are paying their bills for living expenses while a case is ending. The adage that “you take the plaintiff as you find him or her” underscores that defendants’ legal obligations are the same regardless of plaintiffs’ personal financial condition at the time of their injury, and regardless of whether the plaintiffs need to obtain funding (or gifts or private loans) to address their personal financial condition. As a result, any requirement for disclosure of Consumer Funding in personal injury cases would be requiring discovery of information that is not relevant on the amount of damage caused by defendant’s conduct, and the monetary sum that should be paid by the defendant to compensate a plaintiff for the damage suffered.

Defendants have argued that, regardless of probative value, information regarding Consumer Funding should be disclosed because the funding has been obtained in connection with a legal claim, and because funding companies receive an interest in any proceeds that individuals may recover on the claims. But these facts do not suggest that information regarding Consumer Funding should be generally disclosed to defendants pursuant to Legislative mandate. To the contrary, these facts demonstrate that Consumer Funding information should be protected from disclosure by the work protect doctrine. Lambeth Magnetic Structures LLC v. Seagate Technology (US) Holdings, Inc., Civil Action No. 16-538, 16-541 (W.D. Pa. December 19, 2017).

The “Work Product Doctrine” That Limits Disclosure In Pre-Trial Discovery

The work product doctrine provides essentially that information prepared “in anticipation of litigation” by or for a party does not have to be disclosed. The rationale is that the internal thinking and conduct of parties and their attorneys with respect to a lawsuit should be protected from disclosure, as a matter of public policy, to preserve the privacy of internal assessments on the merits of the case, and strategies for proving the case based on those assessments. Consumer Funding fits squarely within this definition of “work product.” But see Charge Injection Techs., Inc. v. E.I. DuPont De Nemours & Co., No. CV 07C-12-134-JRJ, 2015 WL 1540520, at *5 (Del. Super. Ct. Mar. 31, 2015).

Consumer Funding is obtained in connection with anticipated or ongoing litigation, and with the knowledge and often the review of the plaintiffs’ attorneys. Moreover, information regarding the existence, extent and nature of Consumer Funding can reveal important clues regarding the assessment of a case by the funding company, the plaintiff, and the plaintiff’s attorney. For example, the funding companies provide funding to plaintiffs based on their own confidential assessment that the cases have merit and a particular value. Disclosure of the existence and amount of Consumer Funding will permit defendants to draw inferences about the funding companies’ confidential assessments, and to gain a strategic advantage as a result. Similarly, plaintiffs and their attorneys are normally only willing to enter into a funding agreement (which provides the funding company with an interest in the case recovery) if they have reached their own confidential assessments regarding how the funding will help increase the value of the case. Disclosing Consumer Funding will give defendants unfair strategic insight into those confidential assessments of the plaintiffs and their attorneys as well.

Such unfair access by defendants to the plaintiffs’ internal strategic assessments is exactly the kind of information that the time-honored work product doctrine was designed to prevent. There is no justification for a legislative mandate that would summarily upset that precedent. At least one commentator has written persuasively that there are significant public policy reasons that counsel against disclosure of Consumer Funding in pretrial discovery. Sharfman, The Economic Case Against Forced Disclosure of Third Party Litigation Funding, New York State Bar Association Journal (January 11,2022). This economist points out that, as a baseline matter, privacy considerations rules have typically prevented discovery of a party’s finances or financial condition unless there are very specific and compelling reasons requiring disclosure. That privacy is particularly important with respect to financial information such as Consumer Funding because it has “economic value,” and “is economically efficient and actually beneficial from a social welfare perspective.”

Public Policy Reasons That Should Protect Against Disclosure

As discussed above, a legislative mandate requiring the disclosure of Consumer Funding information would reveal these internal confidential assessments, and give the defendants an unfair strategic advantage. Defendants would know more about the plaintiffs’ own intenal valuation of their cases through this disclosure, and the plaintiffs would have no corresponding disclosure from the defendants with respect to the defendants’ internal assessments of value. That disparity not only results in an unfair exchange of value in the pre-trial discovery process that favors defendants at the expense of plaintiffs, and tilts the playing field unfairly. It creates an imbalance of information that, as a matter of standard economic theory, will result in economic inefficiency in the negotiation of any settlement. Defendants will have insight into the plaintiff’s assessment of the value of the cases, and plaintiffs will not have an equivalent insight into the defendants’ assessment, which in turn will result in plaintiffs having less power to negotiate a just and fair resolution that is in the best interests of justice.

Just as significantly, a legislative mandate requiring disclosure of Consumer Funding would have an adverse effect on plaintiffs who have not obtained consumer legal funding. The inferences that defendants could draw are that (a) such plaintiffs are susceptible to a “lowball” settlement offer because they have not obtained the personal financial resources to pay bills that may be necessary to withstand a lengthy lawsuit, and (b) no funding company would provide those resources because the merits of the case are not strong enough to warrant funding. Plaintiffs should not have a disclosure obligation that, by virtue of their failure to produce any such information, could create such inferences and reveal clues to the defendant, which in turn could affect the defendant’s decision to settle or litigate the case for an amount unrelated to the merits.

The Defendants’ Arguments For Disclosure Have No Weight

Despite these numerous and well-supported reasons not to legislatively mandate disclosure of Consumer Funding, defendants have insisted that disclosure should nevertheless be required. Defendants’ insistence rests in part on inapplicable reasons that address “commercial litigation finance” (not Consumer Funding), and in part on an unpersuasive concern that Consumer Funding has improved a plaintiff’s ability to obtain the best possible result on legal claims.

Defendant’s most common reason for disclosure confuses consumer legal funding with commercial litigation finance. Commercial litigation finance is a transaction in which a finance company invests directly in the lawsuit, and pays the legal expenses of that lawsuit until a resolution results in a recovery for the company. As a result, the finance company is alleged to have some direct control or influence over the lawsuit and its prosecution. The special circumstances in a commercial litigation finance transaction are very different from consumer legal funding. Consumer legal funding amounts are expressly not to be used for litigation expenses, and the funding company is expressly not permitted to have any control over or input in the lawsuit.

Conflating the two, defendants argue that any finance arrangements should be disclosed to address who is controlling the case, and to assess any ethical issues about “fee sharing” and “conflicts of interests.” While these arguments may have some applicability to commercial litigation finance arrangements, they have no relevance to consumer legal funding arrangements, where the funding companies and the funding are not involved in the litigation, and the funding company cannot and does not have any role in, much less influence over, the litigation in a way that would create any conflict of interest or other ethical issues. Moreover, the consumer companies receive an interest in any case recovery that is completely separate from and unrelated to any legal fees received by the plaintiffs’ attorneys, and thus there are no actual or potential concerns with respect to the “sharing of fees.”

Defendants also contend that Consumer Funding agreements should be treated like insurance policies, which are usually discoverable in pre-trial discovery. It is true that insurance policies are usually disclosed during discovery. However, they are not disclosed because they have probative value with respect to the merits of any case. Indeed, insurance policies, and insurance coverage information, are generally not admissible in any trial on the merits. Instead, insurance policies are disclosed for pre-trial purposes so that the parties can make a realistic appraisal of whether the defendant has assets necessary to satisfy any judgment in the case, and whether settlement can be achieved based on some or all of those available assets. There is no equivalent rationale for Consumer Funding agreements. The plaintiff in a personal injury case has no corresponding obligation to show assets (or any financial capability) because the plaintiff will not be required to satisfy any judgement at the end of the case. Nor is the plaintiff’s financial status relevant to the merits of the case, for the reasons discussed above.

Disclosure of insurance policies is also not equivalent to disclosure of Consumer Funding because, as mentioned earlier, Consumer Funding information would give Defendants access to and insight into information regarding plaintiffs’ internal assessments of the value of their cases. That is not true with insurance policies, which only contain the amount that may be available for a judgment. Equivalent disclosure would require defendants to reveal to the plaintiffs their (or their insurance companies’) internal assessment of the value and merits of a case, which defendants would certainly claim is work product.

Conclusion

Most fundamentally, defendants are concerned that Consumer Funding is increasing the plaintiffs’ ability to reject early settlements that do not reflect the real value of a case, and to prosecute the case until a fair outcome can be reached. While this concern may result in higher settlement costs for defendants, their choice is to pay those larger settlements or not based on the merits of the case. Defendants should not be able to drive lower settlement amounts by seeking disclosure of Consumer Funding information that tips the scales of justice not on the merits of but instead on unfair access to plaintiff’s internal assessment of the value of the case.

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