[1] A few years ago, commentators estimated there was $5 billion in litigation financing in the United States.[2] Since then, the litigation funding industry has continued to grow. For good reason, Third-Party Litigation Financing (“TPLF”) and its offshoot, Third-Party Medical Funding (“TPMF”), are hot topics in litigation. They are issues for defendants in a variety of types of litigation, including product liability disputes.
These two financial mechanisms are largely unrelated. In traditional TPLF arrangements, an investor advances money to a party—usually a plaintiff—to pay lawsuit expenses. In exchange, plaintiff agrees to give the investor a portion of his proceeds from the litigation. Traditionally, these are nonrecourse investments, in which the funder is guaranteed a portion of any awarded damages, including fees, judgments, or settlements.
A TPMF is different than traditional TPLF. Plaintiffs in personal-injury cases now secure the services of third-party litigation funders that promise to provide plaintiffs with medical services from doctors within the third-party funder’s “network” of providers. In exchange, the injured party transfers his/her right to recover the medical bills to the third-party funder in the form of a medical “lien.” The doctors normally also agree to accept payment of a percentage of the medical bills from the third-party funder in exchange for the transfer of the full medical “lien.” Yet, unlike Medicare, Medicaid, and private medical payers, third-party medical funders are typically unwilling to negotiate reductions in the “liens,” which increase the cost to defend cases and make settlement difficult.
There are arguments that suggest traditional TLPF is improper. For example, opponents argue they violate the Model Rules of Professional Conduct. Model Rule 5.4(a) provides lawyers are not to share fees with non-lawyers’, such as third-party funders, and Model Rule 1.7(a) bars from taking on representation where there are conflicts of interest, and contractual stipulations in the third-party funder contract have the potential to be inconsistent with plaintiff interests. Supporters of TPLF argue that if a plaintiff contracts directly with the third-party funder that Model Rule 5.4(a) is not violated and that a plaintiff can waive the potential conflict by consent and comply with Model Rule 1.7(a). In addition to the Model Rules, some states also still have laws prohibiting champerty and maintenance. Both were medieval laws adopted to avoid frivolous litigation. Champerty is an agreement to divide litigation proceeds between the owner of a claim and an unrelated party that supports the lawsuit. Maintenance is improper assistance in prosecuting or defending a lawsuit given to one with no bona fide interest in the lawsuit. Yet, decisions on whether third-party funding violates these rules vary widely across the country.
Whether a traditional TPLF or a TMPF are permissible state by state is beyond the scope of this paper. However, it is safe to say that despite efforts from defense bars across the country, third-party litigation funding continues to thrive. Indeed, the American Bar Association and California Bar Association issued recent opinions which do not denounce litigation funding.[3] Rather, the organizations provide guidance on “best practices” when utilizing same.
Yet, even if deemed an acceptable tool available for claimants, the funding arrangements are still an issue in litigation. They are an issue that defendants should not ignore. Whether permitted or not, the existence of TPLF and/or TPMF is relevant. Herein, we discuss the reasons and note several tactics defendants can utilize to discover the existence of third-party funding as well as the related documents. Obtaining that information will assist in leveling the playing field.
Why Are TPLF and TPMF Relevant and Determining Whether TPLF and TPMF Exist in Your Case?
It is hard to dispute that TPLF and TPMF can have a big effect on a case and its resolution. Defendants have a fundamental interest in knowing who controls the litigation. They desire to know whether unnecessary medical expenses and procedures are being promoted by a funder to drive up case value.[4] They have interest in discovering potential bias, such as whether a selected doctor’s arrangement with the funder compromises him/her. Defendants also need to understand the funding arrangements since they can create conflicts of interest for judges, lawyers and parties.[5] They have an interest in knowing if a third-party arrangement creates a lien that must be satisfied. A funding relationship can also dissuade settlement, particularly if the claimant has already been paid by the funder. The extent to which any of these issues exist depends on the terms of the third-party funder’s contract. Yet, it is likely that many have defended cases in which some form of TPLF or TMPF existed, but never knew.[6]
So, a threshold question is whether third-party litigation funding is an issue. Our experience suggests claimants are reluctant to disclose TPLF and TPMF, presumably because of the negative optics (i.e., ethical questions, bias of medical providers, unnecessary treatment, etc.). Fights over the disclosure of the existence of the funding agreements and certainly the agreements themselves are routine. The parameters of permissible discovery of same is a litigation hot spot. To avoid being unaware of third-party funding, practitioners must be deliberate and through in seeking the information.
Though the American Bar Association cautions attorneys utilizing third-party funding to “assume that some level of disclosure may be required,” and that the “litigation funding arrangement may well be examined by a court or the other party,”[7] when addressing the issue of discoverability, unfortunately, courts have taken very different positions. Some courts allowed disclosure,[8] while others have denied defendants’ requests outright.[9]
We are beginning to see states pass legislation in the interest of transparency. In 2018, Wisconsin became the first state to mandate disclosure of TPLF arrangements. In all state court civil cases—not just in complex litigation or class actions—the Wisconsin statute requires a funded party to provide to all other parties any third-party litigation agreement.[10] West Virginia passed a nearly identical statute last year.[11] While other states will likely pass similar legislation, a federal disclosure requirement might influence states to act more swiftly.
Individual courts and districts are similarly undertaking efforts toward requiring disclosure of third-party financers.[12] The U.S. District Court for the Northern District of California, for example, updated its district-wide standing order to mandate disclosure of third-party financers in class actions.[13] Also, in April 2021, the U.S. District Court for the District of New Jersey proposed an amendment to its local rules that would require automatic disclosure of a third-party financer’s identity, a statement regarding whether the financer’s approval is necessary for litigation and settlement decisions, and a description of the nature of the financial interest[14]—a move the U.S. Chamber of Commerce lauded as essential to “fair” and “ethical” civil litigation.[15]
Third-party funding is not an issue in every case. However, there are some tell-tale signs that may indicate that TPLF or TMPF may exist in a case:
- Unusually high medical specials. Often a plaintiff’s medical specials will be much higher than we typically see for similar injuries. For example, we have seen medicals totaling several hundred thousand dollars for soft-tissue injuries sustained in low-speed motor vehicle collisions.
- Medical treatment for “new” injuries. Be wary of medical treatment for injuries that appear to be wholly unrelated to the injured parties’ initial injuries. As an illustration, if a plaintiff complains of neck and shoulder pain on the day of the incident but, six months later, undergoes a sacroiliac joint fusion.
- Medical providers rendering treatment outside of their specialty. Though not a surprise, it appears many doctors refuse to agree to the arguably unethical contract terms required by the third-party medical funders. Thus, third-party medical funders often must refer claimants to medical providers with no little or no specialization in the required treatment (i.e., a psychiatrist recommending orthopedic care).
- Accelerated medical treatment. Some third-party medical funders seek to drive up the medical specials, particularly if its recover is directly tied to medical expenses. So, the funder’s often associate doctors with a reputation of aggressive medical treatment. In addition, the third-party medical funder often will push the medical provider and plaintiff to ensure that there is no “time gap” in the medical treatment. We have seen plaintiffs undergo highly invasive medical procedures, such as lumbar fusions, within six (6) months of a motor-vehicle accident.
- Location of medical providers. Third-party funders may have a difficult time locating doctors willing to participate in the funders’ “networks.” Thus, if there is a funder involved, plaintiff may be seeing a medical provider far from his/her residence. The further the distance, the more likely third-party medical funding is involved.
Obtaining Relevant Information from TPLF
Though jurisdictions differ on the disclosure requirements for TPLF and TMPF, defendants should employ a careful strategy to determine whether funding is involved. The first step is propounding clear discovery requests to plaintiffs targeting TPLF and TPMF, particularly if the tell-tale signs are present.
But, determining whether TPLF exists in your case is only the first hurdle. The real challenge is obtaining the most useful information (the actual documents concerning the TPLF and TMPF) from the plaintiff and/or the third-party funder. These documents may include:
- Agreements between third-party funder and plaintiffs
- Agreements between third-party funder and medical providers
- Email correspondence between third-party funder and doctors regarding medical treatment
- Email correspondence between third-party funder and plaintiff’s counsel
- Case evaluations prepared by plaintiff’s counsel provided to the third-party funder
Decisions across the country suggest third-party funders, doctors in their networks, and plaintiffs fight to prevent the production of these documents. They do so because the documents typically reveal the underbelly of third-party funding, i.e. liens, bias, financial interest of doctors, control and unnecessary treatment.
So, how do you get these documents? Plaintiffs often have a subset of the documents in their possession and, when they do, regularly object to the production of same, asserting they are privileged. Though one should not neglect seeking all TPLF and TPMF information from plaintiffs, you should also work to obtain the documents directly from the third-party funder.
Typically, the third-party is not a party to the litigation, so you need to issue subpoenas. This process is easier in federal court under Fed. R. Civ. P. 45, given nationwide subpoena power. In cases in state court, one must issue subpoenas in the jurisdiction in which the third-party funder is located, following the Uniform Interstate Depositions and Discovery Act.
Expect that third-party funders will object to the subpoenas. The objections may be multifaceted. One objection often seen is a claim the information is privileged. That objection can be challenged because third-party funders are not parties to the litigation and, thus, have a weak argument that the information is protected work-product and/or attorney-client communication.
Using the Received Information from Third-Party Funders
Documents received concerning the third-party funding arrangements are often a treasure trove of information for an attack on plaintiff’s case. The fact that a plaintiff uses a third-party funder can cast doubt on their motivations in pursuing a lawsuit. Further, if a third-party funder is providing medical care and/or living expenses, it should prevent plaintiff from testifying as to some of the hardship he/she incurred as a result of an injury or, alternatively, create robust cross if he/she does.
The documents can also be valuable in challenging the necessity and reasonableness of a plaintiff’s medical treatment. Most third-party medical funders have a “network” of medical providers to whom they send plaintiffs. The “network” providers regularly have a blank check for medical treatment and procedures and the funders push the providers to provide treatment, sometimes unnecessary, thereby increasing the plaintiff’s medical specials.
Perhaps the most damaging use of this information is using it to challenge the credibility and bias of the plaintiff’s doctors. Many doctor’s agreements with funders provide defendants with a valuable cross-examination weapons, such as agreements evidencing the doctor has a direct financial interest in providing favorable testimony for plaintiff. In other words, the providers are not your run-of-the-meal treater but, instead, are effectively retained plaintiff medical experts. Attacking the providers on their relationship with the third-party funders, takes them out of their safety zone – the treatment of a plaintiff.
Conclusion
Third-party litigation funding appears to be here to stay. However, there is a silver lining – defendants can often use these ethically questionable agreements (and the related documents) to chip away at a plaintiff’s case. To do so, defendants must be aggressive in uncovering the third-party funder’s involvement and in obtaining documents related to the funding agreement.
[1] Meade Mitchell and Jon Still are partners at Butler Snow LLP in Jackson, MS. Each are involved in product liability defense work, locally and nationally. Their contact information is meade.mitchell@butlersnow.com at 601-985-4560 and jon.still@butlersnow.com at 601-985-4434.
[2] Natalie Rodriguez, Going Mainstream: Has Litigation Finance Shed Its Stigma?, Law360, December 12, 2017, available at https://www.law360.com/articles/992299.
[3] See Cal. Bar Assoc. Formal Op. 2020-204 (Oct. 1, 2020) (available at: http://www.calbar.ca.gov/Portals/0/documents/ethics/Opinions/Formal-Opinion-No-2020-204-Litigation-Funding.pdf); ABA Resolution; Best Practices for Third-Party Litigation Funding (August 2020) (available at: https://www.americanbar.org/content/dam/aba/directories/policy/annual-2020/111a-annual-2020.pdf).
[4] See Michael Goldstein and Jessica Silver-Greenberg, How Profiteers Lure Women into Often-Unneeded Surgery; N.Y. Times (Apr. 14, 2018), https://www.nytimes.com/2018/04/14/ business/vaginal-mesh-surgery-lawsuits-financing.html
[5] Patrick A. Tighe, Memorandum: Survey of Federal and State Disclosure Rules Regarding Litigation Funding 209 (Feb. 7, 2018), https://judicialstudies.duke.edu/wp-content/uploads/2018/04/Panel-5-Survey-of-Federal-and-State-Disclosure-Rules-Regarding-Litigation-Funding-Feb.-2018.pdf.
[6] There is also the argument that the attorney-client privilege does not exist as to communications with a third-party funder, though this argument is challenged by claimants and third-party funders. Hence, those communications may be discoverable.
[7] American Bar Association, Best Practices for Third Party Litigation Funding, 2, 11 (Aug. 2020) (“ABA Best Practices”), https://www.americanbar.org/content/dam/aba/ directories/policy/annual-2020/111a-annual-2020.pdf.
[8] See, e.g., In re: Am. Med. Sys. Inc., MDL No. 2325, 2016 WL 3077904, at *5 (S.D. W. Va. May 31, 2016) (funder’s relationship with doctors is relevant to plaintiffs’ motive for corrective surgery as well as its cost); Cobra Int’l, Inc. v. BCNY Int’l, Inc., No. 05-61225-CIV, 2013 WL 11311345, at *3 (S.D. Fla. Nov. 4, 2013) (funding agreement is relevant to determining ownership of the patent and who has control over the case); see also In re Int’l Oil Trading Co., LLC, 548 B.R. 825, 838 (Bankr. S.D. Fla. 2016) (ordering that the funding agreement be produced but allowing redaction of terms that disclose counsel’s mental impressions and opinions about the case)
[9] See, e.g., Benitez v. Lopez, No. 17-cv-3827-SJ-SJB, 2019 WL 1578167 (E.D.N.Y. Mar. 14, 2019) (denying defendants’ motion to compel, finding that documents concerning litigation financing were irrelevant and that asserted potential related problems were speculative); In re: Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prods. Liab. Litig., 405 F. Supp. 3d 612, 615 (D.N.J. Sept. 18, 2019) (denying the discovery request and holding the litigation funding information was irrelevant, but stating that discovery could be allowed if the defendant showed good cause, e.g., where “something untoward occurred,” or a non-party was making litigation decisions, or the interests of the class were not being protected or a conflict of interest existed).
[10] See Wis. Stat. § 804.01(2)(bg).
[11] Compare W. Va. Code Ann. § 46A-6N-6 with Wis. Stat. § 804.01(2).
[12] See Third-Party Litigation Financing: Local Rules and Forms, Federal Judicial Center, https://www.fjc.gov/content/333092/third-party-litigation-financing-local-rules-and-forms.
[13] N.D. Cal., Standing Order for All Judges of the Northern District of California: Contents of Joint Case Management Statement (Nov. 1, 2018) (“N.D. Cal. Standing Order”), https://www.cand.uscourts.gov/wp-content/uploads/judges/Standing_Order_All_ Judges_11.1.2018.pdf.
[14] D.N.J., Notice to the Bar: Proposed Amendments to the Local Civil Rules (Apr. 14, 2021) (“D.N.J. Proposed Amendments”), https://www.njd.uscourts.gov/sites/njd/files/Notice BarNewRule2021.pdf.
[15] Letter from Harold Kim, President of the U.S. Chamber Institute for Legal Reform, and Anthony Anastasio, President of the New Jersey Civil Justice Institute, to William T. Walsh, Clerk of Court for the United States District Court for the District of New Jersey (May 21, 2021), at 3, https://instituteforlegalreform.com/us-chamber-njcji-comments/.
