Who Is Paying for that Lawsuit?

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The advisory committee on the Federal Rules of Civil Procedure is considering proposed amendments to Rule 26 that would require disclosure of litigation financing arrangements.  Specifically, the proposal would require disclosure of 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 a civil action. Travis Lenkner, a senior advisor at litigation finance firm Burford Capital, and John Beisner, a partner at Skadden, Arps, Slate, Meagher & Flom LLP will join us to discuss the proposal.


Travis Lenkner, Senior Advisor, Burford Capital

John Beisner, Partner, Skadden, Arps, Slate, Meagher & Flom LLP


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Event Transcript

Speaker 1:                           Welcome to the Federalist Society's Practice Group podcast. The following podcast, hosted by the Federalist Society's Litigation Practice Group was recorded on Thursday, April 5th, 2018 during a live, courthouse steps telephone conference call exclusively for Federalist Society members.

Wesley Hodges:                Welcome to the Federalist Society's telephone conference call. This afternoon we will be discussing the proposed amendments to Rule 26 that the Advisory Committee on the Federal Rules of Federal Procedure is considering. My name is Wesley Hodges and I'm the Associate Director of Practice Groups at the Federalist Society. As always, please note that all expressions of opinion are those of the experts on today's call. Today we are fortunate to have with us Travis Lenkner who is a Senior Advisor at Burford Capital as well as Managing Partner of the law firm Keller-Lenkner. We also have with us John Beisner, who is a partner at Skadden Arps. After remarks from our speakers, we will have an audience Q and A. As they speak, please keep in mind what questions you may have. After they give their remarks, we'll open up for a Q and A the floor will be open and you can present your questions then. Thank you all for speaking with us today, John the floor is yours to begin.

John Beisner:                     Thank you, Wesley and thanks to all of you who are listening in today, it's a pleasure to be with you. Let me start our discussion by just briefly noting the topic that we're talking about here and that is third party litigation, finance, and I think one way to define it is to say it's a practice of investors who are in essence buying an interest in the outcome of a lawsuit sometimes it's to allow a plaintiff to cash out of all or part of its interests in a claim. In other instances it's to allow plaintiff's counsel to be paid up front for their prosecution of the claim or in other instances it's to provide a plaintiff with money to litigate its claims, to hire experts and the like and sometimes it's a combination of all of the above but it's fundamentally third party litigation funders investing in a lawsuit and I wanna be clear that we're not talking here about bank loans to law firms and the like where the lender is not taking a contingent interest in the outcome of the case, it's not seeking proceeds directly from the outcome.

                                                The rule that we're talking about or the potential rule change is to Rule 26 of the Federal Rules of Civil Procedure and this is the initial disclosure section of Rule 26 and just in the interest of completeness, let me read you the language that the Advisory Committee is considering:

                                                "It would require the disclosure of any agreement under which any person, other than an attorney permitted to charge a contingency 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."

                                                So that's the disclosure that the Advisory Committee that has been proposed be added to Rule 26. Initially when this rule was proposed there were a number of entities in the funding industry that expressed opposition saying that this was totally unprecedented, it's never been required before, expressed concern about violating privileges and interestingly just within the last week or so, the Advisory Committee on Civil Rules released a research paper in which they had asked the Advisory Committee staff to do some research on local rules to see whether any of them already required disclosures.

                                                Interestingly, the research came back and it concluded that six of our Federal Courts of Appeals already have local rules that require the disclosure of the identity of any litigation funders. The memo that the Advisory Committee released as a 25% of our District Courts already have local rules requiring the disclosures of lenders in lawsuits. To be clear, those rules in all instances don't require disclosure of the lending agreements, in fact they sort of a crazy quilt as to what exactly they do require and how they get there, but the research folks who put this memo together have concluded that disclosure is required in quite a few federal districts already and I would respectfully suggest it puts to rest the notion that all of this is unprecedented and it is a breach of privilege of some sort.

                                                I think that this development, this research, makes this discussion a little less of an issue about whether disclosure should be required for the first time and more of an issue of whether there is a need for a uniform federal rule about disclosure when funding is used, who is providing it, and whether the agreement itself should be disclosed.

                                                Let me go through the reasons I would respectfully suggest third party litigation funding agreements should be disclosed. The first one I would mention is that in my view, the defendant has a right to know who is on the other side of the lawsuit. If you think about it, basically the funder is acquiring an interest in the lawsuit that is being brought against me as a defendant. Keep in mind that the level of that investment may be totaled. It could be an instance where basically the funder is buying out the plaintiff and has a right then to receive all of the proceeds, I don't want to suggest that's the normal circumstance, but at least theoretically that's possible. But, under these agreements which are admittedly structured in a wide variety of ways, but normally they've got an entitlement to some cut of the proceeds from the litigation at the end and I would suggest that as a defendant I have some right to know who is on the other side of the case, especially if that entity is exercising some control over the litigation.

                                                The second reason why I think disclosure is important is for the simple reason of judicial conflicts of interest. I suspect the main reason why we're seeing in the local rules of the various courts these disclosure requirements is because the courts want to be sure that they don't have any conflicts with anybody who has a right to receive compensation from the litigation and I think that's the second reason why there should be a uniform rule requiring disclosure.

                                                The third reason is I think that the existence of funding in these cases is critical to court consideration of settlement possibilities and in indeed the party's consideration of that as well. I think as defense counsel, we've probably all been in a situation, or in fact plaintiff's counsel as well, where the court may consistent with Rule 16 order folks with decision making authority to come in and participate in settlement discussions or at least talk about how settlement discussions might occur and where you've got a funder involved, I think it's important that that entity not be left out. Agreements may vary as to the rights of the funder to veto or approve or participate in the settlement discussion, but I think in all cases the funder is probably gonna be playing some role in that, at least on an advisory basis and I don't see a reason why that entity shouldn't be included in those discussions as well.

                                                The mandatory disclosure rules in Rule 26 already require disclosure of insurance agreements and if you look at the Advisory Committee notes, I think they're instructive as to why disclosure of funders is important as well. What the note says is, "Disclosure of insurance coverage enable counsel for both sides to make some realistic appraisal of the case so that settlement and litigation are based on knowledge and not speculation," and so I think that in the same way that the court's awareness and the party's awareness of insurance coverage may be critical to settlement discussions, I think the same is true with respect to the presence of litigation funding. I noticed on the side there was an article in the Wall Street Journal last week on this disclosure issue and a representative of [ben-son 00:10:12] was quoted in the article as saying that businesses don't like litigation finance and her quote said, "I understand why. We make it harder and more expensive to settle cases," and again I think that's the reason why it's important to know when funding is present because a defendant who's thinking about settlement may have an entirely different view of that, as may the court, if they know that there is insurance funding in the matter.

                                                Another consideration that I think favors disclosure is the question of whether the funding arrangement is legal and ethical, which I think is a question that the defendant has a legitimate interest, a standing, to know about. To give an example of this, you do have the issue of Champerty and Maintenance, I suspect that some of you on the call will say, "Well that's some Medieval law that doesn't really exist anymore," but the reality is that over the last two years, there have been five reported decisions in which courts have found that third party funding agreements were illegal and nullified them. Three of these decisions were from State Appellate Courts applying the law of Minnesota, Pennsylvania, and New York. There was a Federal District Court decision applying Kentucky law and a Bankruptcy Court decision, Federal Bankruptcy Court decision applying North Carolina law. It is certainly the case that in some jurisdictions funding is not prohibited by common law or by statute, but there are jurisdictions where it is and I think the defendant has a right to know if there's a funding agreement there so that issue may be tested.

                                                Another issue that has been noted in a number of funding agreements that have become public is the question of sharing attorney's fees as I think we all know under Model Rule 5.4A, there are restrictions on circumstances and in most circumstances, an attorney is not permitted to share fees with a non-lawyer. The fee-splitting is prohibited and in some agreements, one that has been publicized a fair bit recently, is the Garibay case under the Northern District of California where when the funding agreement was revealed, it turned out that those sorts of fee sharing provisions were in there.

                                                Another reason to disclose the agreements is because in some of the agreements, there is funder control over the litigation. If you look at the Benson website at their Best Practices in there it has, and this is Best Practices for Terms in Funding Agreements, there are a lot of provisions in there that are contemplated that do give the funder various forms of control over the litigation that its funding. The Burford agreement in the Chevron litigation concerning the Ecuadorian environmental claims against Chevron had a lot of those sorts of control agreements as well. These provisions are particularly critical in class actions because the court and thee defendant have a right to understand who's running the litigation on the other side because that has adequacy of representation implications under Rule 23 A4 and again the Garibay case that I mentioned earlier is an instance where the District Court ordered production of an agreement, particularly referencing 23 A4 as a reason why that's required.

                                                Another reason why I think that the existence of funding and the agreements are necessary is because of the way our discovery rules, particularly in light of the recent amendments, have been structured to take the palate of proportionality and the potential for cost shifting. Rule 26 B1 says, among other things, that discovery should be, and I'm quoting now, "Proportional to the needs of the case considering the party's resources." Well, if you have what's basically an impecunious plaintiff before the court the court may give one answer to a question in a discovery debate, but if the court is aware and the defendant is aware that substantial funding is being provided by a third party litigation funder, that may be a very different answer and if the plaintiff is being provided with substantial wherewithal to litigate the case, that answer under 26 B1 may be quite different.

                                                I think there's also the issue that has been illustrated in some cases of particularly where the funder is able to exercise control that if for any reason Rule 11 sanctions are imposed in the case, it may be more appropriate to impose those on the funder as opposed to the party itself. And that's another reason why disclosures should be made.

                                                I think another reason for disclosure, frankly, is just a notion of truth in litigation. A couple of years ago I had a discussion before a group of State Supreme Court Justices on this subject, I think there was a representative of Burford on that instance on the other side as well and they were listening to this discussion and one of the Supreme Court Justices asked a very interesting question and said, "If you're having closing argument at trial and the plaintiff's counsel is talking about the poor plaintiff, the mom and pop grocery store owner who gets run out of business by a large grocery store chain, and talks about the need to compensate the mom and pop and really hits hard the notion that they don't have much financial wherewithal, but in fact most of the money that would come from the verdict would go to a litigation funder or even a substantial percentage of it, is that a fair statement to the jury?"

                                                I don't know, it seems to me that may be well a complicated question, but it does seem inappropriate that you could litigate a case with the presence of the funder being in complete secrecy to be proceeding on a clandestine basis so that there is no opportunity for the defendant to even raise that issue at trial if it arises.

                                                Two final points I wanted to note here. The first is that I've seen in the media a fair bit of rhetoric noting that disclosure would violate notions of privilege and would somehow invade information that should be withheld under a work product doctrine and would unfairly reveal information about the plaintiff's litigation about the case in a way that a defendant is not required to reveal. And I guess I just wanted to briefly note, I think that is not a fair criticism given that at the moment there's so much of a comparable nature that in fact a defendant does need to reveal.

                                                As I mentioned earlier, Rule 26, the initial disclosure requirements say that the defendant needs to put on the table any insurance agreements that it has to be sure the agreements are usually provided. That may lead to some debates about other information being provided that may arguably be privileged, and courts deal with that all the time. But, the fact of the funding from the insurance company, whether it be in the form of indemnification or paying from the litigation, all that is laid out on the table and so I don't think it's unfair for comparable disclosure to be made on the plaintiff's side. If anything it's a balancing step. Obviously if you have third party indemnification in a case, plaintiffs often pursue that and are permitted to do so and get public disclosures if corporations require to provide on reserves and expenditures on the litigation so I don't view this as being an unfair imbalanced intrusion on information on plaintiff's side of the case. I think if anything it's a balancing step.

                                                To be sure, the courts have been mixed on requests by defendants for such information. But I think a lot of times the adverse decisions on this result from defendants trying to get information about strategy issues in the case that may well be beyond the basic disclosure of the agreement and the fact of funding that we're talking about.

                                                I also just wanted to briefly comment that I've been somewhat bemused by some in the industry painting this as a cockamamie idea and as being exclusively advanced by the U.S. Chamber and I would just note that there's a large number of organizations, both from the business community and defense counsels who have come together jointly to make this proposal. You have Advanced Medical Technology Association, the American Insurance Association, the Financial Services Roundtable, the Pharmaceutical Research and Manufacturers of America, large groups that have considered this issue carefully and have decided that this is a change of rules that they would support. A lot of attorney organizations such as the Defense Research Institute, the Association of Defense Trial Lawyers, and so on came together to make this proposal jointly. I think the suggestion that this was just some late night idea that hasn't been well considered, I think those are groundless challenges to the proposal.

                                                I would note that the state of Wisconsin, within the last few days, has enacted and the governor has signed into law, a statute that now requires this type of disclosure in any State Court action that is filed there. And, of course, the U.S. House of Representatives, within the last year, passed the Fairness in Class Action Act that contains in it as well disclosure obligations in the context of class actions. Of course, that passed the House, it has not passed the Senate, but the House has spoken on this issue as well. So with that I will conclude and turn it over to you, Travis.

Travis Lenkner:                 Well great, thanks John and thanks to everyone at the Federalist Society for giving us the opportunity to talk about this issue today and to all of you for eating a salad or a sandwich while your phone is on mute and you get to listen to us inform you a little bit about the contours of this issue. We appreciate everyone taking the time. I want to do three quick things in addition to just introducing myself, give a little bit of a background about litigation finance, just a very short overview, talk a bit about the history of this particular rule proposal, and then walk through responses to some of the issues that John raised and that the Chamber has advanced as reasons supporting the disclosure proposal that they have again put before the Advisory Committee.

                                                First, though, a very short primer to catch everyone up to speed on what we're actually talking about here today, which is the concept of litigation finance, or as the Chamber calls it, TPLF, or Third Party Litigation Funding. What is this and why does it exist? The short answer to 'What is this?' is that this is a specialty finance tool that has arisen as a result of market need in the legal services marketplace and that specifically has been created based on demand, including from the types of customers and clients Burford serves, which are very frequently publicly traded companies and AmLaw 100 and 200 law firms. It's no secret to anyone listening in on this phone call that litigation always lengthy and always expensive is only taking more time and becoming more expensive. Litigation clients simply want more options in connection with litigation than just increasing the amount of the checks that they are writing to the law firms that represent them in those cases.

                                                The groups who turn to a firm like Burford for litigation finance tend to fall into two categories. First, businesses that have the ability to pay to finance their own litigation but simply don't want to do so for whatever internal business reason, that's really no different from a company that has cash on hand to make an acquisition, but wishes to use debt financing to make that acquisition instead because the company has other strategic uses for the cash that it already has on the balance sheet, we work with many clients that fall into that category.

                                                The other category is companies and groups that would otherwise be turning to law firms that already would be working on a contingency, but they instead wish to expand the range of counsel that they can turn to and potentially work with a firm that might not traditionally be on a contingent fee arrangement instead would charge by the hour. My former law firm, Gibson Dunn is known as mostly an hourly fee law firm that does a lot of work on the defense side and probably would not typically enter into a contingency arrangement so somebody wanting contingent fee economics from a firm like that would need to potentially enter into some form of litigation finance. To John's law firm Skadden Arps, which has represented arbitration claimants in situations where those claimants were using third party funding to pay Skadden's bills and prosecute those claims. That's another group of people that might come to us to use litigation finance.

                                                What's the history, then, if we have some basic understanding of these arrangements, what's the history of this particular rule proposal and how did it come to be in front of the Advisory Committee? This proposal that we're discussing today is actually a verbatim carbon copy of a proposal that the Chamber of Commerce made first in 2014 to the Advisory Committee, and that it then pressed again in 2016 to the Advisory Committee. Both times, the Committee heard the same arguments that the Chamber is making today, some of which John has explained on the call today and essentially set those arguments aside in favor of, at best for the Chamber's position, sort of a wait and see approach, electing to say that nothing in the development of litigation finance as a concept justified a blanket amendment to the Federal Rules of Civil Procedure affecting every piece of civil litigation in the federal courts and imposing an additional mandatory disclosure requirement in every single piece of federal civil litigation.

                                                In 2017, last summer, the Chamber [inaudible 00:28:36] to the Advisory Committee, the Advisory Committee considered the proposal at its November meeting and you can read online in the last week or so the Committee has posted a draft set of minutes from that meeting that I think any fair reading of those minutes would fairly show that the Committee seems poised again to say that that caution and taking a wait and see approach is the position that probably will win the day.

                                                I would say in response to John it is correct that in addition to the Chamber bringing the proposal back this time in 2017 some other groups signed the Chamber's letter alongside it this time in support of that proposal but to say that, before it was the Chamber, but now it's also defense lawyers and defense counsel, and the pharmaceutical industry, seems to me to be just two different ways of describing the same group. I'm not sure a longer signature block reflects really any sort of broader support for the proposal and indeed the two pieces of legislation that John mentioned, the Wisconsin legislation and also the Class Action legislation that has passed the House, but notably not the Senate in the Congress. Both of those are Chamber sponsored and Chamber advocated legal reform proposals. This very much is a Chamber proposal to amend the federal rules and I think should be understood in that context.

                                                Let me walk through a few of John's arguments and then I do, both of us, we were talking before the call, we wanna open it up to questions and have a lively conversation based on the issues that you all specifically wanna speak about as well. Let me walk through a few of the particular points that John mentioned. I would start, as an overview, to say that many of the points suffer from a couple of defects. First, they are generally not the types of things even if the Chamber's correct that these issues exist and it is not for the most part correct that they exist, the issues mentioned are not the business of federal trial courts to police and historically, they have not been reasons to amend the federal rules and to require blanket disclosures in order to police.

                                                References to potential ethical issues or problems that might accompany certain nonstandard litigation agreements, references to outmoded Champerty and Maintenance Doctrines which we can talk more about, those are not the province of the Federal District Courts to police. Those are State Court doctrines and state by state rules of attorney practice and ethical conduct and other proposals to amend the federal rules outside of the litigation finance context have been rejected on the same grounds that they are targeting the sorts of conduct or issues that are not appropriately part of the Federal rules of Civil Procedure.

                                                One more note at the outset, I would say that there is, as John mentioned, a research memo that has been prepared in connection with looking at potential disclosure requirement for litigation finance and without going into the specifics of that memo I think a closer read of it shows a couple of things.

                                                One, the rules that supposedly require disclosure of litigation finance in many or some federal courts in many cases actually do not require such disclosure upon a closer reading. Second, and importantly, to the extent the rules might require disclosure of some types of litigation finance agreements, I don't understand any of those rules to require automatic disclosure, not only of the fact of financing, but also of the entire agreement itself.

                                                I think it's important to know what the Chamber is seeking here. It wants not just the fact of financing to be disclosed, it wants a copy of the agreement. It is incorrect to say that courts are mixed in terms of whether that sort of information typically is discoverable. Again, not disclosed mandatorily, but even discoverable if deemed relevant, the vast number of courts that have considered this question come out to say that the agreements are not discoverable, they typically are not relevant, they're protected based on privilege or work product grounds so there is no debate as to the confidentiality of such agreements and in fact the leading case on these types of issues, a case called Miller v. Caterpillar in the northern district of Illinois, is a case that features the law firm of Kirkland and Ellis on the plaintiff's side representing the party that had obtained litigation finance, going a little bit more to show some of the institutionalization of this space as well.

                                                Let me just take a couple of the other points that John mentioned and then, as I said, I do think it'd be more interesting to take this instead in response to questions. One argument that is frequently advanced in favor of automatic disclosure, is that this is essentially just an effort for parity because insurance arrangements are required to be automatically disclosed by Rule 26. That is not parity, insurance on the defense side and litigation finance on the plaintiff's side are actually quite different concepts and the Advisory Committee reporters and minutes on this issue in the past have made that quite plain. Let me explain that a little bit.

                                                In 1970, the Committee amended Rule 26 to require disclosure because it was felt that it would, as John said, enable counsel for both sides to make a realistic appraisal of the case, but that was because of really a few situations. It was limited to insurance coverage where insurance is an asset that would specifically satisfy the claim and it was appropriate, the Committee said, because insurance companies ordinarily control the litigation. Those are both key distinctions from any financing arrangement that might be put in place to fund litigation on the plaintiff's side. In other words, if the parties are going to be in court fighting over whether such an amount should be recovered by a plaintiff, there should be some automatic disclosure of whether such amount could be recovered by the plaintiff, that is, is the defendant capable of paying and what is the asset that would satisfy the claim.

                                                That's very different from looking into financing on the plaintiff's side. It's also important to note that the Committee, when it made this change, excluded from disclosure under Rule 26, any personal and financial information concerning the defendant, discovery of which is beyond the purpose of Rule 26. The Committee was very careful to limit the expansion of the disclosure requirement specifically to insurance. At the time of the amendment there was a sharp conflict on whether a defendant's liability insurance coverage was subject to discovery, as I just mentioned there's no conflict here, the cases are uniform that discovery of litigation finance arrangements is protected by work product and frequently privilege. Again, insurance as an asset created specifically to satisfy the claim that's being litigated. That is distinct from litigation finance arrangements.

                                                It's also important to note that the limited liability disclosure language in Rule 26 is much narrower than the language which John read that is the Chamber's proposal for mandatory disclosure of any agreement under which any person has a right to receive compensation contingent on, and sourced from, the proceeds of the action. If you just pause and think about the breadth of that language and the extent of what it could mean, any amount of any shareholder of a company, however de minimus, any arrangements premised on the success of a company that is a small company for which litigation or a current litigation claim is its principle asset. Those are just a couple examples but there are many more of the way that this is an incredibly broad and overreaching proposal and some of the early committee comments in the meeting in December make clear that there's fairly widespread agreement on that point.

                                                I think some of the other points that have been mentioned in favor of the disclosure rule are fairly easily answered, you can see letters have been filed before the Committee on this topic that are publicly available. I'd invite anyone who thinks that Champerty and Maintenance are alive and well as legal doctrines today to simply use Google to satisfy their curiosity that in fact those are not doctrines that are in serious dispute in terms of their application. The vast majority of states they've been overruled either by statute or by judicial decision and to cite a few outlier cases over the last several years does not begin to describe the state of the law in that area. The same in true for any concerns under Rule 5.4 regarding the sharing of attorney's fees. All one needs to od is read the white paper by an ABA commission that studied this issue, I think now eight, seven, eight, nine years ago as well as other studies by the New York City Bar for example that are very clear on the Rule 5.4 [crosstalk 00:39:37] problem has been solved, thank you. I will make a reservation though, I will do that after the call. No problem.

                                                Finally on control, I just wanted to mention that too. I think that is also a matter that it only takes a few moments to read some of the vast swaths of literature that are now out there on what a traditional litigation funding agreement looks like. I don't think that the examples that are being used are fair and accurate representations of what even those agreements mean, not to mention the majority of agreements that are used today. On the whole, I think stepping back and just analyzing the proposal, this is now we're in the fourth or fifth year of an effort to push the Advisory Committee to amend the federal rules and really tilt the balance with a very aggressive and broad mandatory disclosure requirement, not a discoverability provision but a mandatory disclosure requirement in all federal civil litigation.

                                                This is really a piece from the Chamber playbook. If the Chamber loses here, it wins. If it wins it wins, if it loses it wins because it's part of a broader PR campaign to deprive plaintiffs and plaintiff counsel of resources. What's unfortunate here is that the brush that's being used to paint this picture is so broad that it's also sweeping in litigation for finance arrangements of the types that Burford provides. I think one of the most recent statistics that we have at Burford is that within the year 2017 we had worked with three quarters of the AmLaw 100 in terms of firms that are seeking out these solutions on behalf of their clients. If anything this is capital in a litigation system that is being mainstreamed by the presence of more of a litigation finance industry and it's unfortunate that the brush that's being used is so broad here that I think some of the Chamber's own purported members and clients would be disappointed to know that the extent to which this proposal would impose a pretty draconian disclosure requirement across the board.

                                                With that I think you have a very fair representation of John's and the Chamber's and the proponents' points of view as well as some of the responses from the finance community. You also have hotel instructions on how to make your room reservation so you have a lot of things to use at this point maybe as fuel for questions or discussion points and I know John and I as well would be happy to answer questions or keep the conversation going.

Wesley Hodges:                Thank you, Travis. I apologize everyone for the inconvenience. We have John back with us, John can you hear us?

John Beisner:                     Yes, I'm on now, my apologies. Somehow got disconnected there.

Wesley Hodges:                Wonderful. Well as Travis said, let's go ahead and move to audience Q and A. In a moment you'll hear a prompt indicating that the floor mode has been turned on. After that to request the floor, just enter the star key and then the pound key on your telephone. When we get to your question, you'll hear a prompt, then you may ask your question. We'll answer all questions in the order in which they are received. It looks like we do have one question in the queue right now for anyone that would like to ask a question just enter the star key, and then the pound key on your telephone. Travis and John if you're okay, let's go ahead and move to our first audience question.

Gene Burd:                         Yes, good afternoon, thank you very much John and Travis for excellent presentation, this is Gene Burd, I'm a partner with Arnold, Gold, and Gregory in Washington, D.C. My question is for John. Of course the contingency fee arrangements existed in the United States for a very long time and attorneys are not prohibited from representing a client based on a contingency fee arrangement. To my knowledge, I'm not aware of cases where courts would be requiring on the regular basis to require plaintiff lawyers to disclose their details or the fact that they are representing plaintiffs on a contingency basis. Why would that be different for the third party funding where the idea is very similar where the third party funder has a private arrangement with the client typically not with the lawyer, thank you.

John Beisner:                     Yeah, I think the rationale is pretty simple and that is the attorneys who are counsel of record who presumably have that contingency fee arrangement are before the court and are subject to the court's supervision. I would note that there are a number of cases where courts have become actively involved in overseeing those relationships particularly en masse toward NDL proceedings where the courts have asked a lot of questions about what the relationship is and has gotten involved in that sort of process and require disclosure and indeed have stepped in at times to require changes to those contingency fee arrangements in parts in respect to settlements in those cases. I think the main difference is that those attorneys who have those relationships are before the court and there I think is in a presumption of the nature of the control that those attorneys have in that circumstance. What you have, though, where there's a third party funder is somebody who's hiding in the shadows who may have the ability to control the litigation and no one is aware of that.  I think that's the reason why that is very different.

                                                Travis mentioned during his presentation that the funders don't control, well, I don't know how we test that issue. There's certainly a lot of indications from what we've seen including I think what may be the one Burford contract that we've seen, that being in the Ecuadorian case that there was a lot of control that was exercised there. Travis indicated that's a reason why in the insurance context disclosures were required and I think that applies here, but the fact is that since these disclosures rarely happen to say that control is never involved I think requires a pretty big leap of faith. I think that's the difference is the reason for the disclosure is that the attorneys are before the court and they're known entities and the funders, their role ought to be known as well.

Gene Burd:                         Travis, would you care to comment?

Travis Lenkner:                 Sure, I guess I just make a few quick points. I think the comparison to contingent fee agreements is interesting for a number of reasons. It's true that an attorney representing a party on a contingency basis is before the court, but the court does not typically know and there's certainly no automatic disclosure mandated to tell the court or to tell the defendant that the attorney is representing the client on a contingent basis as opposed to an hourly or a flat fee basis. Indeed, we rely not on the Federal Rules of Civil Procedure, but we rely on the ethical rules governing attorney conduct to ensure that whatever the manner in which the attorney is representing the client, he or she is doing so ethically and following the standards set by the relevant bar or regulatory authority. Yes, the attorney is before the court, but the attorney's engagement agreement is not before the court and there's no reason to treat the issue here differently.

                                                The other quick statement I would make is that I think the rhetoric here is doing more of the work than the substance. Everyone who is funding litigation is supposedly in the shadows, we're very shadowy and that is a description that doesn't really offer very much when one considers that there are a host of actors in any piece of litigation who are not before the court, not known to the court, and whose relationships with the parties to the litigation, whether financial or otherwise, may bear, in small part or in very large part, on the litigant's calculations in terms of settlement and litigation strategy and just because those people are quote unquote, in the shadows, doesn't mean we have automatic disclosure of everyone who might have an interest in the case or who's interests in the litigant might be changed based on the results of a case.

                                                We look at cases based on their merits and we judge them based on their merits, not based on who is ultimately backing them and given that the Chamber is involved in quite a lot of litigation itself as a party and a plaintiff, I would think that that would be a position that it would support. I think the analogy to contingent fee agreements is something that's fairly apt in our view and that goes a long way here to showing why a mandatory disclosure requirement is at best over broad.

Wesley Hodges:                Thank you for your question, caller. Looks like we have three questions in the queue, let's go ahead and move to our next audience question.

Speaker 6:                           Hello, my question regards attorney contingency fees as well. And that is that nowadays they're so widespread that they're pretty much assumed in personal injury and other cases and so there doesn't seem to be a concern that they would have the knowledge or the assumption of a contingency fee agreement would have a detrimental effect on the outcome of the case, which seems to be the main concern with a mandatory disclosure that if we were required to disclose such a thing it could have a detrimental effect on the outcome of the case or the plaintiff's verdict in favor of the plaintiff or the amount of reward or whatnot.

                                                It was also said that these funding agreements are becoming an industry and so my question is, as they become more prevalent, does the supposed need or harm, does that analysis change? So if they became as prevalent as contingency fee agreements, would that mitigate against the need to disclose or actually argue more for it?

John Beisner:                     If I may take that on first, I think it argues more for it because we don't know what they may contain and I think they're likely much more varied than contingency fee agreements are as far as counsel are concerned. I think it's become relatively standardized to the extent that anybody that's had a window on those. I think that the problem that we've got with the funding agreement is that we're, and the reason I used the phrase 'in the shadows' which I think is accurate is a lot of the resistance for the disclosure and a lot of other aspects to debate are just sort of, well here's what we do in these agreements and you should just trust our word on that. Travis mentioned we don't exercise control at some point. Well, a lot of the agreements we've seen, including at least one from Burford, have a lot of control in it and particularly if you're in a Class Action, analyzing Rule 23 A4, Advocacy of Representation Issues, if in fact the plaintiff's counsel has handed over a lot of control, especially the right to proceeds to a funder, that needs to be known.

                                                I think the big problem here is that we really do not know what's in a lot of these agreements except anecdotally and the resistance to that is because the industry doesn't want anyone to know what's in those agreements and that's why I keep asserting the easy in the shadows notion on this is we don't know what rights the funders are taking in these agreements. Travis, I take you at your word, maybe, except for the one we know about, none of the Burford agreements assert control, but there's a lot of other players in this market and when the agreements do pop out normally a lot of things are noted in there that do raise ethical issues of questions of control.

Travis Lenkner:                 Well let me jump in on that specific point and then make one broader point as well. I think the Burford agreement that John is referring to and is the same agreement that is featured I believe, if I remember correctly in the Chamber's letter proposing the rule change, does not include control provisions. I guess it depends on one's definition of control, but the provision that's always cited as an example is that Burford, before making an investment in the particular case that's used as the example, required that the claimant in the case had entered into an engagement agreement with a particular law firm. It was the Squire Patton Boggs law firm.

                                                I was not at Burford at that time, I was in fact, on the other side of the case that was funded representing the defendant, but one can imagine a host of reasons why someone making an investment in a case would want to know that its dollars were going to pay an AmLaw 100 law firm and not a solo practitioner operating out of a garage. That fact, and a requirement that that fact be true, is not, I would submit, 'control of the litigation' in terms of strategy decisions or settlement decisions. More broadly on the issue of the detrimental effect of if funding agreements themselves are disclosed, I would mention just a couple of points.

                                                First, I think this is a pretty transparent effort by defendants to find out what a plaintiff's resources are so that the defendant then knows how long it has to keep the litigation machine running before the plaintiff is starved of resources. Basically, can I outlast you or do I actually have to outplay you on the merits? Our view is that it's not fair for a defendant to basically get to check the bank balance of the plaintiff to know how long the plaintiff might be able to survive and whether simply running out the clock is an effective strategy as opposed to litigating the actual case.

                                                Beyond that, as I mentioned previously, the precedent on whether these agreements and the terms of the agreements and their substance is discoverable is decidedly against the discoverability of the agreements and their terms and so what's in front of the Committee now is a proposal to not just make them discoverable, but to require that they be disclosed at the outset of any case and that runs pretty counter to a lot of privilege and work product protections that aren't hypothetical, but have been found by a lot of federal and state courts to be worthy of such protection that defendants who have known a case was funded, or suspected a case was funded and have tried to get their hands on a funding agreement generally have failed to do so.

John Beisner:                     If I may, I guess I would disagree with the last point, because the Wall Street Journal article that came out a week or so ago made clear I think the results are more mixed on that and I think that as far as the exercise of control issue with respect to the Burford agreement you've been talking about, I'd refer to Maya Steinitz's article in the William & Mary Law Review back in 2012 that spends a lot of time reviewing the details of that agreement and pointing out the types of control that were indicated in there in the Garibay litigation, another Chevron case.

                                                I would note when that agreement was, the court required production of that agreement and again that is an instance where the court did require it. It turned out that the funder had the right to approve the project plan for the strategy in the litigation, had the right to be notified and to go to meetings with all experts who might be retained in the case, veto rights over the experts, right to participate in any mediation or hearings related to the claim and to make it worse, that was a purported Class Action. The plaintiff's intent was to proceed on that basis with the funder again working in the shadows was exercising control without telling the court and without telling the class members that some of their rights to recovery had already been signed over to this funder. I think that again, the problem we have here going back to the threshold question is that it's hard to know what's wrong with these agreements because we don't see that many of them and that's why disclosure is needed.

Speaker 6:                           Hmm, so it sounds like what we're saying is that if the agreements become so common that they're assumed, much like contingency fee agreements that it wouldn't change the analysis? Is that both sides are pretty much saying-

John Beisner:                     Well, what I'm saying is that we're not at that stage now. I'm not sure given that my suspicion is that these agreements are not gonna be standardized in that way because you have so many funders in the marketplace coming in, they're gonna have their different angle on how do you make a profit off of these cases. My guess is is the likelihood that they are going to be standardized is a lot less.

Speaker 6:                           Okay, thank you.

Wesley Hodges:                Thank you very much for your question. We are at the top of the hour, John, Travis, do you have time for one more question?

Travis Lenkner:                 Sure.

John Beisner:                     Sure.

Wesley Hodges:                Wonderful, let's take our last question for the day then.

Phil Goldstein:                   Thanks, this is Phil Goldstein, I'm not an attorney. I've dabbled, fairly unsuccessfully in litigation financing and it seems to me that there's a, what I would call an intended consequence that nobody's talked about which I think is that if this rule is adopted, it's going to deter litigation financing because when I look at it as a potential source of the funds, I don't want to have my identity disclosed, I don't want, there's competitive reasons as you indicated each of these is an individualized assessment as to how you want to structure the deal. There's a pretty good reason why the potential funder, especially if it's not a large company like Burford, would want to keep the relationship and the contract confidential. What's your response to my suggestion that the real purpose of this is to deter litigation financing.

John Beisner:                     My response is as follows, I think that litigation finance, from a profitability standpoint is a wonderful idea for those who are investing in it in the sense that it's hard to lose money on this. If you invested in some other business you'd be subject to actually having to sell things to other people and engage in contract, this is like in some respects, getting yourself involved in a bit of a confidence scheme in the following sense.

                                                When you sue somebody, when you sue a defendant, this isn't a free enterprise arrangement. This is the defendant has to come into court, there are a lot of the aspects of the rules that are intended to encourage access to the courts and so in a lot of instances, the discovery is free and frankly if you can get a case past the motion of dismissed stage, it's hard to lose money in that sort of case because the defendant at some point is at least going to settle with you for costs to avoid the expenditures on discovery and other things.

                                                It's a wonderful thing to invest in and I guess my reaction to that is if you want to profit from the litigation system and take advantage of that, I don't know where the rule is that you shouldn't have to participate in it. If you don't wanna have to participate in the litigation system, then go invest in a doughnut shop or something. I just don't understand this notion of why you get to come into the case, you're the only person coming in voluntarily 'cause the plaintiff has to go there to prosecute his or her claim for relief, the defendant has no choice but to be there, only the funder is there voluntarily. As I said, if you don't wanna deal with the challenges of the litigation system and what everybody else has to deal with, then invest in something else, but the idea is that all of this should be done to somehow protect this wonderful investment opportunity I just think turns the world upside down.

Phil Goldstein:                   Well I think what you're really saying is you just don't like litigation funding and if you can't get rid of it entirely, lets at least deter it.

John Beisner:                     No, I don't think that's it at all. I just think it ought to be a level playing field and you shouldn't be able to come in and try to profit off the litigation system and pretend that you're not there, which is what you're proposing to do-

Wesley Hodges:                Thank you, caller-

Travis Lenkner:                 Yeah, I guess-

Wesley Hodges:                Go ahead-

Travis Lenkner:                 This is Travis, let me just offer the other perspective on that and I think this is where John and I probably have the greatest divide between us. I think to hear these contracts and this concept to be described as a confidence scheme, I'll set aside and say instead that John describes this rule as trying, and some deterrents as trying to level the playing field and we're just describing different playing fields. It serves his interest and his client's interest to describe the playing field as one in which investors are simply waltzing in, dropping money on meritless cases, somehow getting them past a motion to dismiss, mostly settling for costs or more and counting money all the way to the bank and if the business were that easy, there'd be a lot more people in it, it would've existed a long time ago and we'd be having different teleforums.

                                                Instead this is a business and an industry that is subject to many constraints already placed on plaintiffs and on counsel in the litigation system and so to be a specialty finance provider to an entity that happens to be a plaintiff in litigation is no different than being a specialty finance provider to a defendant in litigation or to the operator of a doughnut shop. We don't require disclosure of confidential financial arrangements for defendants and doughnut shops, but the proposal here would be to require mandatory disclosure of every page of the agreement of the arrangement that proves capital to a plaintiff. It's just a debate about which playing field we're talking about, but I think it's easy to see in the response there what the view is and it's a defense-oriented view and that's fine, but sort of has to be known and the proposal is kind of, I think appropriately seen in that context and people can take from that what they will.

Wesley Hodges:                Thank you, Travis, and thank you, caller, for that question. We appreciate all of the interaction and investment in this call, I apologize that we are at the end of our time, John do you have any final thoughts? Then we'll turn to Travis for his.

John Beisner:                     I don't have anything further, I guess I just in response to Travis' comment on that, just say I think that the notion of investing in a lawsuit and expecting a complete confidentiality for that I just think is not an appropriate and a realistic proposition. I think if you decide that you're going to invest to try to be part of an effort to extract money from a defendant, the presence of that entity ought to be known.

                                                One quick thing I guess I would note with respect to this disclosure of the agreements. I think as there is on the insurance side, sometimes I suspect there may be aspects of those agreements that might arguably contain confidential information, strategic information about the proceedings, but courts are accustomed to reviewing those things and making determinations about whether certain aspects of those are confidential and that comes up in the context of mandatory disclosures as well as any other discovery obligation and so I would just note that there is a way to deal with any of those sorts of issues. And thanks for the opportunity to participate.

Wesley Hodges:                Thank you, John. Any final thoughts from you, Travis?

Travis Lenkner:                 Sure, just very quickly and I'd first echo John's thanks, thanks to John and also to Wes and everybody at FedSoc for putting this together I think even in John's allowance that there might be some confidential information in these agreements, there's the preview of what is to come. Here is now in every civil case an automatic disclosure requirement that will be followed by a prolonged dispute over what part of certain agreements is or is not confidential and is or is not properly disclosed to the defendant so it's just opening up a discovery rabbit hole and the only reason that it's okay to do so is because it's a pro-defendant discovery rabbit hold and not a pro-plaintiff discovery rabbit hole.

                                                I think that you'd see a lot of disagreement about that here's adding additional cost and time to the litigation process. More broadly, I think there is a fundamental disagreement about whether these arrangements are appropriately kept confidential, I would note John's firm is representing Peter Thiel in a Bankruptcy Court in the Southern District of New York in the Gawker bankruptcy and has aggressively argued to keep the details confidential of whether there was a funding agreement in that case and what the terms of it were. I think there are multiple perspectives even within Skadden about what arguments can and should be made on this score, but more broadly and more fundamentally as I said before, I think litigation is most appropriately judged on the merits and not judged on ability to pay or mechanisms of paying and that should be even more true in a system where access is difficult, costs are high, and the ability to get in the door and how one does ought to be less important than the causes of action, the elements of the claim, and whether those elements are satisfied.

Wesley Hodges:                Wonderful. Well, on behalf of the Federalist Society, I'd like to thank our experts for the benefit of their valuable time and expertise today. We welcome all listener feedback and info at FedSoc.org, thank you for joining us, this call is now adjourned.