As fees and costs associated with litigation continue to rise, along with lengthy discovery periods and uncertain trials, those who require legal services can incur great costs in connection with litigation. As a result, such individuals and their attorneys are increasingly looking elsewhere for funding. This has led to a rise in third-party litigation agreements. These agreements can provide a major benefit to plaintiffs as they can decrease the financial risk when pursing what may be a frivolous lawsuit.

Third-party litigation agreements permit hedge funds and other financers to invest in lawsuits in exchange for a percentage of any settlement or judgment. The practice started in Australia, expanded to Europe and the United States and is now spreading elsewhere. Such agreements are popular because claims can be litigated without having to personally incur the high costs of litigation. Further, based on an overall lack of cohesive regulation at the state level, such agreements lack transparency to both lawyers and judges alike. As a result, ethical and potential conflicts of interest issues arise with respect to the forces driving litigation strategy or settlement decisions. This can be a major detriment to insurance carriers and defense counsel as the funding can alter and increase the demands from a claimant. This can frustrate settlement and claim evaluation and lead to greater uncertainty in defenses strategy.

In other words, without disclosure requirements and other commonsense safeguards, these third-party financers may take over litigation and fuel unmeritorious lawsuits.

Since 2021, civil litigants in New Jersey's Federal Courts have had to disclose any sources of third-party litigation funding. To date, two attempts have now unsuccessfully been made to require disclosure of third-party funding agreements at the state level. However, the issue has not yet been settled, and this will continue to be a predominant issue in New Jersey and beyond.

The New Jersey Supreme Court, Civil Practice Committee (“Committee”), recently received a proposal from the New Jersey Civil Justice Institute (“NJCJI”) to align New Jersey’s Civil Discovery Rules more closely with the Federal Rules of Civil Procedure, regarding the disclosure of third-party litigation funding agreements. In the Committee’s 2024 report, the proposal to revise the Rules was declined because the Committee found it required more information about the impact of third-party litigation disclosures. The Committee opined that there was insufficient evidence to recommend a rule change at this time. The Committee indicated that, should the issue become ripe in the future, a rule change would be considered.

In the Committee’s 2024 report, two different categories of third-party litigation funding agreements were considered. The first involves lawyers/law firms receiving funding for specific cases. In these instances, the funder would invest in a particular litigation in exchange for a contingent interest in the litigation.

The second category involves individual plaintiffs who use loans as a means of financial support while their cases are pending. Often, such loans are not disclosed by the client to the attorney and have the potential to interfere with settlement. These loans can exceed the reasonable settlement value of a claim. As such, a plaintiff may not allow their attorney to accept a fair and reasonable settlement offer as it below the loan amount.

The NJCJI’s proposal would have required mandatory disclosure of the existence of both categories of third-party litigation funding agreements.

Opponents asserted mandatory disclosure rules encourage discovery abuses by litigants, who could use the rule to seek previously privileged discovery. This could include funding arrangements, litigations budgets, and communications with the funders that discuss a case’s strengths and weaknesses.

In support of the rule change, the NJCJI asserted litigation funders, such as Hedge Funds, can secretly invest in lawsuits in exchange for a percentage of the proceeds and then exert control over litigation strategy. The NJCJI further cited to other states, such as Wisconsin and West Virginia, which require disclosure of third-party litigation funding agreements; and argued some form of disclosure is mandated in the local rules of six U.S. Courts of Appeals, including the Third Circuit, as well as a quarter of all federal district courts. Furthermore, the NJCJI argued litigation funding encourages meritless suits, and increasing litigations costs because of outside interference in lawsuits.

In rejecting the NJCJI’s proposal, the Committee referenced Bill S1475, pending before the New Jersey Legislature, which would establish regulations for legal funding. The Bill includes a provision prohibiting an attorney or law firm from having a financial interest in a company that is providing funding to a client; however the Bill is silent regarding funding disclosures.

The Committee's ruling has continued the long standing practice of protecting the disclosure of third-party funding agreements. However, based on the dicta of the Committee's ruling they have not forgone reconsidering the issue and revising the rules at a later date. As more data comes forward regarding the impact that third-party litigation agreements have on litigation we can expect to see additional attempts to expand the disclosure requirements.

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