May funders remain anonymous? A tale of two courtrooms

22nd Nov 2016

By: Mary H. Terzino

California and England are a continent and an ocean apart, but courts in both locations recently agreed that third party litigation funding is subject to disclosure when the adequacy of financial resources is at stake.

First, there is the case in the High Court of Justice of England & Wales. Litigation in England operates on the “loser pays” basis; in general, the party not prevailing must pay the opposing party’s costs. In the case of Stuart Barrie Wall v. The Royal Bank of Scotland (RBS), RBS estimated its defence costs at GBP9 million, and was concerned that the claimant, an individual, would not be able to meet an adverse costs order. RBS had reason to believe that Wall’s claim was being financed by a third party litigation funder. RBS argued that, regardless of Mr Wall’s insurance arrangements, they could not evaluate bringing an application for security for costs against the funder without knowing the identity of any funders standing behind the claim. Andrew Baker QC, sitting as a High Court judge, agreed that it was reasonable for Wall to disclose information about a funder under these circumstances. The judge also dismissed curtly an argument on behalf of Mr Wall that revealing the identity of the funder would infringe any right to privacy under the European Convention on Human Rights stating that Mr Wall “could not have thought that the identity of his funders would be a matter he could keep private” in every circumstance. Some observers have characterized this as a “test case” for whether third party litigation funders can retain anonymity.

Second, a decision in a California federal court, which does not have a “loser pays” system, nevertheless also pertained to the adequacy of resources to pursue a case. In Gbarabe v. Chevron, Nigerians brought a putative class action against Chevron. One of the decisions a judge must make in such cases is to determine whether the lawyers seeking to be named class counsel – that is, to serve as the lead lawyers in prosecuting the case, even if other class members have their own lawyers – have sufficient financial resources to represent the entire class. Chevron argued that they could not take a position on the adequacy of class counsel without knowing information about counsel’s third party litigation funder and the funder’s commitments in the litigation. The court agreed, requiring the lawyers – one of whom is a QC in England in addition to her California practice – to produce the funding agreement.

The funder in this instance is Therium, a UK firm which has only recently begun operations in the United States. The funding agreement reveals that Therium’s current funding commitment is $1.7 million. The agreement is structured so that Therium’s profits come out of the class counsel’s contingency fee, consisting of a return of its investment; another six times its investment ($10.2 million at present); and  two percent of the claimants’ recovery. Therium’s contract is with the lawyers, not the claimants.

This is an interesting arrangement, not the least because fee-splitting between lawyers and non-lawyers (i.e., Therium) is prohibited by the California Rules of Professional Conduct as well as by the American Bar Association’s model rules. The funding agreement further provides glimpses of how a funder disclaiming control over the litigation can, in fact, exercise considerable input – not only through its control of the purse-strings, but through attendance at strategy sessions and by exercising approval rights over various expert consultants and witnesses and co-counsel. Of particular interest is the contractual requirement that the lawyers use “reasonable endeavors” to recover the “maximum possible contingency fee.” Who will decide what “the maximum possible” is? What if the claimants are happy with a smaller settlement than the funder deems appropriate? After all, a contingency fee by its nature is a percentage of the overall judgment or settlement awarded to the claimants. In effect, this provision seems to give the funder substantial rights to decide the settlement amount itself, if the case is resolved short of trial.

Is this another “test case”? Unfortunately, absent legal safeguards requiring transparency, disclosure decisions both in the UK and in the US are now being made on a case-by-case basis. Nevertheless, as these examples demonstrate, there are profoundly good reasons why courts should not allow third party funders to hide behind confidentiality agreements.