Litigation finance
Disclosure and champerty
status: draft
Disclosure and champerty
Two legal considerations dominate litigation finance structuring: disclosure requirements (when must you reveal the funding?) and champerty (is the funding arrangement even valid?). Both are jurisdiction-specific and evolving rapidly.
Third-party funding disclosure
Disclosure obligations are expanding. Assume your funding will eventually become known—structure accordingly.
Federal court rules
The federal landscape is fragmented but trending toward mandatory disclosure.
| Court/District | Requirement | Scope |
|---|---|---|
| N.D. California (Local Rule 3-15) | Disclose non-party with financial interest | Covers most funders; disclosed to court |
| D. New Jersey (Local Civil Rule 7.1.1) | Disclose funder identity | Standalone litigation funding rule (2021) |
| E.D. & W.D. Wisconsin | Standing orders requiring disclosure | Identity and general terms |
| D. Delaware | Disclose funding in patent cases | Affects significant portion of funded IP |
| MDL Panel | Increasingly requires disclosure | Case management; varies by proceeding |
Coming changes: The Judicial Conference has studied uniform federal disclosure rules. While no rule exists yet, expect broader requirements within 2-3 years. Draft rules have proposed disclosure of:
- Funder identity
- Whether funder has approval rights over settlement
- General economic terms (not specific percentages)
State court rules
| State | Status | Notes |
|---|---|---|
| Wisconsin | Disclosure required | First state; must produce agreement upon request |
| West Virginia | Disclosure required | Identity and basic terms |
| Montana | Enacted requirements | Primarily targeting consumer funding |
| Indiana | Enacted requirements | Consumer focus with spillover |
| Louisiana | Proposed requirements | Pending legislation |
| New York | No general requirement | Courts may order production in discovery |
| California | No commercial requirement | Consumer funding regulated separately |
Most states have no explicit requirements, but courts can order disclosure in discovery if relevant. The trend is clearly toward more disclosure, not less.
International arbitration
Disclosure is more established in international arbitration:
| Institution | Requirement |
|---|---|
| ICSID | Tribunals routinely order disclosure; affects costs allocation |
| ICC | 2021 Rules require disclosure of funder existence and identity |
| SIAC | Disclosure requirements adopted |
| HKIAC | Disclosure guidance issued |
| LCIA | Disclosure requirements in place |
Why arbitration moved first: Arbitrators have broad discretion over procedure, funders often have interests in cost allocation, and arbitral institutions compete globally on governance standards.
Practical implications
Structure for disclosure:
Assume your funding arrangement will become known. Structure so that disclosure doesn’t harm competitive position or case strategy:
- Separate economic terms from strategy discussions in documentation
- Use standard market terms that don’t reveal unusual positions
- Maintain privilege protections through proper structuring
Privilege protection:
The funding agreement itself may be discoverable even if communications remain privileged. Best practices:
- Separate funding negotiation from case strategy communications
- Involve counsel in privilege-protected discussions
- Mark privileged communications clearly
- Consider common-interest agreements with funder
Disclosure timing:
Early disclosure (at case inception) is less disruptive than mid-litigation disclosure. If you know disclosure is coming, get ahead of it rather than having it forced during settlement negotiations.
Competitive intelligence:
Your competitors will learn about your funded positions. Factor this into:
- Deal terms (if terms are disclosed, are they market?)
- Relationship management (counterparty may know your capital constraints)
- Settlement strategy (defendant knows you have funding support)
status: draft
Champerty law by jurisdiction
Champerty (third-party financing of litigation for a share of proceeds) was historically prohibited. Most US jurisdictions have abolished or limited these restrictions, but the landscape remains uneven.
States where funding is clearly permitted
These jurisdictions have explicitly authorized litigation funding by statute, court decision, or abolished champerty entirely:
| State | Status | Key Authority |
|---|---|---|
| California | Permitted | Champerty doctrine abolished |
| New York | Permitted | Judiciary Law §489 narrowly construed |
| Texas | Permitted | No champerty prohibition |
| Florida | Permitted | Champerty abolished |
| Illinois | Permitted | Consumer regulated; commercial permitted |
| Massachusetts | Permitted | Courts have upheld funding |
| Washington | Permitted | Champerty not recognized |
| Nevada | Permitted | Explicitly authorized |
| Arizona | Permitted | No champerty bar |
| New Jersey | Permitted | Courts enforce commercial funding |
| Colorado | Permitted | No restrictions for commercial |
In these jurisdictions, properly structured funding agreements are enforceable according to their terms.
States with restrictions or uncertainty
Delaware: The primary cautionary jurisdiction.
Delaware has not abolished champerty. The Court of Chancery has expressed skepticism about funding arrangements with strong funder control. Key cases:
- Charge Injection Technologies v. DuPont (Del. Ch. 2016): Court expressed concern about funder control; noted funder was “real party in interest”
- Hamilton Capital VII (Del. 2023): Continued scrutiny of aggressive control provisions
Practice tips for Delaware:
- Minimize funder control rights in agreement
- Ensure plaintiff retains all litigation decisions
- Consider New York governing law for the funding agreement itself
- Obtain Delaware counsel opinion on enforceability
Other uncertain jurisdictions:
| State | Status |
|---|---|
| Minnesota | Retains doctrine; not applied to modern funding |
| Alabama | Champerty statute on books; rare enforcement |
| South Carolina | Traditional restrictions; untested recently |
| Georgia | Technically prohibited; not applied to modern structures |
| Pennsylvania | Mixed precedent; older cases not overruled |
| Ohio | Mixed precedent; case-by-case review |
Structuring around champerty risk
For cases touching uncertain jurisdictions:
1. Ensure plaintiff controls litigation:
- No funder veto over strategy, witnesses, or litigation decisions
- Settlement approval rights framed as economic protection only (minimum return), not case control
- Document plaintiff’s independent decision-making
2. Document independence:
- Investment committee memos should reflect plaintiff sought funding, not that it was imposed
- Show plaintiff evaluated multiple funders
- Demonstrate arm’s-length negotiation
3. Choose governing law carefully:
- Many funding agreements use New York or California law regardless of case jurisdiction
- Check that choice-of-law clause will be respected in relevant courts
- Consider whether the case itself involves Delaware law (separate analysis)
4. Consider assignment vs. funding:
- Purchasing a claim outright may face different treatment than funding
- Assignment may be more clearly permitted but changes accounting treatment
- Hybrid structures (partial assignment) may offer benefits
5. Get specific legal opinions:
- For Delaware-touching matters, obtain Delaware counsel opinion
- For matters in uncertain jurisdictions, confirm enforceability before funding
status: draft
Regulatory developments
Beyond disclosure and champerty, broader regulatory trends affect litigation finance:
Consumer litigation funding
Consumer legal funding (small advances to personal injury plaintiffs) faces increasing regulation:
| State | Regulation |
|---|---|
| Multiple states | Rate caps, disclosure requirements |
| CFPB | Has expressed interest in oversight |
| State AGs | Enforcement actions against abusive practices |
Commercial litigation funding is generally not subject to these consumer protections, but regulatory spillover is possible.
Securities law
- Fund structures must comply with securities registration or exemption requirements
- Most litigation finance funds rely on Rule 506 (accredited investors)
- Public funder vehicles (Burford, Omni Bridgeway) have securities law obligations
Professional responsibility
- Bar rules on fee-splitting may affect how funding arrangements are structured
- Lawyers cannot share fees with non-lawyers (varies by jurisdiction)
- Funding must be structured as client capital, not lawyer fee-sharing
Trend direction
| Factor | Direction | Impact |
|---|---|---|
| Disclosure requirements | Expanding | More transparency; less asymmetry |
| Champerty restrictions | Contracting | More jurisdictions permitting funding |
| Consumer regulation | Expanding | May spill into commercial space |
| Institutional acceptance | Growing | More capital; more standardized structures |
The overall trend supports litigation finance growth, but compliance complexity is increasing. Structures that were fine 5 years ago may need updating.
status: draft
Related: Single-Case Funding · Diligence Guide
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