Ruling will boost defendants' chances of discovering who is funding litigation against them

By Kristin Danley-Greiner | Aug 16, 2016

SAN FRANCISCO (Legal Newsline) – A court in California recently went against the tide and granted a defendant’s motion requiring the plaintiff to reveal the identity of a third-party funder, which to date has been protected by confidentiality agreements.

It has become commonplace for third party-funders to pay the owner of a civil claim upfront in return for the claim owner’s promise to convey a portion of the potential recovery. 

This brings tax advantages for both the third-party funders and class action plaintiffs attorneys, allowing them to defer tax liability on the monetary advancement until the claim pays off while the funders deduct expenses and pay taxes on profit accrued at the lower capital-gains rate. These agreements routinely are entered confidentially.

But Judge Susan Illston, with the U.S. District Court for the Northern District of California, recently granted a defendant’s motion that required the plaintiff to reveal the identity of who was funding its proposed class action regarding a gas explosion off the coast of Nigeria in Gbarabe v. Chevron Corp. on Aug. 5. Illston noted that considering the circumstances of the case, the litigation funding agreement was relevant.

Alex Karasik with Sefarth Shaw LLP said the court examined the adequacy of the class counsel.

“When appointing class counsel for class action litigation, one of the criteria the court must consider is the resources that counsel will commit to representing the class,” Karasik told Legal Newsline

“Given the complexity of investigating, preparing for and trying an international class action, coupled with the plaintiffs counsel appearing to be solo practitioners, it was evident to all parties that outside funding would be needed to try this case. 

"Without being able to review the litigation funding agreement and identify who would be funding the class action and for how much money, the court agreed with the defendant that it would be deprived of the ability to make its own assessment and arguments regarding the adequacy of class counsel.”

But that ruling wasn’t received well by plaintiffs attorneys who originally refused to produce the documents, then finally submitted a redacted copy of the litigation funding agreement. They were then forced to submit a clean copy of the litigation funding agreement for an in-camera review, as well as an executed declaration by the funder’s chief investment officer. 

The court deemed the proposal for an in-camera review of the agreement as inadequate because it prevented the defendant, Chevron, from making its own assessments and arguments regarding the funding agreement and its impact on the plaintiff’s ability to represent the class.  

Karasik said the ruling is good news for businesses facing class action litigation.

“This ruling is excellent for businesses confronted with class action litigation, which are often ‘bet-the-company’ cases,” he said. “Whether third-party funders of class actions are motivated by seeing the financial demise of the defendant or their own monetary gain, businesses want to know who they are up against in high-stakes, high-profile litigation. 

"This ruling can serve as a blueprint for companies seeking transparency in how class action lawsuits against them are funded. Nonetheless, it remains to be seen whether other courts will adopt a similar approach, especially in circumstances that are less complex.”

The judge’s ruling also serves as fair warning to third-party funders that seek anonymity.

“This will ideally result in a chilling effect of this practice that amounts to tax-incentivized gambling on class action litigation," Karasik said. 

"Armed with this ruling, it is highly predictable that class action defendants will be aggressive in seeking to compel the production of litigation funding agreements.”

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Chevron U.S.A. U.S. District Court for the Northern District of California

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