United States: Discoverability Of Third Party Funding Agreements In Arbitration – Part I

The use of third party funding of arbitration and litigation proceedings provides broader access to formal claim resolution mechanisms, but that benefit may come with some unique issues for the uninitiated.12 This post identifies the discoverability issues in arbitration concerning third party funding.

This will be a two-part discussion.  Here, we describe the arguments concerning requests for disclosure of funding agreements and correspondence with funders, as well as the significance of the relevance of such documents to the substantive claims in issue.  In a second part, to be posted here soon, we will discuss the emerging case law regarding whether such documents can be shielded from disclosure by reason of the attorney-client privilege or the work-product doctrine.

Identify the Governing Rules

Generally, the discoverability of third party funding agreements and related documents will be governed by several sets of rules, including those of the particular arbitral proceeding (as set out in the pertinent arbitration agreement expressly or by incorporation by reference of other administrative rules), state law, and/or federal law. Other procedural rules, such as the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration, may also have been adopted by the parties or be considered by the arbitral tribunal as guidance.  Fundamentally, arbitration is contractual, and so the applicable rules beyond state and/or federal law will vary principally based on the terms of the arbitration agreement.  And obviously, applicable state and federal law may vary by jurisdiction.3 In any case, one's first task is to identify the applicable rules.

Relevance of the Existence, Identity, and Terms of a Third-Party Funder, Etc.

Next, let us distinguish two subjects of disclosure relating to third-party funders:  (1) disclosure of the existence of a funding arrangement (and the identity of the funder); and (2) disclosure of communications between the funder and its client and the client's counsel (including the funding agreement).  The relevance of these two sorts of disclosures differs.

While the leading arbitration-administering organizations (e.g., AAA, ICC, LCIA) do not currently have specific rules regarding to the disclosure of third-party funding arrangements, such disclosure may be necessary in connection with the typical assessment of potential conflicts of interest of the arbitrator(s).4 Most sets of rules for administered arbitration proceedings require disclosure by the parties of information that will enable arbitrator candidates to identify potential biases or interests or the appearance of same.  Thus, disclosure of the existence and identity of a third-party funder arguably would be required as part of the typical initial party-affiliation disclosures.5

Among other things, a candidate arbitrator may have an interest in a third-party funding corporation, or there may be a prior or current relationship between an arbitrator or an arbitrator's law firm and the funder.  The rapid proliferation of litigation funding arrangements increases the likelihood of such relationships as time passes, and such relationships may be disqualifying for a candidate arbitrator. 

Moreover, if information sufficient to identify such a potential conflict is not disclosed until after proceedings have commenced, it could result in the disqualification of an arbitrator at an inopportune time and with the consequent additional costs, as well as possible sanctions of a party for failure to disclose the disqualifying information earlier, perhaps in the form of fee shifting. 

Indeed, it may well become customary that candidate arbitrators must disclose litigation funders with which they or their firms have or have had a relationship, in which case the pressure for mandatory voluntary disclosure by the parties of their own relationships with such companies may be unavoidable.

Relevance of Third-Party Funding Agreements and Communications

Furthermore, disclosure of (a) the existence of a funding agreement is different from disclosure of (b) the agreement itself or of related communications.  Funded litigants have been fairly successful in blocking discovery of the latter categories of documents on relevance grounds.  For example, in Space Data Corp. v. Google LLC, No. 5:16-cv-03260, 2017 U.S. Dist. LEXIS 22571 (N.D. Cal. Feb. 16, 2017), the court denied the defendants' motion to compel discovery in a litigation of board meeting minutes containing discussions of third party funding, finding that the defendants failed to establish how the requested materials were "relevant to any party's claim" or "proportional to the needs of the case."6

Similarly, a federal district court in New York held that a funding agreement is discoverable only when it is directly at issue in the case.  See Kaplan v. S.A.C. Capital Advisors, L.P., No. 12-CV-9350 (VM)(KNF), 2015 U.S. Dist. LEXIS 135031, at *16-17 (S.D.N.Y. Sept. 10, 2015).7 In Kaplan, the court rejected demands for discovery of a litigation financing agreement, finding that the following concerns asserted by the demanding party were purely speculative:  (a) the funding arrangements could affect the strategic decisions made on behalf of a class; (b) the funding arrangements could cause a conflict of interest between counsel and the class; (c) the funding might cause some resource mismanagement of which the class is unaware; (d) the fact of third party funding could sow disagreements among class members about the results obtained; or (e) counsel might run out of funds.  See id.

While the relevance of third-party funding agreements has only been addressed in a few jurisdictions, the two opinions noted above are well-reasoned.  Their principal points are that (a) the facts relevant to an arbitrated dispute will almost always pre-date funding arrangements and communications with funders to support the adjudication of the pre-existing dispute, and therefore facts regarding the latter will not tend to prove or disprove any material fact; and (2) communications between counsel or client and the funder, while they may include descriptions of relevant facts, are virtually always hearsay and are rarely if ever best evidence of any material fact.

The law concerning relevance is fairly uniform across jurisdictions, and so the above decisions should serve as persuasive authority in other jurisdictions.  It therefore appears likely that irrelevance will remain a shielding defense against disclosure of third-party funding agreements and communications between counsel and funder regarding pre-suit analyses.

In part two of this series, we will discuss the emerging split in judicial views concerning the applicability of the attorney-client privilege and the work-product doctrine to funding agreements and communications with funders.

However, until more courts rule on the relevance defense to discovery, the risk of some disclosure remains a significant concern when representing a funded party, and practitioners should draft third-party funding documents and communications assuming that they might eventually be discoverable.



1 Roger Parloff, Have You Got a Piece of This Lawsuit?, FORTUNE (June 13, 2011), available at http://features.blogs.fortune.cnn.com/2011/06/28/have-you-got-apiece-of-this-lawsuit-2/ (describing how a plaintiff's relationship with a third-party funder was disclosed due to litigation against the plaintiff's attorney).

2 Daniel T. Pascucci, Are Third-Party Funding Costs Recoverable in Arbitration?, available at https://www.mintz.com/insights-center/viewpoints/2196/2018-07-are-third-party-funding-costs-recoverable-arbitration

3 Mark R. Cheskin and Hans H. Hertell, Applicable Law of the Contract, Arbitration Agreement and Arbitration Procedure, Federal Bar Association, available at http://www.fedbar.org/Sections/International-Law-Section/Global-Perspectives/Fall-2015/Applicable-Law-to-the-Contract-Arbitration-Agreement-and-Arbitration-Procedure.aspx.

4 Jennifer A. Trusz, Full Disclosure? Conflicts of Interest Arising from Third Party Funding in International Commercial Arbitration, 101 Georgetown L. J., 1649, 1665 (2013).

5 But cf. MLC Intellectual Property LLC v. Micron Technology, Inc., No. 14-CV-03657, 2019 WL 118595 (N.D. Cal. Jan. 7, 2019) (federal court litigation).

6 Space Data Corp. v. Google LLC, No. 5:16-cv-03260, 2017 U.S. Dist. LEXIS 22571 (N.D. Cal. Feb. 16, 2017), ECF No. 264, Order re: Discovery Dispute on Litigation Funding June 1, 2018, available at: https://www.law360.com/dockets/download/5b1fec9b195b5e52c20000af?doc_url=https%3A%2F%2Fecf.cand.uscourts.gov%2Fdoc1%2F035116823204&label=Case+Filing (accessed January 15, 2019).

7 The seminal decision currently is arguably Miller UK Ltd. v. Caterpillar, Inc., 17 F.Supp.3d 711, 723-24 (N.D. Ill. 2014).

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