Third Circuit issues litigation funding decision

The U.S. Court of Appeals for the Third Circuit’s recent pronouncement about the inability of district courts to simply abandon an often-disparaged form of litigation funding, known as post-settlement lending agreements, may have come in a limited context, but, according to some observers, the ruling could prove instructive as courts and legislators continue to parse out the judiciary’s role in the emerging world of litigation funding.

Late last month, a unanimous three-judge panel of the Third Circuit ruled that U.S. District Judge Anita Brody of the Eastern District of Pennsylvania, who is overseeing the implementation of the NFL concussion settlement, went beyond the court’s reach when she nullified numerous lending agreements in their entirety.

The agreements had been entered into by former players expecting to recover from the class action settlement, which is expected to award about $1 billion to former players suffering neurocognitive injuries. But, a leading attorney for the class has long contended that many of the loans are usurious and went against clear language in the settlement agreement that barred players from “assigning” their claims to lenders—meaning the lenders can step into the role of the players and receive money directly from the settlement administrator.

Although the district court judge had agreed with class counsel, and barred the agreements entirely, in late April the Third Circuit panel reversed, saying that, while the court’s role as a fiduciary to the class allowed it to void assignment agreements, the court did not have the authority to void contracts in which the companies sought payment directly from the players.

“The court had the option of invalidating only the assignment portions of the agreements containing true assignments and directing the claims administrator not to recognize any true assignments, without voiding the agreements in their entirety,” Judge D. Brooks Smith said.

Although observers agree that the ruling is narrow since it came before the court in the context of post-settlement consumer loans — which are very different from the commercial loans, pre-resolution that help push the cases forward and are more commonly thought of as litigation funding — it comes at a time when litigation funding, in all its forms, is getting a lot more scrutiny.

In February, several senators, including Chuck Grassley of Iowa, reintroduced legislation that would require plaintiffs to disclose when they’ve secured third-party funding in class actions and multidistrict litigation, and the federal judiciary Committee on Rules of Practice and Procedure has, for several years, been looking into potentially implementing similar disclosure rules for all types of lawsuits.

While those efforts are receiving considerable pushback, some observers say the Third Circuit’s ruling could provide beneficial context for any new rules that may be developed.

“The courts are starting to see instances where a party, or in this case class counsel, wants to argue that certain funding practices are inappropriate,” Maya Steinitz, a professor at the University of Iowa’s College of Law, said. “It’s helpful to see how third-party funding of class actions comes up in the real world and in contexts where there is, at least, alleged abuses.”

Related: Hard times: The NFL’s insurance struggles

A broad win for the industry

Along with coming before the court in the limited context of a post-settlement, consumer loan, the Third Circuit’s recent ruling may be even further limited, because the deals were made as a result of a class action litigation.

Class actions, observers noted, are different from most other types of litigation because courts play a more involved role, acting not only as a neutral between the parties, but a fiduciary for the class.

Industry insiders, however, said they still see the ruling as a broad win.

Jack Kelly, managing director of the American Legal Finance Association, which is a trade association representing numerous consumer-side funding companies, including some that provided loans in the NFL concussion settlement, said the ruling should not have any direct impacts on the pre-judgment agreement marketplace, but he said he particularly liked the decision’s language saying the agreements should be treated like any other financial agreement and subject to the usual contract defenses.

“This didn’t diminish the argument that if a person is incapacitated, they can’t enter into it,” he said. “[Consumers] should be fully educated and informed about what they’re doing. That’s why we’ve supported legislation and policy that advances that.”

Stevens & Lee attorney Eric Robinson, who focuses on litigation finance and alternative funding, said the ruling was a win for both sides, because it upheld the parties’ “freedom of contract.” That can be especially significant to claimants in large class actions, like the NFL case, who may not have the means to pay the bills while they wait out the potentially lengthy claims process, Robinson said.

“It’s useful and instructive, and it says, if you’re a party and you’ve got a claim, it’s an asset and it’s got value,” he said.

Even those who are skeptical of post-settlement consumer loans said the ruling appeared to be a win for the industry.

Joann Needleman, who leads Clark Hill’s consumer financial services and regulatory compliance practice group, noted the lingering allegations—initially raised by co-lead class counsel Christopher Seeger—that many of the loans are usurious and problematic. But, she said the companies were getting “great results.”

“I can certainly understand what the court was trying to do. … She was trying to protect people who are really harmed. But, you have to have guardrails in the law,” Needleman said, adding that the issue came down to “basic civil procedure.”

“It’s a shame, but at the end of the day, they’re not parties. The jurisdiction of the court can only go so far,” she said.

On the other side of the litigation funding market are pre-judgement, commercial financing agreements, which are entered into to help litigants pursue more complex, non-consumer claims. While there is little overlap between these two forms of litigation funding, there is still much for the commercial side to like about the Third Circuit’s ruling.

One major point of contention that cuts across all of the litigation funding industry is the argument that there is a clear distinction between “assignment” agreements, where the companies essentially step into the shoes of the party seeking to recover, and other types of agreements, where the parties do not sign over their legal claim, but instead seek to collect directly from the entity that entered into the agreement. Although some parties have pushed back on this differentiation, district courts, including in Delaware and New York, have upheld the distinction.

According to Andrew Cohen, senior vice president of Burford Capital, a leading firm in the commercial litigation funding field, the recent NFL decision means a circuit court is further bolstering that differentiation.

“The Third Circuit’s distinction is helpful, because it means they recognize the difference between assigning a claim and assigning a right to some of the proceeds of a claim,” Cohen said.

Jurisdiction and disclosure

Disclosure of third-party funding agreements has been at the heart of the debate about litigation funding for years, and recently it has begun gaining some traction. Along with the Senate and rules committees eyeing the subject, judges are taking on the issue as well, including U.S. District Judge Paul Grimm, who is overseeing dozens of class actions stemming from Marriott’s data breach.

Grimm previously told Law.com that it’s important judges know everyone with a stake in a case.

“What you don’t know, if you have third-party funding, is if someone from the outside has made a decision, an investment decision, that this case has merit, and they have advanced the money to take the case forward,” he said. “Then, when it comes time to resolve the case, those people are not in the room, and if they have minimal expectations of what they must recover in order to maximize their investment, that is an influence, a potential influence, in how the litigation is conducted and how the litigation might be resolved.”

Steinitz, who teaches civil procedure and has served as expert witness and consultant to litigation finance firms, said the Third Circuit’s ruling could be used to favor more disclosure.

“It will bolster the notion that, at least in the context of class and mass actions, disclosure is appropriate because someone other than the plaintiffs may wish to challenge them, like class counsel, or maybe a judge as a fiduciary,” Steinitz said.

But University of Georgia School of Law professor Elizabeth Chamblee Burch said the Third Circuit’s ruling raises questions about what courts can actually do once the agreements are disclosed.

“The question after that is, then what? Say they have disclosure in camera, what is the judge supposed to do with that information?” Burch said. “The NFL case is an early and interesting example of that.”

Burch noted that, along with fears about predatory lending, questions have also recently arisen—in particular in the NFL litigation and the Chinese drywall litigation—regarding the relationships between attorneys and the funding companies.

Those new dynamics could put courts in a new role they may not be as comfortable with, Burch said.

“What about non-class actions? What about monitoring relationships between lawyers and funders? There are so many different relationships and so many different ways it may impact a lawsuit,” Burch said. “[In some cases] the judge has to act as inquisitor rather than neutral arbitrator. I’m not sure how comfortable judges are with that.”

The opinion, Burch said, raises more questions than it answers—questions the courts will continue to grapple with.