US judges rule legal finance may not be discussed at trial

Commercial legal finance is increasingly in the headlines these days—and the headlines that matter most, arguably, are those that discuss recent rulings by judges demonstrating support for commercial legal finance and recognizing that the existence of funding and funding agreements are not proper subjects for discovery or discussion at trial.

In recent months, for example, Chief Judge Rodney Gilstrap (E.D. Tex.)^[1] and Judge Alan D. Albright (W.D. Tex.)^[2] issued orders holding that parties in upcoming trials were precluded from introducing evidence, testimony, or argument regarding legal finance.

Judges have authority and discretion to require disclosure of legal finance as they see fit. These recent orders show that judges can and do regulate the cases in their own courthouses. The orders reinforce that further regulation through legislative or other action is unnecessary and would interfere with judges’ ability to manage their own cases.

Broad legal finance disclosure requirements are inconsistent with existing rules

Commercial legal finance is becoming increasingly commonplace for litigants facing high-risk litigation. As one General Counsel of a multinational logistics company put it: “Fifteen years ago, if someone asked about funding litigation it sounded radical, but today it is mainstream.” As legal finance becomes routine business practice, it is important that legal finance transactions be treated the same way as other commercial finance transactions.

Commercial legal finance agreements are private financial transactions between funders and litigants. Claimants are not required or expected to disclose their private financial transactions when it comes to other forms of financing, such as general recourse bank loans or even law firm contingency fee arrangements. There’s no reason to apply different rules to commercial legal finance arrangements.

Proponents of increased disclosure of legal finance have failed to make the case for treating legal finance differently from any other type of corporate finance such that special rules of disclosure should apply. Financing-related communications and agreements are not generally relevant to the merits of the underlying litigation, and so it is inconsistent with the rules of litigation practice to require disclosure in this instance. In reality, adverse parties use disclosure requests as a tactic to create expensive and time-wasting detours—and judges commonly reject them.

Courts increasingly support protection of parties’ private finances 

Courts recognize the often disingenuous motives behind defendants’ disclosure requests and continue to support the protection of legal finance arrangements. In December 2022, Chief Judge Rodney Gilstrap of the Eastern District of Texas, which is a key jurisdiction for patent litigation, issued a sua sponte order deciding 23 common motions in limine—a series of default rules about topics the parties are precluded from raising at trial without prior leave of the court, including “evidence, testimony, or argument regarding funding of the litigation”. Then in April 2023, Western District of Texas Judge Albright issued a similar order on motions in limine—again sua sponte, and again precluding either party from introducing “evidence, testimony, or argument regarding funding of the litigation.”

These recent orders echo the well-established proposition that documents created in connection with legal finance are protected from discovery. For example, in Worldview v. Woodrow (N.Y. App. Div. 2021), the New York Appellate Division declined to force disclosure of legal finance on the ground that the details of the funding agreement had no bearing on any particular claim or defense. And beyond the question of relevance, judges have consistently found that legal finance documents are protected by the work product doctrine. For example, in Lambeth Magnetic Structures, LLC v. Seagate Tech. (W.D. Pa. Dec. 19, 2017), the court found that work product protection applied to communications with potential legal finance providers in the period leading up to litigation.

While in limine motions perhaps garner less attention than other aspects of litigation, it is worth noting the import of these orders. Both of these judges who oversee large patent dockets are saying that, at least in their cases, the issue of legal finance is not one that should be put in front of a jury, under the broad discretion granted to them under Federal Rule of Evidence 403 to exclude evidence where the probative value is outweighed by the risk of, e.g., unfair prejudice, misleading the jury, or wasting time. These orders implicitly acknowledge that legal finance is simply a non-issue.

Ultimately, judges have shown time and again that they are able make sound decisions regarding the relevance of legal finance to individual cases. These orders make clear that  judges use the discretion granted to them under the rules to manage their own cases, and that no additional regulation is needed to grant them that authority.   

[1] Standing Order on Motions in Limine in Cases Assigned to Chief Judge Rodney Gilstrap Involving Allegations of Patent Infringement and/or Breach of FRAND Obligations, as well as Declaratory Judgment Actions which Relate to the Same (E.D. Tex. Dec. 14, 2022)

[2]Corrigent Corp. v. Cisco Systems Inc, Order on Motions in Limine, No. 6:22-CV-00396-ADA (W.D. Tex. Apr. 26, 2023)

This article was originally published in New York Law Journal and can be found here. 

Reprinted with permission from the June 8, 2023 issue of New York Law Journal. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.