Third-party litigation funding has received increased scrutiny over the past several years, particularly in the context of mass torts, class actions, and multidistrict litigation. Most of this scrutiny has focused on pre-litigation or pre-resolution commercial loans to fund the litigation, and particularly whether parties are required to disclose such funding during the course of the litigation.
For example, in February 2019, several U.S. senators reintroduced S.471, the Litigation Funding Transparency Act of 2019, which would require plaintiffs to disclose third-party litigation funding for class actions and multidistrict litigation. This came on the heels of a January 2019 letter from more than 25 major U.S. companies to the Committee on Rules of Practice and Procedure requesting an amendment to Federal Rule of Civil Procedure 26(a)(1)(A) “to require in civil actions the disclosure of agreements giving a non-party or non-counsel the contingent right to receive compensation from proceeds of the litigation.”
In the meantime, proponents of litigation funding have not sat by idly. In February 2019, executives from litigation funding companies wrote their own letter to the Committee on Rules of Practice and Procedure stating that the proposed disclosure rule is too broad and that “advocates for a catch-all disclosure rule ignore … [that] federal courts can easily handle discovery issues relating to litigation finance under existing Rule 26 and/or their own inherent authority.”
A recent opinion from the Third Circuit in In Re: National Football League Players’ Concussion Injury Litigation highlights a separate aspect of third-party litigation funding: post-settlement consumer loans.
One focus of the Third Circuit’s opinion was an order from the District Court that nullified several post-settlement lending agreements in their entirety. The District Court previously had entered a final order certifying a class of former NFL players and approving the parties’ final Settlement Agreement, under which a class member first had to submit a claim package. A Claims Administrator would then review the package and make a determination as to whether the class member qualified for a monetary award. Either the class member or the NFL then could appeal the award determination. The Claims Administrator does not pay out the individual’s award until after any appeals are completed. Under this process, class members often would wait two years or longer before receiving any award.
While waiting to receive their awards, many class members entered into cash-advance agreements with third-party litigation funders. Pursuant to the cash-advance agreements, the class members purported to “assign” their rights to a portion of their settlement proceeds in exchange for receipt of immediate cash.
In December 2017, the District Court voided all cash-advance agreements based on the Settlement Agreement’s anti-assignment provision and the District Court’s role as a fiduciary to the class. On appeal, the Third Circuit reversed.
The Third Circuit examined the Settlement Agreement’s anti-assignment language and, applying general contract principles, held that under the express language of the Agreement any attempt to assign rights or claims relating to the subject matter of the complaint was void. The Third Circuit agreed with the District Court that “true assignments contained within the cash advance agreements—that is, contractual provisions that allowed the lender to step into the shoes of the player and seek funds directly from the settlement fund—were void ab initio.” The Third Circuit affirmed the District Court’s order to the extent it voided any true assignments. However, the Third Circuit also concluded that the District Court went beyond its authority when it purported to void the cash advance agreements in their entirety, reasoning that there may be portions of the agreement that are enforceable after any true assignments are voided. The Court stated that a “court or arbitrator subsequently adjudicating these issues will need to address whether any individual agreement contains a true assignment.”
Importantly, the Third Circuit stated that it expressed “no opinion as to the ultimate enforceability of any of the cash advance agreements,” in subsequent litigation regarding the agreements “the full array of standard contract defenses will apply,” and there may be issues of “unconscionability, fraud, or usury.”
Proponents of third-party litigation funding have viewed the Third Circuit’s holding—that “the District Court went too far in voiding [certain lending agreements] in their entirety”—as a win. However, the opinion is far from an endorsement for litigation funding. It came before the Court in the context of post-settlement consumer loans rather than pre-resolution lending; and the Third Circuit affirmed in part the District Court’s decision to void certain lending agreements. Moreover, the opinion made clear that the typical contract defenses apply to third-party funding contracts and left the door open for the agreements to be voided after examination on a case-by-case basis to determine whether they contain any enforceable rights after any true assignment is voided.
It will be interesting to see how the Third Circuit’s reasoning impacts, if at all, the ongoing debate surrounding pre-resolution lending agreements.