Are Plaintiffs Complying with Wisconsin’s Third-Party Financing Disclosure Requirement?
Adam Jordahl, The Hamilton Consulting Group, LLC, and Nicole Marklein, Cross Jenks Mercer & Maffei, LLP

I. Introduction

Pursuant to 2017 Wisconsin Act 235, parties to litigation in this state are required to disclose—“without awaiting a discovery request”—any financing arrangements whereby any person (other than the party’s attorney) has a right to recover that is contingent on and sourced from the proceeds of the litigation. Now that this legislation has been in place for over five years, has it been effective in its intended purpose? This article will explore the purpose of third-party litigation financing disclosures, the requirements under Wisconsin law, and will provide suggestions for how to more effectively ensure that plaintiffs are complying with them.

II. Background

Third-party litigation funding (TPLF) or “litigation financing” is a form of investing in which hedge funds and other financiers invest in a lawsuit in exchange for a portion of any settlement or judgment award. The investment provides cash to plaintiffs to litigate a claim, while the financier—thanks to its sophisticated underwriting—anticipates the case to end in a large enough judgment or settlement to satisfy its obligations.

According to one report, American litigation funders invested $3.2 billion in 2022. Those companies had a combined total of $13.5 billion in assets under management. Critics of litigation financing argue that it raises litigation costs, delays settlements, supports unmeritorious lawsuits, and risks allowing third parties to influence or control a party’s decisions. Specifically, obligations to litigation funders can prevent a plaintiff from accepting an otherwise reasonable settlement offer because the plaintiff would be left with very little recovery after paying his or her attorney and the financier.

A recent example of this practice concerns Burford Capital, a financial services firm specializing in legal activities. Burford is the largest provider of litigation financing in the world. The dispute between Burford and its client, food distributor Sysco, arose from an ongoing lawsuit involving antitrust claims filed by Sysco against several large meat producers. According to court filings from Burford subsidiaries, the firm advanced more than $140 million to Sysco to finance the lawsuit. The filings also show that Burford had a contractual right to review and consent to any settlement offers, as long as Burford’s consent was not “unreasonably withheld.” When Sysco attempted to settle its claims against some of the defendants, Burford intervened because the firm felt the settlement amounts were too low. An arbitration panel ruled that Burford could prevent Sysco from settling those claims. Sysco filed suit, contending that Burford is “forcing Sysco to continue to litigate against its will” and “attempting to unlawfully seize control of Sysco’s settlement rights and rewrite the terms of [the]contract.”

This high-profile dispute between a plaintiff and a litigation financier demonstrates the importance of reasonable, commonsense regulations on litigation financing, which are needed to prevent conflicts of interest and protect the integrity of the legal system. For instance, courts and all other parties to a lawsuit should be made aware of a third party’s financial interest in the case, especially if that third party may control or influence a party’s decisions. Without this transparency, it is difficult for parties, judges, and juries to make informed decisions about a case.

III. Statutory Text and History

In Wisconsin, since the enactment of 2017 Act 235, a litigation financing agreement must be disclosed to the court and other parties to a case. Act 235 created Wis. Stat. § 804.01(2)(bg), which provides:

Third party agreements. Except as otherwise stipulated or ordered by the court, a party shall, without awaiting a discovery request, provide to the other parties any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.

This broad disclosure requirement applies to any litigation funding or settlement advance agreement, whether large or small, made between a financier and an individual consumer or a commercial entity. One legal analysis focused on insurance defense has noted that the provision should also be useful “in cases where providers agree to forego their charges until after a verdict.” Prior to Act 235, such an agreement had to be specifically asked for in discovery, “but now must be disclosed without request.”

The disclosure provision was created as part of a larger, landmark civil litigation reform law aiming to address the high transactional costs of litigation by reforming the discovery process, aligning class action procedure with rules used in federal courts and many other states, and reducing various statutes of limitation and repose. Wisconsin’s first-in-the-nation transparency law in particular was praised by U.S. Chamber Institute for Legal Reform as a “groundbreaking” model that other states should follow.

Federal authorities are beginning to take notice of the litigation financing industry, as evidenced by a recent congressional hearing on TPLF oversight held by the U.S. House Committee on Oversight and Accountability. In written comments to the committee, the U.S. Chamber of Commerce emphasized the need to require disclosure of litigation financing agreements, in part due to potential national security risks:

[T]here is a growing concern that a large volume of foreign-sourced money may be pouring into U.S. courts via TPLF, raising significant national and economic security risks. The limited information available because of the secrecy of the practice suggests that sovereign wealth funds and non-U.S. citizens are participating in TPLF against U.S. companies. The result is that a foreign actor could control the litigation and influence its strategy to advance their own national interests, such as to gain access to sensitive information, damage U.S. companies, and influence U.S. policy to advance its own strategic interests at the expense of competing U.S. priorities.

The comments also argue that some litigation financing agreements violate legal ethics principles, which generally prohibit fee-splitting between an attorney and a nonlawyer or the possession of an ownership interest in a law firm by a nonlawyer.

Tort reform advocates are hoping to see a similar transparency requirement implemented at the federal level. A broad national coalition including the U.S. Chamber, DRI Center for Law and Public Policy, American Tort Reform Association, and various business groups, has asked the Advisory Committee on Civil Rules to amend Rule 26 of the Federal Rules of Civil Procedure to require disclosure of a litigation financing agreement in any civil action filed in federal court.

IV. Suggestions for Ensuring Compliance

Anecdotally, it appears to the authors that few voluntary disclosures of third-party litigation financing arrangements have been made since the enactment of the disclosure requirement in Wisconsin. Nor could we find any available court filings in which this issue has been addressed. We question whether this is because: a) third-party litigation financing agreements are not common; b) plaintiffs are unaware of their disclosure obligations; c) plaintiffs are not being forced to comply with their disclosure obligations; or d) some combination of these or other factors.

Unfortunately, the new disclosure provision does not provide an explicit enforcement mechanism or penalties for noncompliance. The sanctions applicable to misrepresentations to the court under Wis. Stat. § 802.05 are expressly inapplicable to disclosures and discovery under Wis. Stat. § 804.01. Nonetheless, we suggest that there are options for the defense bar to encourage litigation financing disclosure while the related case law is still developing.

One option is to request that the Court set a very early date in the scheduling order by which the plaintiff must comply with the disclosure requirement of § 804.01(2)(bg). This will educate both the judge and plaintiff’s counsel on this requirement and will also set up the ability to seek sanctions under Wis. Stat. § 802.10(7) for violating a court order if the plaintiff does not comply.

Although it is not required, defense counsel may make discovery requests seeking information about third-party financing of the litigation. The request can specifically note that it is not subject to the statutory limitations on the number of interrogatories set forth in Wis. Stat. § 804.08(1)(am). Some sample discovery requests include:

REQUEST FOR ADMISSION: Admit that no person or entity, other than your attorney or any subrogated party named in this action, has the right to receive any portion of your recovery from this lawsuit, whether by settlement or judgment.

INTERROGATORY: Pursuant to Wis. Stat. § 804.01(2)(bg), list the name, address and phone number of any person or entity, other than your attorney, who has any right, whether contractual or otherwise, to receive any portion of your recovery from this lawsuit. (Note: Pursuant to § 804.01(2)(bg), this interrogatory does not count against the number of interrogatories permitted as a matter of course under Wis. Stat. § 804.08(1)(am).)

REQUEST FOR PRODUCTION: Provide a true and accurate copy of all communications, contract, agreements, and other documents related to any agreement described in Wis. Stat. § 804.01(2)(bg).

It will be important to track and document each time a plaintiff’s attorney or his or her firm fails to make a voluntary disclosure of a third-party financing agreement as required by law. If an attorney or firm fails to comply more than once, particularly after being ordered to do so in a court’s scheduling order or specifically asked in a discovery request, there is a better case for sanctions or other remedial action.

V. Conclusion

It is well documented that third-party litigation financing arrangements can interfere with the timely and reasonable resolution of litigation. By helping to reveal all interested parties, disclosure requirements such as the one found in Wis. Stat. § 804.01(2)(bg) help parties to identify and head off these problems early in litigation. However, in order to benefit from this relatively new requirement, the defense bar must educate judges and counsel and force compliance so that disclosure of third-party financing arrangements becomes routine and expected in Wisconsin civil cases.

Author Biographies:

Adam Jordahl ([email protected]) is the Communications & Government Relations Manager for the Hamilton Consulting Group, a full-service government affairs firm located in Madison. On behalf of the firm and its clients, including Wisconsin Defense Counsel, he monitors legislation, rules, and public meetings, researches policy issues, and produces publications, client reports, and member communications. Adam earned a B.A. from Rice University, graduating cum laude with distinction for his senior thesis on internet memes and political messaging.

Nicole Marklein ([email protected]) represents businesses and individuals in various types of litigation, from contract disputes to personal injuries. She also enjoys providing her business clients with cost-effective employment advice and representation to help avoid employment claims and limit potential exposure if a claim arises. Noting the growing need for quality representation of individuals seeking to help provide or build their families, Attorney Marklein has gained expertise in the field of alternative family reproductive law. She is an LGBTQ ally and enjoys providing cost-effective legal assistance to all types of families. Attorney Marklein serves as the Immediate Past President of the Wisconsin Defense Counsel, and is an active member of DRI, representing Wisconsin on DRI’s State Legislation and Rules Task Force. She also serves on the Wisconsin Civil Justice Council.