United States: Bankrolling Class Actions: Court Rules That Plaintiff Must Identify Third-Party Funder Of Class Action Lawsuit

Last Updated: August 16 2016
Article by Gerald L. Maatman Jr. and Alex W. Karasik

Seyfarth Synopsis: The increasingly common practice of third-party funding of class actions, which provides tax incentives to plaintiffs' attorneys and third-party funders alike, may no longer be protected under confidentiality agreements. Finding a class action funding agreement to be relevant in determining the adequacy of class counsel, a court in California granted a defendant's motion to compel the plaintiff to produce the litigation funding agreement and reveal the identity of the third-party funder. This ruling is key for all employers facing class action litigation.

A recent trend has emerged in the class action landscape whereby a third-party funder pays the owner of a civil claim an up-front monetary payment in return for the claim owner's promise to convey a portion of the potential recovery. Class action plaintiffs' attorneys and third-party funders are incentivized under this approach through tax advantages, whereby the attorneys can defer tax liability on the monetary advancement until the claim pays off while the funders can deduct their expenses and pay tax on any profit at the lower capital-gains rate. Predictably, many of the third-party funders enter into such agreements with plaintiffs' attorneys confidentially for varying business or personal reasons.

In a novel decision that will profoundly impact the practice of third-party funding of class actions, Judge Illston of the U.S. District Court for the Northern District of California recently granted defendant's ("Chevron") motion to compel plaintiff to reveal the identity of who was funding its proposed class action regarding a gas explosion off the coast of Nigeria in Gbarabe v. Chevron Corp., No. 14-CV-173 (N.D. Cal. Aug. 5, 2016). This ruling provides businesses facing class actions, including employers facing workplace class actions, a blueprint as to how to compel plaintiffs to identify stakeholders in class action lawsuits against their companies.

Case Background

Plaintiff, a Nigerian fisherman near the coastal waters of Bayelsa, Nigeria, brought a class action suit on January 13, 2014 for alleged losses to the classes' livelihood and health problems. Id. at 2. After several rounds of motion practice and extensions, plaintiff moved for class certification on April 8, 2016.

To determine whether plaintiff's counsel could adequately represent the proposed class of Nigerian fisherman and residents, Chevron requested that plaintiff be ordered to produce "documents reflecting or relating to the actual or potential financing or funding of the prosecution of this litigation" and to comply with Civil Local Rule 3-15. Id. Chevron argued that when the Court ruled on the upcoming class certification motion, it must examine the resources that plaintiff's counsel will commit to representing the class, which was especially important in a case like this involving claims that are likely to be expensive to investigate, prepare for trial, and prosecute to verdict. Further, Chevron noted that plaintiff did not dispute that his counsel, a group of solo practitioners, were dependent on outside funding to prosecute the case.

After initially refusing to produce the requested documents, plaintiff produced a heavily redacted copy of a litigation funding agreement. Id. at 3. Chevron argued the redactions made it impossible for it to assess whether counsel could commit adequate resources to the class. While plaintiff conceded the relevance of the funding agreement to the class certification adequacy determination, and further did not assert that the agreement was privileged, plaintiff argued that he and "his counsel are under a contractual obligation to preserve the confidentiality of the funder's identity, as well as the terms of the agreement, absent a Court order or a determination that it would be prudent to do so." Id. Plaintiff thereafter proposed submitting an unredacted copy of the litigation funding agreement to the Court for in camera review, along with an executed declaration by the funder's Chief Investment Officer which addresses each item identified by defendant in their motion. Id.

The Court's Decision

The Court rejected plaintiff's proposed approach and granted Chevron's motion to compel production of the litigation funding agreement.

The Court noted that under the circumstances of the case, the litigation funding agreement was relevant to the adequacy determination and thus should be produced to defendant. Further, the Court noted that the confidentiality provision of the funding agreement did not prohibit plaintiff from producing the agreement. Id. Plaintiff's proposal for in camera review of the agreement by the Court was found to be inadequate because it would deprive Chevron of the ability to make its own assessment and arguments regarding the funding agreement and its impact, if any, on plaintiff's ability to adequately represent the class. Accordingly, the Court ordered plaintiff to produce the litigation funding agreement to Chevron along with any other documents that were responsive to Chevron's document request. Id. at 4.

Implications For Employers

A business confronted with class action litigation absolutely would want to know if someone other than the plaintiffs themselves have a financial interest in a "bet-the-company" case. The ruling in Gbarabe arms employers with a potential strategy to unmask third-party funders that may have an interest in seeing their financial demise as a class action defendant. Given that this ruling stemmed from internationally-based class action litigation involving solo practitioners, businesses should be cautioned that courts may not always find litigation funding agreements to be relevant in determining the adequacy of plaintiffs' counsel. Nonetheless, the arguments presented by Chevron are instructive in showing class action defendants how they can attempt to figure out who is bankrolling litigation battles against them. Finally, this ruling should serve as a cautionary tale to those third-party funders who desire anonymity, and ideally result in a chilling effect of this practice that amounts to tax-incentivized gambling on class action litigation. Workplace class actions can expect to see similar challenges to the adequacy of class counsel with motions to compel the production of litigation funding agreements in the very near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Gerald L. Maatman Jr.
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