Highlights
The New Jersey Senate will vote on a bill to regulate the commercial litigation funding industry – both who can engage in such funding and what the terms of those agreements must contain
Proponents of the bill see it as a means to "stop the bad apples" in a "largely unregulated" industry
Some critics are concerned with the effect the proposed bill will have on the discoverability of consumer funding agreements in the underlying litigation
The ongoing debate over the importance and level of transparency in litigation continues to bring the issue of litigation funding to the fore. Thus far, there has been a patchwork approach across jurisdictions with regard to the disclosure of such funding agreements. Certain courts, including those in New Jersey or specific judges, have issued standing orders requiring disclosure while others have remained silent.
While Congress addresses the merits of the Litigation Transparency Act, the New Jersey legislature is considering its own bill regarding the regulation and transparency of litigation funding.
New Jersey's Proposed Consumer Legal Funding Act
By a vote of 4-1, the New Jersey Senate Commerce Committee advanced a bill out of committee that seeks to regulate consumer litigation funding within the state. The Consumer Legal Funding Act only applies to consumer litigation funding – "a transaction in which a company purchases and a consumer sells to the company a contingent right to receive an amount of the potential proceeds of a settlement, judgment, award, or verdict." It does not apply to other forms of litigation funding, such as funding given to plaintiff's counsel to cover the costs of litigation and running the law firm.
The bill will now move to the full Senate for reading, debate, and a vote.
The bill has provisions specifically aimed at protecting plaintiffs from predatory terms or lending tactics, including the following:
- Any consumer legal funding agreement must contain a full explanation of its terms and provide a right of rescission, under certain circumstances.
- There would be a prohibition on funding companies paying "commissions, referral fees, or other forms of consideration to any attorney, law firm, medical provider, chiropractor, or physical therapist or any of their employees for referring a consumer to the company."
- Funding companies would be barred from receiving "any right to make any decisions with respect to the conduct of the underlying legal claim or any settlement or resolution thereof. The right to make those decisions shall remain solely with the consumer and the attorney in the legal claim."
- Funding companies would be required to register with the state, pay biannual registration fees, and file any form of financing agreement they intend to use with the state.
State Sen. John McKeon, who represents parts of Essex and Passaic Counties, sponsored the bill. At the committee hearing, it was reported the managing partner of a litigation funding company testified regarding the need to "stop the bad apples" who are operating in this "largely unregulated" industry. As there is currently no regulation specific to this industry, certain stakeholders believe that the chance for abuse is high.
Even those who voice concern about the bill do not dispute its goal – consumer protection. Rather, they believe that the existence of these funding agreements should not be discoverable in litigation. One critic, state Sen. Jon Bramnick, who is also an attorney, told the media, "I love everything about the bill because some of the interest rates are outrageous. What I don't like is that this bill now says I have to tell the defendant insurance company that my client is borrowing money."
While the bill itself does not explicitly say so, certain senators have voiced concern that these agreements will be deemed discoverable in litigation. If the existence of these funding agreements is discoverable, a defendant would likely be able to use the state equivalent of the Freedom of Information Act – known as the Open Public Records Act – to learn the terms of any funding agreement.
Takeaways
Proponents of the proposed bill state it will increase transparency in litigation and will protect consumers. While this bill does not cover all forms of litigation financing, it demonstrates a recognition that the legal funding industry is growing and having an effect on those who receive this funding and on litigation more broadly. It will be important to see whether similar efforts are taken in other jurisdictions – such as Indiana and West Virginia which have already done so – and whether the scope of such bills is expanded to include all forms of litigation funding.
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