Third-Party Litigation Funders and ERISA Suits

For a cut of the potential winnings, there are financial companies willing to put up capital to pay for some or all of the cost of private litigation, such as attorneys’ fees, discovery expenses, expert witness fees and court costs.

Given the substantial complexity and cost of litigation under the Employee Retirement Income Security Act (ERISA), it makes sense to ask whether “litigation finance” is common in the retirement plan industry.

In the experience of David Levine and Kevin Walsh, principals at Groom Law Group, in fact this is not common in the ERISA domain. Both Walsh and Levine said they have not seen third parties funding any of the significant ERISA cases they have worked on or studied. Other attorneys active in the ERISA space concurred. 

One potential caveat to keep in mind here is that litigation funding firms commonly deploy non-disclosure agreements, so it is theoretically possible that litigation funding has occurred in ERISA lawsuits without being disclosed. According to Validity Finance, which engages in litigation funding across a variety of industries, the process starts with a potential client sharing basic information about their proposed claims. Generally, the litigation funder will execute a non-disclosure agreement at this early stage and only then conduct an initial screening of the claims and an evaluation of the basic economics of a potential funding agreement.

Assuming the claims seem reasonable, the litigation funding firm will then conduct its full due diligence to confirm the strength of the claims. It is common for the litigation funding firm to ask for documentation from the potential client and any existing counsel. From here, in Validity Finance’s case, a proposal is submitted to the firm’s investment committee for approval. Should the committee approve the proposal, litigation funding is then made available according to the terms of a privately negotiated contract.

According to Laina Miller Hammond and Wendie Childress, both serving in counsel roles at Validity Finance, in commercial litigation, “discovery has become a war of attrition in which the better-resourced party has an almost insuperable advantage.” They say litigation finance is growing in the U.S. and as a result, deep-pocketed parties facing lawsuits are using the discovery process as a delay tactic and to seek disclosure of confidential financing arrangements.

“Allowing such discovery is irrelevant to the merits of the case, and unduly burdens both courts and those litigants who avail themselves of financing,” they say. “Courts across the country are increasingly refusing to permit discovery of litigation financing documents, describing the use of financing as ‘a side issue at best.’”

Notably, the U.S. District Court for the Eastern District of New York recently weighed in on this issue in a case called Benitez v. Lopez. In short, the court held that litigation finance agreements are “not relevant to the litigation and should not be discoverable.” Hammond and Childress note that the defendants had argued they needed access to the funding agreement in order to understand “the motives behind it,” and claimed that the existence of the agreement went “directly to plaintiff’s credibility and [was] grounds for impeachment at trial.”

In denying the motion, the court stated “the financial backing of a litigation funder is as irrelevant to credibility as the plaintiff’s personal financial wealth, credit history, or indebtedness. That a person has received litigation funding does not assist the fact finder in determining whether or not the witness is telling the truth.”

Financing More Likely in the Future?

Despite the prospect of an undisclosed financing agreement, one potential obstruction to litigation funding becoming popular in the ERISA domain is that recovered losses are generally paid to the retirement plan, rather than to a private individual who could then pay the litigation funding firm according to the terms of a private, undisclosed contract. While ERISA permits the payment of substantial attorney’s fees to the counsel that represents participant-plaintiffs, it is far from clear that a participant could somehow compel an ERISA-covered retirement plan to pay some portion of its recovered losses to a third-party financier.

With this in mind, perhaps the most likely area in which litigation financing could be playing an undisclosed role in the ERISA domain would be a case where a firm like Validity Finance is providing financial resources to the attorneys representing classes of participant-plaintiffs, rather than providing such support directly to the lead plaintiffs. Indeed, according to Validity’s leadership, law firms have begun to realize the power of “portfolio financing” and are engaging third-parties to support their practices financially.  

“If your firm has an existing group of cases or wishes to build a portfolio, we can help,” the firm’s website advertises. “Like other funders, we can finance up to half of the fee and cost budgets of a basket of cases. This frees up capital for the firm’s other financial needs.”

In this way, Validity’s model helps litigators spread their risk, and its investments are “made in the firm not in the cases,” meaning law firm management can choose to use capital for broader strategic purposes—such as hiring lateral lawyers, expanding offices into new markets or covering fixed fee overruns.

According to Validity, generally, the term “litigation funder” describes a privately held or publicly traded entity that has its own pool of capital earmarked to invest in litigation. How a funder accesses that capital can vary widely. Some funders draw upon a dedicated investment fund, Validity’s leadership explains, while others rely on multiple investors to provide financial backing. Still others in the market “find and diligence cases first and then attempt to raise the necessary capital from their network of sources through a process called syndication.”