Introduction
Non‑party financial investments tied to the outcome of specific litigation can present a judge with the same duty to recuse as owning stock in a party to the lawsuit. For example, a judge who owns (or whose spouse owns) shares in a company that either provides third‑party litigation funding ("TPLF"), or invests in a company that does, should know whether that company stands to benefit directly from the judgment or settlement in one of her cases.
Because TPLF arrangements can mean that an investor is effectively a real party in interest, the Subcommittee should amend Federal Rule of Civil Procedure ("FRCP") 7.1 to require disclosures that would better inform judges of circumstances that might trigger the statutory duty to recuse³ by revealing non‑party financial investments contingent on the outcomes of cases. Such non‑party financial investments are pervasive in federal district courts, and it is increasingly acknowledged that judges should know about them.⁴
Amending Rule 7.1 to include non‑party disclosures would not only provide judges with much‑needed information informing the duty to recuse, but also would be consistent with the Chief Justice’s public call for greater attention to promoting a culture of compliance in the federal judiciary,⁵ inspired by reporting identifying 685 instances of judicial conflicts of interest.⁶
I. Judges Should Know Whether They Have Financial Interests in the Non‑Parties Whose Rights and Obligations Are Contingent on the Outcome of the Case
Federal judges are required by statute⁷ and the Code of Conduct for Federal Judges⁸ to recuse when they know they have a financial interest that would be substantially affected by the outcome of the proceeding. This responsibility applies not only to interests in the subject matter or parties, but also to any other interest that could be substantially affected by the outcome of the proceeding.⁹
The duty relates to financial interests however small¹⁰ and extends beyond actual conflicts of interest to include any appearance of impropriety.¹¹ To comply with these provisions, judges should know more than whether they might have a financial interest in a party; they should also know whether they have a financial interest in a non‑party company or fund that has investments contingent upon the outcome of a case.
II. Judges Should Know When TPLF Investment Agreements Give Non‑Parties the Right to Receive Proceeds from Judgments and Settlements
As the Subcommittee is aware, the increasing prevalence of third‑party litigation funding (especially by entities that also engage in other business) may serve to create interests in the litigation of which a judge is not aware.¹² Such interests are common and substantial. According to recent surveys, there are more than $11 billion in TPLF investments tied to U.S. litigation outcomes.¹³
These investments exist at all stages of litigation,¹⁴ across many federal courts, and span a wide range of subject matters. They are held by public companies, private companies, individuals, asset managers (including family offices), hedge funds, and institutions,¹⁵ including non‑U.S. investors¹⁶ and sovereign wealth funds.¹⁷
Litigation finance is the practice by which a third party unrelated to a lawsuit provides capital to a litigant in return for a portion of any financial recovery.¹⁸ Consequently, a judge’s financial interest in a company engaged in litigation funding has the same significance as an interest in an actual party. Because such interests are contingent on the litigation’s outcome, judges should be informed of their presence to assess recusal obligations.
Moreover, TPLF has become a mainstream investment vehicle, frequently recommended as an asset class uncorrelated with traditional markets, even within retirement accounts. Given that judges must recuse for any financial interest, however small,¹⁹ disclosure obligations are increasingly critical.
III. Existing Local Disclosure Rules Are Failing to Inform Judges About Non‑Party Contingent Financial Interests
Fifty of the ninety‑four federal judicial districts have adopted local rules requiring disclosures beyond Rule 7.1,²⁰ reflecting a demand for more information. Yet this checkerboard of rules has not resulted in consistent disclosure of non‑party contingent financial interests.
Although many federal circuit and district courts require some disclosure of litigation funders for recusal purposes,²¹ compliance is inconsistent. One major funder has acknowledged that these disclosure provisions do not appear to be much‑followed or enforced.²² Funders themselves disagree about the scope of disclosure obligations,²³ and district courts have drafted Local Rule 7.1 provisions in non‑uniform ways.²⁴
As a result, the information judges receive varies significantly by jurisdiction. In response, some courts have acted independently: the District of New Jersey has adopted an express disclosure rule;²⁵ the Northern District of California requires disclosure in class actions;²⁶ and the District of Delaware has issued a standing order requiring disclosure in all civil cases.²⁷ Uniform guidance through FRCP 7.1 is therefore necessary.
IV. Judges Should Know About Non‑Party Financial Interests for Reasons Beyond Recusal
Settlement Authority
Judges should know whether non‑parties should participate in settlement conferences due to authority or influence over resolution decisions. FRCP 16 permits courts to require participation by individuals with settlement authority, and the Committee Notes clarify that non‑parties may be included depending on the circumstances.³⁰–³²
Courts have identified circumstances in which TPLF agreements grant non‑party investors substantial control over litigation, including settlement decisions.³³–³⁶ In other cases, funding agreements permit funders to attend mediations,³⁷ approve counsel,³⁸ or exert influence through contractual control mechanisms.
Without disclosure, a funder’s role in settlement negotiations may remain hidden, undermining judicial oversight.
The Parties’ Resources
Discovery scope under FRCP 26(b)(1) includes consideration of the parties’ resources.³⁹ Non‑party financial investments are therefore relevant to discovery disputes, protective orders, and sanctions determinations. Because TPLF arrangements can make an investor a de facto real party in interest, courts may need to consider investor responsibility for costs or sanctions in cases of misconduct.
A Rule 7.1 disclosure requirement would alert judges to circumstances warranting additional inquiry.
Conclusion
Judges must consider far more than Rule 7.1 presently requires, particularly with respect to non‑party investments. Statutory and ethical duties apply equally to all financial interests directly contingent on litigation outcomes, not solely to those of named parties. It would therefore be inaccurate to treat TPLF issues as separate from Rule 7.1.⁴¹
The Subcommittee should amend Rule 7.1 to require disclosure of non‑party financial investments tied directly to the outcome of a particular case, including interests arising from third‑party litigation funding contracts.
Notes
- Description of LCJ.
- Description of ILR.
- Memo to Standing Committee (Dec. 8, 2023). 4–41. Citations preserved from original document, including statutes, rules, advisory committee materials, judicial decisions, and published reports.
