Litigation Financing Forced Into the Light by Chevron Case

Posted on December 8th, 2016

Law360

by Andrew Strickler

August 17, 2016

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Law360, New York (August 17, 2016, 10:08 PM ET) — A California judge’s decision to force attorneys to say who is funding their $1.5 billion proposed class action against Chevron over a Nigerian offshore rig explosion has the potential to force the burgeoning and secretive industry of litigation funding out of the shadows, experts say.

The decision, among the first from any federal court to address questions of confidentiality of third-party funders in class certifications, will also likely be used by the plaintiffs bar in future cases to show they’re properly bankrolled and ready to protect class members, triggering more legal battles over who’s putting up the cash and how much.

Gerald Maatman of Seyfarth Shaw LLP said the decision was also notable because it came from U.S. District Judge Susan Illston, a highly respected jurist in the Northern District of California, a focal point for high-stakes class actions.

“This is the first tip of the iceberg of decisions on whether the role of a litigation funder is relevant to the question of adequacy,” he said. “If you’re an institutional litigant being sued in these types of cases, this is an opinion you really ought to read.”

In her Aug. 5 order granting a defense request to see the financing deal, Judge Illston said the details were relevant to the question of counsel’s adequacy at the class certification stage and the requirements of Rule 23 of the Federal Rules of Civil Procedure.

She also said the in-chambers review requested by plaintiffs’ counsel Neil Fraser of Perry Fraser LLP “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.”

The question of disclosures of third-party financing deals — always a sensitive topic for litigants and their private backers — was brought to the forefront in recent months with the revelation that Silicon Valley billionaire Peter Thiel personally bankrolled wrestler Hulk Hogan’s sex tape case against Gawker Media LLC.

The trial resulted in a $140 million judgment against the online publisher, bankruptcy filings by Gawker and its founder Nick Denton, and wider public recognition about third-party legal funders.

For corporate interests, the growing role of major legal-focused funders like Burford Capital Ltd.,Gerchen Keller Capital LLC and IMF Bentham Ltd. in class actions is also a rising concern.

The proposed case against Chevron focuses on a January 2012 explosion on a drilling rig off the coast of Nigeria, and allegations of damages from the loss of fishing yields caused by the disaster and a prolonged rig fire.

The case, now in its third iteration, proposes to represent a class of 12,600 people living along the Nigerian coast who allegedly suffered damage to food and water supplies, health and livelihoods.

The first complaint, originally seeking more than $5 billion for a proposed class of 65,000 people, was dismissed two years ago for vagueness. An amended complaint was dismissed in 2014 when the court found that the plaintiffs had not established they were harmed by the explosion.

The current case’s lone named plaintiff, Natta Iyela Gbarabe, is a fisherman who lives in the southern Nigerian state of Bayelsa.

Under those circumstances and in the absence of class members, the question of counsel adequacy in class certification “is especially important in a case like this involving claims that are likely to be expensive to investigate, prepare for trial, and try,” the company argued in a recent filing.

A July reply brief from the plaintiffs describes the case as “fully capitalized” by an unnamed funder with “several hundred million pounds sterling in liquid resources.” A heavily redacted copy of the contract submitted to the court earlier this year added virtually no additional details.

Chevron has a long and colorful history with funder-backed class actions. In the company’s bitter battle with attorney Steven Donziger over a $9.5 billion environmental judgment in Ecuador,Patton Boggs LLP and a $4 million plaintiffs-side investment by Burford Capital became prime targets as the company pressed a successful racketeering case alleging the plaintiffs tried to “cleanse” a judgment secured through bribery and fraud.

Yeshiva University’s Benjamin N. Cardozo School of Law professor Anthony Sebok, who is also a Burford adviser, said the California decision would not find favor among the growing field of litigation funders. In most instances, he said, they favor a default “no disclosure” strategy: The less the opposition knows about them, the lower the risk of discovery fights, expensive satellite litigations and case slowdowns.

While acknowledging that the decision would cause concern for funders who want to stay anonymous or hidden, Sebok said the judge seemed to assume that the identity of the funder was as important to the case as the money pledged to it.

“If the question of adequacy is about the financial wherewithal of the firm, where the money comes from is not obviously relevant because that wherewithal should be measured in amounts, not sources,” he said.

Judge Illston noted in her decision that Fraser had conceded that the funding deal was relevant to the adequacy rule and did not assert privilege. Instead, he argued that he and his client were under a contractual obligation to preserve the confidentiality of the funder, according to the order.

“The confidentiality provision of the funding agreement does not prohibit plaintiff from producing the agreement, and instead simply states that ‘if at any time such a requirement [to produce the agreement] arises or to do so would be prudent … the lawyers will promptly take all such steps as reasonably practicable to make such disclosure,’” the order said.

Fraser and his co-counsel, Jacqueline Perry, did not respond to requests for comment Wednesday. Attorneys representing Chevron also did not respond to requests for comment.

Selvyn Seidel, chairman of litigation fund Fulbrook Capital Management LLC, predicted that the industry’s most vocal critic, the U.S. Chamber of Commerce, would ring the “fire alarm” in support of a decision favorable to corporate defendants fending off class actions.

But he argued that a number of elements of the California decision would lessen its precedential importance. Primarily, the funding deal in question did not have a strong confidentiality provision, essentially opening the door for Chevron to press for disclosure and the judge to allow it, he said. The plaintiffs’ attorney also made admissions on the relevance of the deal that most lawyers would not make.

Meanwhile, some leaders in the funding industry are becoming friendlier toward strategic disclosures, including of private investments in class actions, further reducing the effect of the order moving forward.

“The key part of this decision is, yes, that discovery was required, but to require the whole agreement to be turned over, that was a stupid thing for the complainants to allow,” Seidel said. “If there is going to be disclosure, then what you disclose is nothing more than the amounts, you don’t just turn over the whole confidential agreement.”

Maatman also argued that class action plaintiffs lawyers will be able to use the decision to argue that their own financial backers support their readiness to represent class members and carry a case to completion.

“This is litigation funding starting to find its way into these class actions, and those are the classic David-versus-Goliath cases that litigation funding seems to be tailor-made for,” he said. “But this decision can cut both ways on the extent to which it helps or hurts plaintiffs secure class certification.”

A class certification motion hearing is scheduled for Dec. 9.

The plaintiffs are represented by Jacqueline Perry and Neil J. Fraser of Perry Fraser LLP.

The defendants are represented by Robert A. Mittelstaedt, Caroline N. Mitchell and David L. Wallach of Jones Day.

The case is Ogola et al. v. Chevron Corp. et al., case number 3:14-cv-00173, in the U.S. District Court for the Northern District of California.