Third party litigation funding and mediation: lessons from the Sysco/Burford saga

The request of Sysco and Carina to substitute Carina for Sysco in the underlying antitrust litigations was made pursuant to Rule 25(c) of the Federal Rules of Civil Procedure. The two courts treated the request quite differently.
The Minnesota court refused to exercise its discretion and substitute the funder for Sysco, finding that permitting the transfer would do "violence" to the Federal Rules of Civil Procedure by allowing "a financier with no interest in the litigation beyond maximizing profit on its investment to override decisions made by the party that actually brought the suit." In Re Pork Antitrust Litigation, 18-cv-1776 (JRT/JFD) (D. Minn. 2024) at p. 3. (https://cases.justia.com/federal/district-courts/minnesota/mndce/0:2018cv01776/174320/2104/0.pdf?ts=1707583105). The Court reasoned that Burford wanted not only a larger settlement payment from the suppliers with whom Sysco was negotiating, but it tried to prevent the settlement because they would set "benchmarks" for settlements with other defendants, which would have a ripple effect and influence those matters as well. Id. at 17. The Court recognized the strong public policy of encouraging the settlement of lawsuits, acknowledging that the reasons behind champerty doctrine are significant. "The litigation burden caused by Burford's efforts to maximize return on investment has been enormous." Id. at 9.

The following month, the Illinois court permitted the substitution. See In Re Broiler Chicken Antitrust Litigation, No. 16 C 8637 (N.D. Ill. 2024) (https://fingfx.thomsonreuters.com/gfx/legaldocs/znpnkmlgbvl/Carina-chicken-order-20240321.pdf) The court rejected defendants' arguments based upon standing, champerty, and public policy, reasoning that champerty laws are only available as a defense by a party to a contract. The court added that even if the defendant suppliers had standing, Illinois champerty laws prohibit "officious intermeddling." Id. at 3. "Sysco is a sophisticated and large corporation, and not a simple and ordinary individual who is vulnerable to the temptation of a 'wicked' non-party 'willfully' intending to 'stir up' or 'foment useless ...or meritless litigation... for the sake of harassment' [Id. quoting Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 725 (N.D. Ill. 2014)], [and] [t]hat melodramatic language signals that the concern for champerty is of a different era and circumstances." Id. The disparity of the two federal court rulings reflects the diverging opinions of TPLF itself.

So, what is the takeaway from the Sysco/Burford saga, and where does California stand on TPLF and mediation? Based upon the above, we can make the following observations:

• TPLF is becoming more and more common in the U.S. legal system, and California will continue to draw TPFs due to its lack of champerty laws and legislative regulation.

• A TPF's role may range from monitoring to a more active role depending upon the negotiated terms of LFA. Whether or not a TPF's involvement in a litigation may offend any champerty laws depends upon the applicable state law.

• Notwithstanding any champerty laws, there is a public policy of encouraging settlement. A TPF's perceived interference in a party's attempt to settle may offend this policy.

• LFAs negotiated post-Sysco are likely to have a choice-of-law clause favorable to TPFL (i.e., Australia, California, Texas).

• Post-Sysco, parties seeking funding may face stricter underwriting and disclosure requirements. Any settlement input or approval right a TPF may have previously insisted upon to safeguard its investment may be relinquished in exchange for more favorable LFA terms. For example, what if the TPF and funded party negotiate different percentages based upon various settlement ranges? What if they negotiate a higher multiple on the TPF's investment for matters settled at lesser amounts? What if the parties negotiate an acceptable range for settlement, and if the funded party settles outside these parameters, the TPF has a breach of contract claim against the funded party? This option, however, would depend upon the liquidity of the funded. The creative financial workarounds are endless.

• Diverging interests between a TPF and a funded party should be expected, but they need not thwart settlement. These can be planned for at the underwriting stage. (TPF should expect that an ongoing business relationship will always be a concern in commercial matters.)

• For purposes of mediation, a mediator should ask pre-mediation if there is a TPF in order to assess a potential conflict. A mediator should also ask if the TPF will be participating in any fashion or has any right to the information discussed in the mediation. Even a right to "monitor" may require the funded party to share terms of the mediation negotiations. If so, the TPF should sign a confidentiality agreement as any participant is expected to do.

• Private caucusing with the funded party will be key to discussing the feasibility of settlement offers and any concerns/needs a funded party may have given the LFA terms. A mediator must be educated on TPLF and LFAs to formulate questions (asked at the appropriate time) that will advance settlement negotiations.

• When examining a funded party's BATNA / MLATNA or conducting a reality-based discussion in private caucus, a mediator may want to consider topics such as: How is the TPF's investment collateralized? Is it a percentage, a sliding scale, or a multiple of the amount invested (to date)? What is it? Are there settlement parameters in the LFA? Is there a waterfall clause?

• While a funded party may want a mediator to convey the existence of a TPF, the mediator should not expect to obtain permission to share information gleaned from the funded in private caucus about the LFA or communications with the TPF; the mediator must be very careful not to divulge this information to the other side when trading offers or information.

• LFAs can be amended; creative workarounds exist. If there are terms that may possibly prevent a settlement, explore the possibility of a re-negotiation between the TPF and the funded party and consider continuing/pausing the mediation session.

Lisa Baker Morgan is an independent mediator affiliated with MCLA in Los Angeles and Mediation and Resolution in Paris. She can be contacted at mediate@lisabmorgan.com.