U.S. Magistrate Judge Joel Schneider of the U.S. District Court for the District of New Jersey. Photo by Carmen Natale

A federal judge overseeing multidistrict litigation over the drug valsartan has denied a request for discovery of litigation funding arrangements involving the plaintiffs.

No binding U.S. Court of Appeals for the Third Circuit precedent addresses whether a plaintiff's litigation funding is a proper subject of discovery, U.S. Magistrate Judge Joel Schneider said in a ruling Wednesday. The plaintiff's argument—that litigation funding is irrelevant to the claims and defenses in the case—won out over the defendants' "parade of horribles" that could arise from litigation funding agreements, Schneider said.

The litigation concerns generic blood pressure drugs manufactured in China and sold in the U.S. contaminated with trace amounts of N-nitrosodimethylamine, also known as NDMA, a probable human carcinogen.

Defendants in the case argued that they should be granted discovery on the use of litigation funding because courts and legislators "increasingly lean towards transparency." A brief submitted by Victoria Lockard of Greenberg Traurig, counsel for defendant Teva Pharmaceuticals, cites a May 2018 decision by Dan Polster, the Northern District of Ohio judge presiding over a nationwide MDL on opioids, mandating disclosure of all litigation funding agreements involving plaintiffs in that case.

In New Jersey, a brief opposing the defendants' request said a plaintiff's use of litigation funding is "private financial information, no different from credit card balances, a mortgage or a home equity loan. That brief, by Adam Slater of Mazie Slater Katz & Freeman in Roseland, said "the financial backing of a litigation funder is as irrelevant to credibility as the plaintiff's personal financial wealth, credit history or indebtedness." In addition, said Slater, disclosure of litigation funding arrangements would "enable the defense to prey upon or take advantage of a plaintiff's financial circumstances, for example, using such information as leverage in settlement negotiations."

Schneider said courts are split on disclosure of litigation funding. He accepted an offer by plaintiffs' counsel to submit their litigation funding documents for in camera review whenever the litigation funding company has input into litigation decisions, including a settlement. But Schneider said he accepted the proposal on the condition that plaintiffs decide when such a review is needed.

Schneider said his ruling should not be construed as placing litigation funding discovery off-limits under all circumstances. If there is a showing that something untoward occurred, the discovery could be relevant, he said. Rather than directing carte blanche discovery of plaintiffs' litigation funding, the court will order discovery if good cause exists to show it is relevant to claims and defenses in the case.

For example, Schneider said, discovery will be ordered if there is a sufficient showing that a nonparty is making ultimate litigation or settlement decisions, if the interests of plaintiffs or the class are sacrificed, or if conflicts of interest exist.

Schneider rejected the defendants' argument that the plaintiffs' litigation funding is "a critical piece of information." He also disagreed with the defendants' statement that there is a "shifting tide towards disclosure of third-party litigation funding information in courts … coupled by a similar movement in the legislative realm." He cited several cases in which disclosure of litigation funding arrangements was denied.

Schneider also rejected what he called the defendants' implicit argument that plaintiff's litigation funding could create perverse financial incentives to sacrifice the client's best interests. "Litigation funding is no different … than the risks presented by hourly and contingency fees, both of which create their own characteristic misalignment of interests," Schneider wrote, quoting a recent Akron Law Review article by W. Bradley Wendel.

The valsartan MDL could be costly to prosecute and defend, given that some of the defendants are located in China and India, as well as the large number of plaintiffs and the seriousness of the claimed injuries, Schneider said.

The case consists of three groups of plaintiffs. Approximately 126 suits have been filed by people who have been diagnosed with various forms of cancer that they say was caused by taking valsartan. Plaintiffs' counsel estimate that group will eventually account for 2,000 cases.

The second category consists of individuals who took the contaminated drugs, and numbers in the tens of thousands. The third group of claimants consists of individuals and entities who paid money for any drug containing valsartan.

Lawsuits over valsartan were consolidated in Camden before U.S. District Judge Robert Kugler and Schneider in February.

The principal defendants are Zhejiang Huahai Pharmaceutical Co. Ltd. and its U.S. affiliates: Prinston Pharmaceutical Inc., Solco Healthcare U.S. LLC, and Huahai U.S. Inc. Prinston, Solco and Huahai have offices at the same location in Cranbury. Other defendants in the MDL include makers of the active ingredient in valsartan, as well as repackagers, wholesalers and retailers.

Slater said Schneider's ruling "is now the seminal decision on the discoverability of litigation funding in MDLs. He analyzed all the relevant case law. He even did something innovative" in allowing plaintiffs to decide when their litigation funding agreements should be subject to in camera review.

The case will be closely watched because of the growing awareness of the lack of oversight for production of drugs manufactured in China and sold in the U.S., Slater said. Evidence will show that Food and Drug Administration officials debated whether to take action against the plant in China that made the valsartan at issue in the MDL, but ultimately the agency's top officials dictated a wait-and-see approach, Slater said. "The FDA has a lot of egg on its face," he said.

Lockard and other members of the defense team did not respond to a request for comment.