The opinions expressed here are those of the author, a columnist for Reuters.

By Jenna Greene

Sept 11 (Reuters) - When litigants strike deals with outside funders to provide financial backing for their cases, the arrangements are usually top-secret. But a juicy trove of contracts has recently come to light, and advocates for mandatory disclosure of funding agreements say the documents show why such a rule is needed.

Lawyers for Civil Justice, which represents corporations and defense counsel and pushes for more disclosure of litigation funding, last week submitted nine contracts as part of lengthy comments to a judicial panel considering a national rule that would require litigation funding disclosure. The agreements came to light via related lawsuits or other government filings, the group said.

Taken together, the contracts offer insight into the degree of control litigation funders can exercise over the cases they back.

Funders typically describe themselves as passive investors, sitting on the sidelines while the clients and their lawyers run the cases. As such, their involvement need not be disclosed, they say, any more than a litigant would report taking out a line of credit at a bank.

But the contracts show funders in at least some instances “have the right to reject settlements, choose and instruct counsel, or even take over litigation entirely,” said Alex Dahl, general counsel of Lawyers for Civil Justice.

For example, Dahl points to a 2022 contract by Burford Capital entities with Sysco Corp stating that the funding recipient “shall not accept a settlement offer without the Capital Providers’ prior written consent.” (However, the amendment came after Sysco allegedly breached a prior deal and as such, may be atypical.)A Burford spokesperson declined comment. A Sysco spokesperson declined comment on pending litigation. Other agreements can give funders the ability to “lock in” a specific lawyer or firm, Lawyers for Civil Justice said in its comments, offering another means of controlling a case. For example, a Longford Capital agreement defines replacing counsel as a “Material Adverse Event” that requires plaintiff to obtain Longford’s prior written consent. Longford did not respond to a request for comment

Even if funders don’t usually exercise the control provisions, Dahl argues that their ability to do so is grounds to require disclosure, “so that the court and all parties can make a realistic appraisal of the case.”

In the U.S., there are about 42 active commercial litigation funders, litigation finance firm Westfleet Advisors said in its annual report in March, with a total of $16.1 billion in assets under management. The financiers committed $2.3 billion to new deals last year, according to the report, a $400 million decline from 2023.

Funders say they help bridge the justice gap by enabling smaller litigants, who might otherwise lack the money, to pursue meritorious claims against deep-pocketed opponents.

Tapped most often by plaintiffs' firms and their clients, funders typically agree to provide financial support of a lawsuit in exchange for a cut of an eventual settlement or judgment.

What’s been missing from the disclosure debate until now is an examination of the contracts themselves.

To be sure, the submitted agreements don’t strike me as entirely representative of the current U.S. market.

For example, one is a 2104 contract to fund a class action in Australia. Paul Kong, executive director of the International Legal Finance Association, a trade group representing the commercial funding industry, calls the samples “cherry-picked.”

Mandatory disclosure of the agreements has broad support from corporations and the defense bar. More than 100 major companies from the technology, pharmaceutical, automotive and other sectors last year sent a letter to federal courts’ Advisory Committee on Civil Rules, which has formed a subcommittee to consider adopting a disclosure rule.

Outside funding “fundamentally alters the dynamics and has a major impact on whether the dispute can be resolved through settlement,” the companies said.

As a journalist, I’m almost always in favor of making information public. As the saying goes, sunshine is the best disinfectant.

Already, defendants are compelled by federal rules of civil procedure to disclose the existence of insurance policies that could cover a judgment. Isn't disclosing litigation funding analogous? I asked Parabellum Capital managing director and corporate counsel Dai Wai Chin Feman.

It's not that simple, he said. Insurance agreements predate litigation, while litigation funding agreements are created in response to a specific lawsuit.

Chin Feman said he doesn’t object to disclosing the existence of funding arrangements and the parties involved, to head off conflicts of interest. Where he draws the line is turning over the full agreements for opposing counsel to peruse.

“We’re not going to give them a tactical weapon to use against us,” he said, noting that the contracts often include information such as the litigation budget, case evaluation and other sensitive work products.

As such, multiple courts have held the agreements are protected from disclosure or irrelevant to the defenses of the case.

A handful of judges and courts, however, have started to require funding agreements be revealed, including in the District of New Jersey and a standing order by Chief U.S. District Judge Colm Connolly in Delaware.

Several states including Louisiana, Indiana and West Virginia in recent years have also put disclosure requirements in place.

In April, lawmakers in Kansas enacted compromise disclosure legislation Chin Feman helped negotiate that won the backing of litigation funders and foes alike.

The law requires claimants to produce the full litigation funding agreements for confidential review by the court. Opposing parties are entitled to more limited disclosures, such as the identity of the funder and whether it has control or approval rights for litigation decisions.

As the federal judicial subcommittee considers enacting a new rule of civil procedure – a process that could take years to complete – it might consider the Kansas model as a way forward.

(Reporting by Jenna Greene)