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SAN FRANCISCO—Litigation funders, the lawyers they do business with and industry critics were digesting the ramifications Tuesday of a first-of-its-kind disclosure rule affecting class actions.

But one thing seems clear: It’s unlikely to be the last word in the transparency debate surrounding the growing financial industry.

“It’s really a harbinger and a signal that courts are really starting to see the need to consider the presence of third-party financiers in a lawsuit and consider their role,” said Radosław Góral, a Dentons attorney who studies the litigation-funding industry.

The rule announced on Monday by the U.S. District Court for the Northern District of California mandates that the existence of a third-party funder be disclosed in class-action lawsuits. Though there’s no immediate sign that other district courts will follow, observers say the Northern District is likely to be a kind of laboratory that other courts look to.

The rule also is likely to generate more litigation—and case law—around the limits of what is discoverable to defense counsel once they learn that a funder is behind a class-action suit. It gives no indication as to what happens once a disclosure is made and whether plaintiffs will be forced to turn over their agreement with a financier or other communications showing case strategy or valuation.

“If they don’t make that clear, they’re probably going to spend a lot of court time sorting through discovery motions and demands for depositions,” said Alan Zimmerman, CEO of the Bay Area-based Law Finance Group.

Christopher Chorba, co-chair of Gibson, Dunn & Crutcher’s class-action litigation practice, said that defense counsel would almost surely want to see a copy of any funding agreement to know whether a financier has any control over litigation or the settlement decisions.

“It might be irrelevant if all of that authority is with the attorney,” Chorba said. “But I would still want to know that and verify.”

The Northern District bench had considered a rule to mandate the disclosure of funding agreements in any case before the court. Its decision to limit the rule only to class actions was greeted with some relief by the big-name funders who had opposed the broader proposal.

But the rule also targets an aspect of the industry that critics of litigation funding like the U.S. Chamber of Commerce have seen as the greatest threat to business.

“Investors who get a contingent fee based on the outcomes of lawsuits should not be allowed to operate in the shadows nor control litigation, especially in class actions, where they can more easily put their own interests before class members’,” Harold Kim, executive vice president of the chamber’s Institute for Legal Reform, said in a statement Tuesday. “We are pleased that the court’s order requires transparency in precisely those kinds of cases.”

Because the rule applies only to class actions, it’s not a fight that all funders will have to worry about. Australia-headquartered Bentham IMF, for example, says it doesn’t fund class actions. And Burford Capital, the largest commercial litigation funder in the U.S., says that class actions make up only a small portion of its investments.

By contrast, Zimmerman says class actions make up a significant portion of the cases that his company invests in. Other firms, like New York-based Counsel Financial, also market themselves as offering various kinds of financing to class-action plaintiffs attorneys. (Counsel Financial did not respond to a request for comment on the new rule on Tuesday.)

Los Angeles plaintiffs attorneys Jacqueline Perry and Neil Fraser, whose $1.7 million funding agreement with U.K.-based Therium Capital Management in a class action against Chevron came to light last August, said the rule would help make funding seem less shadowy. In the Chevron case, U.S. District Judge Susan Illston of the Northern District of California ordered disclosure because she wanted to be sure that the two independent attorneys had the financial wherewithal to represent the interests of the class against the energy giant.

“Essentially, I think third-party funding is a [growing] factor in litigation in this country,” Perry said in an interview. “And I think if it’s going to be noncontroversial, if it’s going to establish itself as a way by which plaintiffs can fight on a level playing field against large corporations, it’s important that it is transparent,”

Copyright The Recorder. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

SAN FRANCISCO—Litigation funders, the lawyers they do business with and industry critics were digesting the ramifications Tuesday of a first-of-its-kind disclosure rule affecting class actions.

But one thing seems clear: It’s unlikely to be the last word in the transparency debate surrounding the growing financial industry.

“It’s really a harbinger and a signal that courts are really starting to see the need to consider the presence of third-party financiers in a lawsuit and consider their role,” said Radosław Góral, a Dentons attorney who studies the litigation-funding industry.

The rule announced on Monday by the U.S. District Court for the Northern District of California mandates that the existence of a third-party funder be disclosed in class-action lawsuits. Though there’s no immediate sign that other district courts will follow, observers say the Northern District is likely to be a kind of laboratory that other courts look to.

The rule also is likely to generate more litigation—and case law—around the limits of what is discoverable to defense counsel once they learn that a funder is behind a class-action suit. It gives no indication as to what happens once a disclosure is made and whether plaintiffs will be forced to turn over their agreement with a financier or other communications showing case strategy or valuation.

“If they don’t make that clear, they’re probably going to spend a lot of court time sorting through discovery motions and demands for depositions,” said Alan Zimmerman, CEO of the Bay Area-based Law Finance Group.

Christopher Chorba, co-chair of Gibson, Dunn & Crutcher ‘s class-action litigation practice, said that defense counsel would almost surely want to see a copy of any funding agreement to know whether a financier has any control over litigation or the settlement decisions.

“It might be irrelevant if all of that authority is with the attorney,” Chorba said. “But I would still want to know that and verify.”

The Northern District bench had considered a rule to mandate the disclosure of funding agreements in any case before the court. Its decision to limit the rule only to class actions was greeted with some relief by the big-name funders who had opposed the broader proposal.

But the rule also targets an aspect of the industry that critics of litigation funding like the U.S. Chamber of Commerce have seen as the greatest threat to business.

“Investors who get a contingent fee based on the outcomes of lawsuits should not be allowed to operate in the shadows nor control litigation, especially in class actions, where they can more easily put their own interests before class members’,” Harold Kim, executive vice president of the chamber’s Institute for Legal Reform, said in a statement Tuesday. “We are pleased that the court’s order requires transparency in precisely those kinds of cases.”

Because the rule applies only to class actions, it’s not a fight that all funders will have to worry about. Australia-headquartered Bentham IMF, for example, says it doesn’t fund class actions. And Burford Capital, the largest commercial litigation funder in the U.S., says that class actions make up only a small portion of its investments.

By contrast, Zimmerman says class actions make up a significant portion of the cases that his company invests in. Other firms, like New York-based Counsel Financial, also market themselves as offering various kinds of financing to class-action plaintiffs attorneys. (Counsel Financial did not respond to a request for comment on the new rule on Tuesday.)

Los Angeles plaintiffs attorneys Jacqueline Perry and Neil Fraser, whose $1.7 million funding agreement with U.K.-based Therium Capital Management in a class action against Chevron came to light last August, said the rule would help make funding seem less shadowy. In the Chevron case, U.S. District Judge Susan Illston of the Northern District of California ordered disclosure because she wanted to be sure that the two independent attorneys had the financial wherewithal to represent the interests of the class against the energy giant.

“Essentially, I think third-party funding is a [growing] factor in litigation in this country,” Perry said in an interview. “And I think if it’s going to be noncontroversial, if it’s going to establish itself as a way by which plaintiffs can fight on a level playing field against large corporations, it’s important that it is transparent,”

Copyright The Recorder. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.