On April 8, Kansas Senate Bill No. 54 (SB54) became law. SB54 is the first-ever legislative compromise between the commercial legal finance industry and the U.S. Chamber of Commerce (the “Chamber”). The law represents a sensible balance between legitimate regulatory goals, such as identifying conflicts of interest, while protecting privileged and confidential information from the prejudice associated with overbroad, forced disclosure. SB54 has elements in common with other approaches to limited disclosure, such as Judge Polster’s procedures in the Opioids MDL, the 2023 recommendations of the Delaware Judiciary, and District of New Jersey Local Civil Rule 7.1.1.

I negotiated the language of SB54 on behalf of the International Legal Finance Association (“ILFA”). Representatives of the Chamber and the Kansas Chamber of Commerce participated directly in the negotiation of the compromise, which was aided by members of the Senate Judiciary Committee. This article provides an overview of what SB54 does—and does not—require, and why. 

Disclosure

SB54 requires the automatic production of commercial litigation funding agreements to the court in camera, with limited disclosures made to opposing parties. 

Prior to the negotiation, the Chamber had insisted upon automatic production of full funding agreements to parties. ILFA opposed this provision—as it does consistently—on the grounds that funding agreements: (1) contain sensitive work product, (2) have been held by a “chorus of courts” to be irrelevant and/or protected from disclosure, and (3) contain information that may be used by opposing parties for inappropriate strategic advantage. 

As a result of our negotiation, the Chamber softened its previous position that opposing parties in litigation should have the right to automatically obtain funding agreements. Instead, the Chamber agreed to the following limited disclosures regarding the funding agreements, which can be verified by the court’s in camera review.: 

1. The funder’s identity and place of incorporation;
2. Whether a funder has control or approval rights for litigation decisions; 
3. Whether a funder has the right to review materials designated confidential under a protective order; 
4. Known conflicts between a funder and the adverse party, its counsel, or the court; 
5. A description of the nature of the funder’s financial interest; and 
6. Whether the funder has capital from adverse foreign countries. 

These representations address various arguments—many of which, to be clear, are purely hypothetical—that the Chamber has asserted in its effort to advance broader proposals that would mandate prejudicial forced disclosure of full funding agreements under the guise of transparency. For example, the Chamber has argued for full disclosure because “everyone involved in a lawsuit should know who is funding it” and “to avoid conflicts of interest” with the judiciary. The Chamber has also argued for full disclosure on the basis that “funders can exercise immense control over litigations in which they invest,” and could be backed by adverse foreign interests that “may even seek to access confidential trade secret information for state purposes.” These unsupported concerns, as far-fetched and implausible as some of them may seem, are nevertheless addressed by SB54 in a tailored manner that does not afford defendants strategic advantage or lead to satellite litigation, while also providing appropriate levels of transparency and protecting the court’s inherent authority to manage its cases. 

Scope

SB54 only requires disclosure regarding agreements between funders and parties. It does not require disclosure concerning financing agreements between funders and counsel, as funders are not in contractual privity with parties under such arrangements. Accordingly, SB54 only requires representations about agreements “if a party has entered into a third-party litigation funding agreement,” which is logical in light of the fact that lawyer-directed financing does not implicate the lion’s share of concerns articulated by the Chamber due to the lack of privity. In addition, disclosure of law firm financing would necessarily ensnare more traditional financing arrangements, such as recourse lines of credit provided by financial institutions.

Foreign Capital

SB54 requires disclosure of capital from “foreign countries of concern,” i.e., those federally designated as foreign adversaries or terrorist organizations, consistent with the approach taken in other states such as Louisiana. ILFA has no objection to this provision, notwithstanding that the Chamber’s articulated bases for seeking such disclosure—that hostile foreign powers may use litigation financers as a conduit to finance cases that are contrary to the U.S. national interest or as a means of obtaining sensitive material produced in discovery—are baseless. Legal finance firms do not control the matters in which they invest. Nor do funders have access to sensitive documents and information produced in discovery. Such information, such as trade secrets, are already protected from improper disclosure through strict protective orders. Investors in legal finance firms are even further attenuated from underlying litigation. They generally have no role in the selection of investments, much less the materials produced via discovery. As one legal expert recently said, the speculation regarding national security is “evidence-free,” and requires “conspiracy thinking to believe this would or could happen.” 

The Chamber’s initial bill language required disclosure of capital from all foreign entities, which would have unnecessarily reduced litigants’ access to capital because a significant share of the funding market has been historically domiciled in foreign, allied countries. The Chamber agreed to this compromise, and ILFA accepted the Chamber’s definition of “foreign country of concern.”

Other Provisions

Notably, SB54 does not contain a number of other problematic provisions that are present in disclosure bills proposed in other states, many of which would operate as de facto funding prohibitions. Examples include indemnification for adverse costs, registration, discovery concerning funding and admissibility of funding-related information, mandatory contract language, and return limitations.

Outlook

SB54 demonstrates that compromise is attainable in the historically polarized litigation funding disclosure debate. For states considering pending legislation—many of which face fatigue from perennial bills that seek to solve nonexistent problems—precedent now exists for a rational level of disclosure that protects against prejudice and preserves access to justice.

Dai Wai Chin Feman is a managing director at Parabellum Capital, where he oversees commercial litigation investments and public policy.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of The National Law Review.