Avoiding the Risk of Fee-Splitting in a Litigation Finance Transaction

One of the most fundamental ethical rules governing law practice is that a lawyer may not share legal fees with a non-lawyer. The rule exists to protect the independence of the lawyer’s professional judgment and to assure that the lawyer serves only the interests of the client.  As with many other aspects of law practice, litigation funding can complicate the process of adhering to this rule.

The fee-splitting problem can arise when the lawyer has a contingent fee agreement with the client and when the funder has a right to share in the proceeds of the litigation.  This means that both the lawyer and the funder have a security interest in the proceeds of the litigation.  In this situation, there can be a question whether the lawyer may give the funder a share of his own security interest in the recovery, as back-up security for funder’s investment.

Authorities are split on how to answer this question. A few state ethics opinions have addressed the fee-splitting rule in connection with litigation financing transactions. These opinions state that a lawyer may not agree to give a funder a share of or a security interest in the fee the lawyer expects to receive under a contingency fee agreement with the client.  According to these authorities, such a transaction between the funder and the lawyer would be fee-splitting.

One court, however, has reached the conclusion that lawyers may pledge their interest in a client’s recovery as security for a loan intended to cover litigation costs. In Core Funding Group v. McDonald, a 2006 case from Ohio, a law firm took a loan to pay for the expenses associate d with a group of contingent fee cases.  The firm offered the expected fees as security for the loan.  The Ohio Court of Appeals held that this transaction was equivalent to a commercial contract in which accounts receivable are offered as security.  This analysis indicates that, at least in Ohio, there is no concern about fee-splitting in a transaction in which a lender gets a security interest in an as yet unearned fee.

Regardless of how any particular jurisdiction views this issue, there are guidelines that lawyers can follow to avoid the risk of being accused of fee-splitting in connection with a litigation financing transaction. Model Rule of Professional Conduct 1.8(f) prohibits lawyers from accepting compensation from a third party for the representation of a client unless the client gives informed consent, there is no interference with the lawyer’s exercise of independent professional judgment, and confidential information is protected as required by Model Rule 1.6.  As long as a lawyer conforms to these principles and assures that all of these conditions are present in the relationship among the funder, client, and himself, he should be well-positioned to avoid any fee-splitting problems.

Topics:  litigation finance, legal reform, third-party funding, fee-splitting, litigation finance best practices

 Works Cited:  Core Funding Group v. McDonald, No. L-05-1291, 2006 WL 832833 (Ohio Ct. App. Mar. 31, 2006)

Leave a Reply

Your email address will not be published. Required fields are marked *