Ethical Ramifications of Litigation Financing in the Class Action Context

Integrating litigation financing into class action litigation will implicate a number of ethical concerns. Litigation finance has been around for over 20 years and is continuing to gain popularity. However, litigation funding in class actions is almost non-existent in the United States. The Ecuadorian-Chevron litigation is one of the only notable class action suit secured by third-party litigation financing.[1] It is unlikely that the Ecuadorian-Chevron litigation will persuade litigation funders to get involved in high-profile class action litigation against multinational corporations.[2] Rather, some of the largest litigation finance firms have disclaimed any intention to fund class actions.[3] Third-party litigation funding has not really entered the class action context due to ethical implications. Counsel for plaintiffs’ in a class action suit has a duty to fairly and adequately represent the interests of the class. The main issues posed include whether disclosure should be required during class certification, whether litigation funding effects the appointment of class counsel, and whether funding arrangements that give funders a stake in the outcome of the case, and counsel more control over the case and shift interests, impair counsel’s professional judgment precluding fair and adequate representation of the class.[4]

Disclosure of Litigation Financing and Confidential Financing Agreements in Class Certification

A recent California case, Gbarabe v. Chevron Corp., addressed whether the role and existence of a litigation financing is relevant to the question of adequacy of class status. [5] The judge granted the defense’s request to see the confidential litigation funding agreement including the identity of the funder, explaining that the details of the agreement were relevant to the question of counsel’s adequacy at the class certification stage.[6] Despite this recent holding, it is unlikely that it would be applicable to other third-party litigation funding cases in the class action context as this case involved a poorly drafted confidentiality clause, and class counsel essentially conceded to relevancy. Also, the judge was influenced by proposed Local Rule 3-15, which requires automatic disclosure of interested parties including litigation funders. The Local Rule raises further questions and concerns. For example, the Rule is vague and fails to indicate where to draw the line in identifying persons with a financial interest. The Rule also attempts to impose additional rules even though adequate laws are in place ensuring compliance with ethical obligations, such as the Model Rules of Professional Conduct, the attorney-client relationship, and the independent judgment rule. Unlike Gbarabe, a New York class action case, Kaplan v. S.A.C. Capital Advisors, protected litigation funding and the financing agreement from discovery.[7] The court rejected defense’s argument that the adequacy of counsel’s representation depends on the financial resources available to prosecute the claim, and explained that litigation funding is irrelevant to adequacy of counsel’s representation.[8] Defense also unsuccessfully asserted that the receipt of litigation funding is a red flag, which may indicate the case is inadequately financed.[9] Allowing litigation funding to weigh in on and affect the merits of a case defies the rules of evidence, namely the relevance and confidentiality provisions. It is actually difficult to pinpoint a scenario where third-party litigation funding would relate to the merits of the case.[10] As counsel in Gharabe stated: “If the question of adequacy is about the financial wherewithal of the firm, where the money comes from is not obviously relevant because that wherewithal should be measured in amounts, not sources.”[11]  Requiring disclosure of the terms of a financing agreement may result in serious consequences to the litigation funders as well as chilling effects on litigation funding. Litigation funders aim for privacy and prefer non-disclosure because the less opposition knows, the lower the risk of discovery arguments and issues.

Appointment of Class Counsel

 Counsel is required to fairly and adequately protect the interests of the class pursuant to Rule 23.[12] The standard for appointing class counsel requires picking the applicant best able to represent the interests of the class. In appointing class counsel, the court must consider the work counsel has done in identifying or investigating potential claims in the action; counsel’s knowledge and experience with class actions, complex litigation, and the types of claims asserted; and, the resources that counsel will commit to representing the class.[13] Where counsel is required to disclose existence and details regarding litigation funding, it will likely reduce counsel’s chances of being appointed as class counsel since judges have a tendency to lean towards experienced and established litigators from firms that have adequate financial resources as opposed to less established and experiences counsel needing third-party funding to support representation. The inability of class counsel to self-fund may prove fatal to class counsel status. Additionally, a funding agreement will likely involve interests that diverge from the class members, and therefore, may seem like a less attractive option to the judge.[14] As such, smaller and inexperienced counsel have legitimate concerns for not wanting to disclose third-party litigation funding. Such outcomes, in turn discourage litigation financiers from funding class action suits.

Agency considerations

 Even in the absence of litigation finance, plaintiffs’ counsel acts as the key player by searching for and identifying a representative plaintiff as opposed the usual scenario of a plaintiff approaching counsel.[15] Further, plaintiffs’ counsel usually makes all major decisions including the decision to file suit, litigation strategy, and the decision to settle. As a result, plaintiffs’ counsel often have a greater economic stake in the outcome of the litigation than any individual plaintiff. The introduction of litigation funding to the class action context intensifies these issues, as the usual procedural structure gives the plaintiffs’ attorney even more control over a case. Litigation funding raises legitimate concerns about the ways litigation funding could alter the incentives of plaintiffs’ counsel and potentially create conflicts between loyalty to the class members and contractual obligations to the litigation funder. Additionally, because a funder usually provides financing in exchange for a stake in the outcome of the proceeding, the funder’s incentives may likely diverge from those of the class member’s. Thus, rather than improving the agency issue between plaintiffs and their counsel, litigation funding adds to the problem by imposing a third-party into the already problematic two-way relationship, creating a three-way triangle of conflicting motivations and divided loyalties. However, litigation funders may address the agency issues between plaintiffs and their counsel by more effectively monitoring the plaintiffs’ attorney. Funders may also explicitly disclaim any control over the proceedings and state that their role will be that of a passive provider of financing.[16]

Mandating litigation funders to disclose financing information is a sensitive topic for funders and private backers, the effect of which should be taken seriously. Further, requiring disclosure of litigation funding will likely result in counsel not being appointed as class counsel. Lastly, litigation funding does tend to raise conflicts of interests, but for those scenarios, rules are in place to prevent potential issues.

[1] See Deborah R. Hensler, The Future of Mass Litigation: Global Class Actions and Third-Party Litigation Funding, 79 Geo. Wash. L. Rev. 306, 323 (2011).

[2] Id.

[3] Id.; see, e.g., Our Public Policy Statement: Pioneering Corporate Claim Finance for Commercial Litigation, JURIDICA, http://www.juridicainvestments.com/about-juridica/our-public-policy-statement.aspx (last visited Nov. 30, 2016).

[4] David Lat, Law360, 5 ethical issues with Litigation Finance, Dec. 2, 2015, http://abovethelaw.com/2015/12/5-ethical-issues-with-litigation-finance/.

[5] Gbarabe v. Chevron Corp., No. 14-cv-00173 (N.D. Cal. Aug. 5, 2016).

[6] Id.

[7] Kaplan v. S.A.C. Capital Advisors, 1:12-cv-09350-VM-KNF, (S.D.N.Y. Sept. 10, 2015).

[8] Id.

[9] Id.

[10] Ralph Sutton & Julia Gewolb, Law360, OPINION: Overreaction Over 3rd-Party Class Action Funding, Aug. 25, 2016, http://www.law360.com/articles/832453/opinion-overreaction-over-3rd-party-class-action-funding.

[11] Gbarabe v. Chevron Corp., No. 14-cv-00173 (N.D. Cal. Aug. 5, 2016).

[12] Fed. R. Civ. P. 23.

[13] Id.

[14] See Hensler, supra note 1, at 322.

[15] Charles R. Korsmoa & Minor Myersaa, Aggregation by Acquisition: Replacing Class Actions with a Market for Legal Claims, 101 Iowa L. Rev. 1323 (May 2016).

[16] See generally Elizabeth Chamblee Burch, Financiers as Monitors in Aggregate Litigation, 87 N.Y.U. L. Rev. 1273 (2012) (suggesting alternative litigation financing as a tool to monitor attorneys representing plaintiffs in a mass litigation).

TownCenter Partner Team

TownCenter Partners, LLC lead Asset Manager is Mr. Roni A. Elias. From modest beginnings, and with the help of a hand-picked dream team of professionals we have built one of the most dynamic and fastest growing companies in the country. TownCenter Partners LLC(TCP) is a real estate partner and master-planner providing development, leasing, management, and third party services. The company’s demonstrated ability to apply big ideas in creative and innovative ways has played a defining role in the firm’s success. Yet, TCP's most important insight has been the core understanding that it is not sight lines or site plans, but human activity, that defines a space and creates a place.

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