Tag Archives: litigation finance best practices

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)

Best Practices for Preserving Privileged Materials in a Litigation Finance Transaction

Litigation financing provides extraordinary opportunities for litigants to reduce the risk of litigation and increase their chances of obtaining a fair recovery on their claim.  But the realities of the litigation financing transaction require that both funders and litigants exercise care with how they exchange privileged information in the process of exploring and finalizing an investment transaction.  As long as a few simple steps are followed during this process, the risk of waiving any privileges can be greatly minimized.

When one considers the general principles behind the attorney-client privilege and work product doctrines, as well as the case law applying those principles in the litigation finance context, it is possible to identify a set of best practices that will protect privileged communications and materials in the litigation finance context.

First, when a prospective funder and a claim holder are discussing the possibility of an investment, they should enter into a non-disclosure agreement that applies to all communications and materials exchanged in the due diligence process.  This agreement will militate against any finding that potential litigation adversaries will have access to any attorney work product disclosed in the due diligence process.

Second, the claim holder should make sure that no attorney-client confidences are disclosed to any prospective funder.  Until the prospective funder actually has a legal interest in the claim, it has an arms-length relationship with the claim holder, and the disclosure of confidential communications to the prospective funder will likely constitute a waiver of the attorney-client privilege.

Third, once a claim holder and a funder have reached an agreement, their contract should include a non-disclosure provision and should make it clear that the funder has a legal interest in the claim itself.  Memorializing the existence of a shared legal interest in the claim will go a long way towards supporting the conclusion that the common-interest doctrine applies to post-agreement communications among the funder, the claim holder, and the claim holder’s counsel.

Topics:  litigation finance, legal reform, third-party funding, attorney-client privilege, work-product privilege, litigation finance best practices

 Works Cited: Maria Glover, Alternative Litigation Financing and the Limits of the Work Product Doctrine, 12 N.Y.U. J.L. & Bus. 911 (2016)

The Importance of Disclosure in Drafting a Litigation Funding Agreement

Full disclosure is an important part of making any transaction work.  This applies to litigation funding transactions to the same extent as any other transaction.  When an attorney advises a client in connection with a litigation funding transaction, she must make sure that there is full disclosure on both sides in the transaction.  This is a crucial step in avoiding any problems or disputes once the case is over and time to repay the investment comes.

In a few jurisdictions, there are express statutory rules about what must be disclosed in litigation financing transactions.  These rules are found in the states that regulate litigation financing directly, such as Maine, Vermont, Indiana, Ohio, and Tennessee.  Some of these jurisdictions prescribe that funders disclose certain information about the fee structure in the transaction and that these disclosures be made in a certain format.  In some states, there are even rules about the font size for these disclosures in the funding agreement.  As a general rule, the disclosure requirements under these statutory schemes mimic the disclosure requirements for consumer lending transactions.

In the vast majority of jurisdictions that do not directly regulate litigation financing, the question arises about what kind of disclosure should be made in connection with the agreement.  It certainly makes sense to disclose the precise nature of the fee structure, and following the model of consumer lending disclosures makes sense, regardless of whether the client is a financially sophisticated business entity or an individual.  Accurate disclosure is never a bad idea, even if it takes a little extra effort.

In addition, if there is a relationship between the funder and the attorney, the nature and extent of this relationship should be disclosed to the litigant.  In many situations, attorneys refer business to funders; and if there has been such a referral relationship in the past, the litigant should be informed about it.  This disclosure need not come in the financing agreement itself, but it should be made in writing to avoid any suggestion later on that the litigant was unaware of the fact that the attorney and the funder had some shared interests outside of the litigant’s own case.

Disclosure is not a one-way street, so it is important that the litigant make disclosures as well.  In this connection, the most important information concerns any security interests in the recovery that the litigant may have previously given out, including, of course, the attorney’s contingent fee, if there is one.  In addition, litigants should disclose any other information relating to their willingness or ability to take the case to its conclusion.  Virtually every funder will seek this information as a matter of course, but if there is any doubt about whether there has been full disclosure by the client, any attorney involved in the financing transaction should make sure that such disclosure has been made.

Topics:  litigation finance, legal reform, third-party funding, ethics, litigation finance best practices, disclosure

 Works Cited:  Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861 (2015)

Best Practices for the Ethical Negotiation of a Litigation Funding Agreement

Of course, attorneys must always be sensitive to their ethical obligations, especially their ethical obligations to their clients.  But those obligations can become more complicated when a litigation funder becomes involved in a case.  Because the funder is a third-party with an interest in the outcome of the case, the attorney for the funded party must take care to observe his duties to the client while simultaneously protecting his client’s interest in maintaining the relationship with the funder.

An ethical challenged can arise if the funding agreement gives the funder a role in making the decision to approve any settlement agreement.  It is obvious why a funder might want to participate in this decision, but there are ethical risks to such participation.  An attorney’s pre-eminent duty is to act in her client’s best interest.  Consequently, with respect to any settlement negotiations, the attorney must always endeavor to negotiate the best deal for the client, even if it that settlement might now be what the funder wants.  For example, a settlement offer might include non-monetary benefits that are worth something to the client but add no value for the funder.  In this case, the attorney must assure that lines of communication between the funder and the client remain open and that all options are clearly discussed.  But, in the end, she has to do what helps her client, even if it does not clearly benefit the funder.

Another potential conflict of interest could arise if the funding agreement gives the funder a role in choosing litigation counsel.  In this situation, the attorney is under pressure to please the funder, but, here again, there is a risk that this pressure could be inconsistent with the attorney’s duty to her client. If the case develops so that there is a conflict between the funders’ interest and the clients, the attorney may find herself in a position where she must withdraw from the representation.

As with everything else in litigation, an attorney’s best practice is to be prepared for such conflicts and to be pro-active about avoiding the circumstances that can create them.  First, attorneys should develop a set of policies for what they will and will not do with respect to any litigation funder, and they should make those policies clear to the client whenever the client begins to consider litigation funding.  Second, the attorney should make sure that she is, at the very least, informed about the negotiations between the client and the funder, even if the client has retained separate counsel to handle the litigation finance arrangement.  By staying in the loop, the attorney can make the client aware of any parts of the funding agreement that could be ethically problematic for the attorney.  Finally, throughout the litigation, the attorney should maintain open lines of communication with both the funder and the client and make sure that all three parties are aware of each other’s positions with respect to all developments in the case.

Litigation financing presents an ethical challenged because it creates a three-sided relationship in a context that usually involves bilateral relationships.  As long as attorneys pay attention to the complications that litigation financing can create, and as long as they communicate clearly with clients about what they can and cannot do in ethical terms, these challenges will not undermine the attorney-client relationship or the benefits of litigation financing.

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

 Works Cited:  Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861 (2015)

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)

Best Practices for Preserving Privileged Materials in a Litigation Finance Transaction

Litigation financing provides extraordinary opportunities for litigants to reduce the risk of litigation and increase their chances of obtaining a fair recovery on their claim.  But the realities of the litigation financing transaction require that both funders and litigants exercise care with how they exchange privileged information in the process of exploring and finalizing an investment transaction.  As long as a few simple steps are followed during this process, the risk of waiving any privileges can be greatly minimized.

When one considers the general principles behind the attorney-client privilege and work product doctrines, as well as the case law applying those principles in the litigation finance context, it is possible to identify a set of best practices that will protect privileged communications and materials in the litigation finance context.

First, when a prospective funder and a claim holder are discussing the possibility of an investment, they should enter into a non-disclosure agreement that applies to all communications and materials exchanged in the due diligence process.  This agreement will militate against any finding that potential litigation adversaries will have access to any attorney work product disclosed in the due diligence process.

Second, the claim holder should make sure that no attorney-client confidences are disclosed to any prospective funder.  Until the prospective funder actually has a legal interest in the claim, it has an arms-length relationship with the claim holder, and the disclosure of confidential communications to the prospective funder will likely constitute a waiver of the attorney-client privilege.

Third, once a claim holder and a funder have reached an agreement, their contract should include a non-disclosure provision and should make it clear that the funder has a legal interest in the claim itself.  Memorializing the existence of a shared legal interest in the claim will go a long way towards supporting the conclusion that the common-interest doctrine applies to post-agreement communications among the funder, the claim holder, and the claim holder’s counsel.

Topics:  litigation finance, legal reform, third-party funding, attorney-client privilege, work-product privilege, litigation finance best practices

 Works Cited: Maria Glover, Alternative Litigation Financing and the Limits of the Work Product Doctrine, 12 N.Y.U. J.L. & Bus. 911 (2016)