The Legal and Ethical Environment
“Champerty” is a medieval legal doctrine that prohibited the sharing of litigation proceeds between a litigant and a third party, while “maintenance” restricted a third party from assisting a litigant in prosecuting or defending a case. In the US many states like California have rejected these doctrines, finding them outdated. Other states, like Minnesota and Ohio, have voided litigation funding contracts, finding them void and unenforceable under these doctrines. The parties to litigation funding must take applicable laws into account when agreeing on funding agreements.
Recent legal opinions have upheld the permissibility of litigation finance. An April 2013 report to an ethics committee of the New York State Bar Association noted several recent court decisions and bar opinions condoning the use of litigation fund. The report found that third-party financing of commercial litigation is becoming an increasingly common way to pay for commercial lawsuits in the US. Courts are extending legal protections to funders, as well. For example, in October 2012, a federal court held that litigation funders may review privileged documents without risk of disclosure to opposing counsel, since the documents were protected as attorney work product. The court found that litigation strategy would be revealed if the documents were produced. The court also declared that the materials were protected by attorney-client privilege, since Burford and the plaintiff had a “common interest in the successful outcome of the litigation which otherwise [the plaintiff] may not have been able to pursue without the financial assistance of Burford.”
Litigation funders are keenly aware of the ethical and legal sensitivities surrounding their industry. They employ top ethics advisors and stay abreast of legal developments, and they analyse the legal and ethical aspects of each investment before funding it. They also take steps to insulate themselves from critique, like avoiding direct contact between the funders and the party to litigation. Funders prefer to contract with the law firm.
The US Chamber of Commerce has criticized the industry, claiming that funders can inappropriately influence the outcome of cases because they are driven by economics rather than legal judgment or clients’ best interest. The response is that the funders should not have a direct say in the direction of the litigation, and therefore improper influence is not an issue. And if financing is structured properly, the economic interests of the claimholder, their lawyers, and the funders should be aligned. The Chamber of Commerce also worries that litigation funding will encourage frivolous litigation by plaintiffs with no financial risk in bringing suit.
Topics: Litigation Finance, Ethics, US Chamber of Commerce, Attorney-Client Privelege
Work cited: John Pierce and David Burnett, The Hedge Fund Journal, June 2013
