Tag Archives: Ethics

Growth and Acceptance of Litigation Funding Continues

Notwithstanding widespread criticism, litigation funding continues to grow and gain acceptance in a variety of ways. Recent events show that there are more litigants – and a wider variety of litigants – seeking funding and that, correspondingly, the investment in funding continues to expand and diversify. Finally, courts are starting to show more awareness of the value of litigation funding in the pursuit of justice.

Recent surveys show that the percentage of lawyers in the United States whose firms used litigation finance grew from 7 percent in 2013 to 11 percent in 2014, and then to 28 percent in 2015. At a recent conference for insurance lawyers and defense attorneys, 35 per cent said they had been involved in a case where litigation funding was used.

As more parties seek third-party funding, more investors are making funds available.  Increasingly, hedge funds are providing capital to funding companies, expanding the availability of funds.  To be sure, some major players have left the market, unwilling to accept the risks of the market.  But, on the other hand, new kinds of funders keep entering the market.  For example, crowdfunding is now being used to finance some cases through platforms such as TrialFunder, which uses proprietary computer models to let people invest modest amounts in lawsuits.

Judges are beginning to recognize the public policy benefits of litigation funding. For example, in Lawsuit Funding LLC v. Lessoff, No. 650757/2012, 2013 BL 343470 (N.Y. Sup. Ct. N.Y. Cty. Dec. 4, 2013), the court pointed out that public policy favors litigation financing because it “allows lawsuits to be decided on their merits, and not based on which party has deeper pockets.”  Generally, courts have not concluded that a funder’s security interest violates the ethical prohibition on sharing fees with nonlawyers. In Counsel Fin. Servs., LLC v. Leibowitz, 2013 BL 199584 (Tex. Ct. App. July 25, 2013), the court confirmed that litigation funding does not violate the prohibition on fee-sharing.

All of these developments demonstrate that the momentum in favor of litigation funding is building. Increasing demand for funding promotes an increase in the supply of available capital, and more widespread investment increases the diversity of funding models and makes it ever more clear that litigation funding can solve a variety of problems in modern litigation.

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

Works Cited:  Joan C. Rogers, Litigation Funding on Rise in Big Cases, Panel Says, Bloomberg (March 23, 2017) available at https://www.bna.com/litigation-funding-rise-n57982085617/


Ethical Considerations in Litigation Funding

This blog is specifically targeted at concerns for the plaintiff’s lawyer to consider when their client is utilizing litigation funding.  There are three main concerns to keep in mind when considering litigation finance and your client: loyalty & conflicts of interest, lawyer independence, and confidentiality/attorney-client privilege.

Duties of Loyalty and Conflict Free Representation: the Rules of Professional Conduct govern conflicts of interest.  Therefore, it could be a problem if an attorney affirmatively advises a client to accept a third-party’s funding that will ultimately benefit the attorney and his/her firm in the end.  However, that does not mean that attorney’s can never advise their clients on third party funding.  Instead, the attorneys should just exercise complete disclosure of the various interests at stake when giving advice regarding alternative litigation funding.

Lawyer Independence: again, according to the Rules of Professional Conduct (particularly rules 1.2(a), 2.1, & 5.4), the plaintiff’s attorney must decide how to handle the case, not the litigation funder.  There is particularly a risk that the funder will want the largest return possible and may not want to encourage a settlement if they believe a trial will result in more money in damages.  This is why it is important to find a litigation funder that takes a hands off approach after agreeing to invest in the case.

Confidentiality and Protecting the Attorney-Client Privilege: generally, a litigation funder will require the client to authorize counsel to release information otherwise protected by attorney-client privilege as part of the underwriting process.  There is a risk here that opposing counsel will argue that by sharing confidential litigation information with a funder the client has voluntarily waived any attorney-client protections.  Different courts have handled this differently but it is best for the attorney to discuss this potential concern with their client upfront and to see how the jurisdiction may have handled this in the past.

These concerns are not meant to prohibit litigation funding but rather to just explain certain risks so that any potential problems can be avoided.  Thus, helping the funder, client, and the attorney by hopefully getting the best outcome possible for the case.

Topics:  litigation finance, alternative litigation finance, third-party funding, ethics, plaintiff attorneys, professional responsibility

 Works Cited:  David Atkins and Marcy Stovall, Litigation Funding: Ethical Considerations for the Plaintiff’s Lawyer, Connecticut Lawyer (February 2017) http://www.pullcom.com/news-publications-930.html

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)

The Ethical Rules Governing Florida Lawyers Who Help Their Clients Find Litigation Financing

When a client retains an attorney for representation in a lawsuit, he will, of course, rely on the attorney’s judgment and advice regarding what is necessary to bring the case to a successful conclusion.  If the client lacks the funds to cover litigation or living expenses while the case is pending, the attorney may wish to help, and the client may need that help.  But, in Florida, if helping means facilitating a litigation financing agreement, the attorney must be careful in how they gives that help if they wants to comply with their ethical obligations to avoid conflicts of interest.

Loyalty to the client is one of a lawyer’s most fundamental duties.  This duty of loyalty means that a lawyer must always serve the client’s interests.  This means that, in almost every situation, a lawyer may not engage in any transactions with the client, apart from the agreement to provide representation.  Being on the other side of a client in a transaction could give the lawyer interests that are adverse to the client and could create a conflict of interest.

This duty of loyalty can be implicated when the lawyer participates in the client’s efforts to obtain litigation financing. The lawyer cannot do anything that would serve the interest of the lender if it would be contrary to the client’s interest.  In general, lawyers should try to keep an arm’s-length relationship with the agreement between their client and the lender. Thus, according to Florida legal ethics authorities, “a lawyer may suggest to a client where the client may try to obtain financial help for individual needs. . ., but the lawyer should not become part of the loan process.”  Florida Ethics Opinion 75-24.  In particular, those authorities have offered the opinion that lawyers should not inform litigation finance companies about clients who might benefit from a non-recourse litigation financing agreement.  Id.

The lawyer should also be careful about providing a litigation finance company with information or opinions about the prospects of the client’s case.  If the litigation finance company seeks confidential information that could reflect on those prospects, such as medical or accident reports, the attorney can furnish that information, but only if the client gives informed consent after the lawyer discloses the benefits and detriments of such disclosure.

But there are some things that the lawyer should not do under any circumstances.  The lawyer should not give any privileged or work product information to the litigation finance company to avoid any suggestion that the attorney-client or work-product privileges have been waived.  And the attorney should not tell the litigation finance company his own opinion of what the case might be worth.

As long as the attorney is mindful of the potential for conflicts of interest, and as long as he avoids any such conflicts, the attorney can provide help to his client in the process of getting litigation financing.  Within the proper ethical boundaries, lawyers and litigation finance companies can each make productive contributions to a client’s ability to recover for his injuries.

Works Cited:

Florida Bar Association, Opinion 00-3 (March 15, 2002)

The Ethical Rules Governing Florida Lawyers Who Help Their Clients Find Litigation Financing

“Timing is everything,” as the saying goes.  When it comes to obtaining litigation financing, timing may not be everything, but it counts for a lot.  A case from Michigan illustrates that a party’s access to litigation financing can depend upon when it seeks the loan.

Because borrowing involves interest costs, it makes financial sense to delay any kind of borrowing until it is absolutely necessary. Of course, this principle applies to parties in litigation who are hard-pressed to cover their litigation costs.  If they must borrow to keep their cases going, they should wait until the latest reasonable time.

But waiting can be enough to turn what would be a legitimate litigation financing agreement into a contract that violates consumer financing laws, particularly the laws against usury.  That’s the lesson of Lawsuit Financial, LLC v. Curry, a Michigan case that invalidated a litigation financing agreement.  In that case, the plaintiff had a potentially valuable personal injury claim and retained a prominent attorney on a contingent fee basis.  She received a verdict for $27 million, but the defendants challenged the jury’s verdict.  While this challenge was pending, she entered an agreement with a litigation financing company, receiving $75,000 and pledging a portion of her recovery.  A few months later, she received an additional advance of $100,000 after amending her agreement with the lender.  Finally, she entered a third amended financing agreement, after which she received an additional $2,500.  According to the agreements, she was obliged to pay the lender $875,000 or 10% of her recovery, whichever was greater. Eventually, she settled the case for $4.7 million.  But the plaintiff, supported by her trial counsel, refused to pay the lender.  Another suit followed in which the lender claimed that the plaintiff had, among other things, breached the loan agreement and/or converted the lender’s rightful proceeds of the lawsuit.

The Michigan Court of Appeals eventually ruled that the lender was not entitled to recover for breach of the loan agreement.  The main question on appeal was whether the agreement created a loan in violation of Michigan’s usury laws.  The lender argued that it did not because the agreement did not create an absolute right to recovery.  In other words, the agreement did not create a “loan” within the legal meaning of the term because, if the plaintiff did not recover anything from the case, she would not have to pay any money back. Like the trial court, the Court of Appeals rejected the lender’s position.  It held that the loan agreement was unenforceable under Michigan’s usury laws because the timing of the loan agreement was such because, as a practical matter, the plaintiff did have an obligation to repay the loan.  The Court of Appeals reasoned that, by completing the loan agreement after the verdict was in, the parties both knew that the plaintiff was going to actually have an obligation to repay, and the difference between the amount loaned and the amount repaid exceeded the limits of lawful interest.

Obviously, this case serves as a lesson to lenders, who are unlikely to make loans once the verdict is in – especially not in Michigan. But there is a lesson here for borrowers as well.  The legality of litigation financing usually depends upon the fact that the loan is “non-recourse.”  That is, that the lender cannot collect in any circumstance and is only entitled to repayment if the borrower wins the case.  If the loan application is made too close to the end of the case, the lender may decline, regardless of how promising the case is, because it does not want to risk a result like the one in Curry.

Works Cited:

Lawsuit Fin., L.L.C. v. Curry, 261 Mich. App. 579, 683 N.W.2d 233 (2004).

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).