Proposed Attorney Guidance an ‘Alert’ on Litigation Finance

Proper written disclosures, ensuring against undue influence, and following ethics rules highlight a proposed American Bar Association best-practices guide for attorneys considering litigation funding representation.

It’s meant to “alert lawyers as to what’s going on” in litigation funding and to show them how to protect their clients and avoid ethical pitfalls, said Jeffrey J. Greenbaum, an attorney with Sills Cummis & Gross in Newark, N.J.

He’s also co-chair of the ABA’s Section of Litigation’s Federal Practice Task Force and the Task Force on Efficient Justice, which is set to present the proposed guide, Resolution 111A, to the association’s House of Delegates for a vote at next week’s first-ever virtual annual meeting.

Litigation funders are third parties that provide capital for a party to pursue or defend a dispute, and take a stake in any recovery or savings. More than 40 entities actively invest in corporate litigation in the U.S. and they have access to nearly $10 billion in capital, according to a survey by Westfleet Advisers.

There is funding for plaintiffs and defendants, for class-actions, and for causes like civil rights, Greenbaum said, adding that some law firms have funders finance a “portfolio of cases.”

Litigation finance remains largely unregulated on a federal level, despite the U.S. Chamber of Commerce arguing fee-sharing agreements between lawyers and funders should be banned and seeking rules forcing litigants to disclose a financier’s interest.

Some state bars, including the New York City Bar Association, have considered changing professional ethics rules to clarify how funding should be used.

The best practice effort is an update to a 2010 ABA white paper on litigation finance. Best practices in the ABA proposal include:

• Provide clients with proper, written disclosure of funding arrangements;
• Draft agreements that allow clients to be “master of litigation” and ensure no undue influence from the funder;
• Follow applicable ethics rules from relevant jurisdictions, including Model Rules 1.8(a): business transactions with clients; 5.4(a) fee sharing; 1.6: duty of confidentiality; as well as any conflicts of interest with funders; and explain attorney-client privilege and work product doctrines.

While intended to direct lawyers to issues they should consider before entering into litigation funding arrangements, the best practices aren’t meant to stake out positions on certain issues, the guide says. These include whether litigation funding should be permitted or whether funding arrangements should be disclosed.

Best practices also aren’t meant as a basis for discipline, but are meant to help lawyers better position themselves “to represent their clients and protect against problems that may arise in these arrangements and relationships,”
the ABA proposal said.

—With Roy Strom