Ethical Considerations When Securing Litigation Finance

In the 2000s, few people in or outside of the legal industry were aware of litigation finance. But that has changed drastically over the past decade as litigation finance has been embraced by law firms and investors, and as litigation finance has grown in numbers and available capital. Today, most lawyers have at least some knowledge of litigation finance. Many large and conservative law firms regularly use third-party litigation funding. This is in large part driven by client inquiries about alternative arrangements, such as financing, and the attractiveness of capital to help a law firms manage or monetize their contingency risk investments.

Initially, a common question by law firms is how to begin the discussion with their clients about litigation financing. Moreover, there are often questions about ethical issues they should watch out for when securing litigation financing.

Here are some consideration

1. Conflicts of Interest Involving Litigation Finance

More legal professionals are being asked to provide clients with guidance concerning the risks associated with litigation, the best financing options, and documenting litigation finance transactions. Firms are also becoming more proactive in their approach to educating clients about legal finance, with some even advertising litigation finance-related practice groups.

An American Bar Association (ABA) informational report, as well as guidance from the California and New York City Bar Associations remind attorneys to be aware of conflicts of interest and the duty of loyalty to the client.  For attorneys and law firms to avoid conflicts of interest, they should provide complete disclosure involving the interests at stake. In particular, clients should understand how funding might favor the attorneys’ and law firms’ interest over their own. This coincides with the ABA’s Rules of Professional Conduct Rule 1.7(b)(2):

“Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.”

2. Advising Clients About Litigation Finance and Related Conflicts

It is critical that attorneys advising clients on litigation finance are aware of and comply with all relevant professional and ethical obligations.  One area that warrants close attention is conflicts of interest.   Rule 1.7(a)(2) of the ABA’s Rules of Professional Conduct states the following:

“[A] lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if […] the representation of one client will be directly adverse to another client […] there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.”

When an attorney or a law firm advises a client with respect to a third-party’s litigation funding proposal, the client may later allege they were encouraged to take the deal. In this case, if the litigation attorney that was funded was also providing advice to the client on the terms of the litigation finance, according to Rule 1.7(a)(2), the attorney or law firm may have become “materially limited by […] by a personal interest of the lawyer.”

In the event that there is a potential conflict of interest, an attorney should fully advise their client as such in writing and advise the client of the client’s right to seek independent representation.  Identifying and advising of a potential conflict protects the client as it is negotiating and entering into the finance agreement and protects the attorney in the event that the client later decides that it is not happy with a funding arrangement.

3. Privilege and Protecting Client Confidentiality

Another important issue to consider is client confidentiality.  According to the ABA’s Rules of Professional Conduct Rule 1.6:

“A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent […] ”

In order to evaluate and monitor investments, litigation finance firms typically expect litigants to allow their attorneys to release information safeguarded by Rule 1.6, attorney-client privilege, and/or the work-product doctrine. For attorneys representing plaintiffs, they might worry about the defendants’ counsel arguing that their clients’ voluntarily waived attorney-client privilege by sharing such information.

There are several articles surveying the landscape of privilege and discoverability in the context of litigation finance. Depending on the circumstances, most courts have frequently ruled on the side of the plaintiffs, preserving reciprocal confidentiality between the plaintiff, its counsel and a funder. While there are some outlier decisions which appear to be factually driven, courts considering the issue often rule that litigation-related disclosures fall under the work product doctrine because the communications are necessarily related to litigation, and in the presence of a confidentiality agreement the disclosure does not increase the risk of disclosure to the defendant(s).

It is wise for attorneys and law firms to have the client and the funder enter into a mutual nondisclsosure agreement in which each agrees in writing to safeguard any non-public information provided. In addition, in furtherance of preserving any attorney-client disclosures, clients and finance providers should acknowledge in writing that they indeed do share a “common legal interest” with the client.

Finally, attorneys and law firms might consider having clients acknowledge in writing that their counsel fully explained any and all possible risks involved in sharing otherwise protected information with a third party, including the possibility of a court concluding that the information disclosed to funders is discoverable by the defendant.

Litigation financing can be a complicated topic. Litigants and attorneys seeking information about litigation financing can contact GLS Capital at [email protected]