Ethical Considerations in Litigation Finance

ETHICAL CONSIDERATIONS IN COMMERCIAL LITIGATION FINANCE

• What are the ethical considerations for each step in the litigation finance process?

• How can litigation finance help lawyers and their clients meet the client’s business and

litigation objectives?

Questions for today:


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Four primary ethical duties:



• Professional independence

• Competence

• Undivided loyalty

• Confidentiality

Ethical considerations for each stage of the process:

COMMERCIAL LITIGATION FINANCE: OVERVIEW OF THE PROCESS


1. Decision to Seek Funding

2. Investment Process

3. Investment Structure

4. Implementation thru Final Judgment or Settlement

How can litigation finance help lawyers and their clients achieve the client’s business and litigation objectives?


• Client cannot afford to pay the rates of the lawyers of its choice

• Legal costs and/or expert witness expenses have exceeded initial budget estimates

• Client is in arrears in paying legal bills (litigation fatigue)

• Client seeks to monetize a claim and/or judgment on appeal to fund business operations or new initiatives

• David versus Goliath

ETHICAL CONSIDERATIONS WHEN DETERMINING WHETHER AND HOW TO SEEK FUNDING

Can a lawyer raise the prospect of litigation finance?



• Yes. If the lawyer stands to benefit financially from the transaction, a lawyer should inform the client of the potential conflict and potentially obtain informed client consent in writing

Is a lawyer required by competency rules to raise litigation funding for the client’s consideration, where appropriate?

• No case so holds

Can a lawyer refer a client or potential client to a litigation funder?



• Several state bars have approved the practice (e.g. NY, NJ, AZ, MD, FL, SC, NV). • Lawyer should disclose to client any long term or close relationship with the funder

and maintain professional independence

Can a lawyer counsel the client during the negotiation with a litigation funder?

• Yes, if competent, capable of maintaining independence and obtains informed written consent respecting any potential conflicts of interest

What should a lawyer do before disclosing confidential information to a prospective litigation funder?

ETHICAL CONSIDERATIONS DURING THE INVESTMENT PROCESS


• Understand the information exchange process from start to finish

• Advise the client of the risks of disclosure and obtain client informed, written consent to disclose confidential information

• Consider applicable protective or confidentiality orders

• Take steps to maintain confidences and guard against waivers:• Non-disclosure agreement• Limit nature and extent of disclosure as far as possible

ABA Model Rule 1.6(a):



• A lawyer must not disclose “information relating to the representation of a client” without the client’s informed consent, unless the disclosure is impliedly authorized in order to carry out the representation

• States may define “confidential information” more narrowly, (limiting it to, for example, embarrassing or privileged information or that specified by client for confidential treatment)

Disclosure of attorney client privileged material.



• Disclosure is not generally necessary

• The common interest exception to waiver may apply

• Common legal interest is typically applied to joint defense agreements and communication with insurance carriers; also M&A context

• ABA Report at 34: it is a “significant unresolved question.”

• But, two courts have held it does not apply to litigation funders. Miller v. Caterpillar (N.D. Ill. 2014); LeaderTech v. Facebook, (D. Del. 2010)

ETHICAL CONSIDERATIONS DURING THE

INVESTMENT PROCESS


Disclosure of attorney work product material:

• Mondis Tech v. LG Electronics, (E. D. Tex 20110): disclosure of

lawyer’s strategy to funder (with NDA) did not waive the

protection as it did not substantially increase the likelihood

of disclosure to the adversary

• Communication with funder can be part of the lawyer’s case

preparation, including, for example, strategy concerning the

nature and extent of discovery proceedings, selection of

expert witnesses, consultants and the like.


Common features of investment structures:

• Investment contract is structured as a bilateral agreement between with the claimholder and financier. The attorney-client relationship remains exclusive to the claimholder and its attorney.

• Non-recourse; if the underlying litigation or arbitration claim is not successful, the claimholder owes nothing.

• Funds are used to pay for litigation fees and expenses, but it is also quite common for claimholders to take additional capital to use toward operating costs such as R&D, payroll, or manufacturing.

ETHICAL CONSIDERATIONS CONCERNINGINVESTMENT STRUCTURE

Is the structure legally permissible?

ETHICAL CONSIDERATIONS CONCERNINGINVESTMENT STRUCTURE


Champerty, Barratry and Maintenance• Case by case analysis required to assess viability of financing and preferential structure for financing under

applicable state law

• Consistent trend across states toward limiting champerty

• Champerty never adopted in some states, abandoned in others by case law or statute and somewhat alive in others

• ABA: champerty permissible where funder is not promoting frivolous litigation, or for an improper motive or engaged in officious intermeddling

• Informative analysis in Miller v. Caterpillar, (N.D. Ill 2014), regarding Illinois criminal statute.

ETHICAL CONSIDERATIONS CONCERNING

INVESTMENT STRUCTURE


Usury

• Typically, state usury laws do not apply to commercial

litigation finance because:

• Exempt as non-recourse financing,

• Exempt as a commercial, not consumer, transaction, or

• The law does not apply to the monetary size of the

financing

Is the structure legally permissible?


INVESTMENT STRUCTURE


Neither Model Rule 1.8(e) or 1.8(i) are implicated as the lawyer is

not providing financial assistance to the client, and the litigation

funder, not the lawyer, acquires an interest in the client’s cause of

action


FUNDING IMPLEMENATION THROUGH FINAL

JUDGMENT OR SETTLEMENT


• Funder monitors the proceedings; receives regular updates

• Litigation counsel can

• access a knowledgeable and experienced sounding board

• exercise independent judgment in counseling client

• exercise independence in prosecuting the case

Typically, the funder is a passive investor.

Model Rule 2.1 – “In representing a client, a lawyer shall exercise

independent professional judgment and render candid advice...”

Model Rule 5.4(c) – A lawyer must not let third party financing

obstruct the lawyer’s independent professional judgment on

behalf of the client.





• Client’s delegation of settlement control to funder does not impair

counsel’s duties of loyalty and independence, nor require counsel

to withdraw, pursuant to Model Rule 1.2(c) and Rule 1.16(a)(1).

• ABA – “There would seem to be no reason, as a matter of contract

law, to regard these contract provisions as unenforceable ... The

presence of a litigation funder is not different in kind from the

other factors that are part of virtually any decision to settle...”

• Caveat: in some states it may be champertous for a third party to

have complete control, when combined with misconduct (e.g.

instigate wrongful or frivolous litigation)

Typically, the funder does not have settlement control. Where the

client has contracted to give settlement control to the funder:





Distribution of proceeds:

• Generally, attorney and funder receive proceeds before client

• ABA – “A lawyer is required to deliver to a client or third

party any funds in which the client or third party has an

interest”

• Fee splitting prohibition under Model Rule 5.4(a) is a prohibition

meant to protect lawyers independence and is not implicated

where a client contracts with a funder for distribution of

proceeds

• Payment of interest on law firm loan secured by legal fees is

permitted





ABA Commission on Ethics 20/20 Informational Report to The

House of Delegates:

• This report “... should not be interpreted as suggesting that

alternative litigation finance raises novel professional

responsibilities, since many of the same issues ... arise whenever

a third party has a financial interest in the outcome of the client’s

litigation.”

• “It is unclear why the historical concerns of the common law

would justify today placing special burdens on litigation funded

by third parties.”

Association of the Bar of the City of New York Formal Opinion 2011

– 2

• Professional independence

• Competence

• Undivided loyalty

• Confidentiality

In conclusion, lawyers must adhere to principles of:



The best way to determine if financing is an attractive option for

your client is to discuss it.

We also present at firms on ethical considerations in litigation

finance for CLE credits. We can be reached at:


1350 Avenue of the Americas

2nd Floor

New York, NY 10019

(646) 389-1032

Boaz Weinstein

[email protected]

Lee Drucker

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Ethical Considerations in Litigation Finance

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