In the U.S., litigation funding is becoming more popular. It offers certain claimants a practical way to cover the costs of pursuing legal action. For legal firms and claimants, litigation funding transactions provide several ethical challenges, including those relating to competence, a duty of loyalty, possible privilege waiver, and third-party intervention, to mention a few.
The expansion of the litigation finance sector in recent years has resulted in considerable analysis and opinion writing. Various professional groups for lawyers have focused on ethical matters, such as the duties of attorneys when their litigation clients want to utilize outside funding for legal action.
What is Litigation Funding?
Lawyers and law firms need capital to operate their businesses effectively. This capital can be raised through bank loans and other business financing ways.
Another kind of operating capital, known as litigation finance, has been accessible in recent years. Case contingency fees serve as collateral for litigation financing agreements, which are non-recourse and exclude the use of attorneys’ assets as collateral. The investor, lawyer, and plaintiff each receive a portion of the net financial recovery after resolving the litigation.
The waterfall is set up such that the client receives the leftover balance after the litigation attorney earns the agreed-upon fee, and the investor gets invested cash plus the interest rate of the award. If there is no recovery, the lawsuit funder loses the money they invested.
Litigation finance entails a specialized third-party funding firm agreeing to cover part or all the expenses and liabilities of a case in exchange for a cut of any reward money and payment of the case’s costs.
In many nations, including the United States, litigation funding has solidified as a component of the civil justice system. Let’s take a further look into the ethical considerations behind non-recourse funding.
1) Examining Merits
When looking for litigation finance firms, you’ll find that a funder analyzes and discusses the pertinent papers with the parties to the transaction to properly assess the merits of a case before investing in it. While nonprivileged materials should be sufficient for most evaluations, there may be unusual circumstances when a third-party funder requires confidential data.
In this case, some State Bars look at the repercussions of potential grant recipients disclosing confidential communications to a third party and the significance of nondisclosure agreements. The good news is most funding companies use NDAs before talks even start to protect client information.
Consider signing these NDA’s to protect you from well-capitalized defendants when they request the disclosure of funding.
2) Competency and Champerty
As an attorney, you understand the importance of having the legal expertise, knowledge, diligence, and planning deemed essential for the representation. These factors help you know where the litigation funding industry and any pertinent local laws stand.
In general, due to sometimes divergent perspectives between state and federal governments, litigation finance regulation in the United States is primarily unregulated.
Even though the outdated common law doctrines of champerty and maintenance are still recognized in certain jurisdictions, many other states have effectively declared them unenforceable under the law. Only a small number of jurisdictions have imposed fee caps or viewed non-recourse financing agreements as traditional loans that must abide by local usury rules.
Champerty, which the U.S. Supreme Court described as helping someone litigate a suit in consideration for a monetary interest in the result, is no longer prohibited in the United States. But it once was.
This restriction was never enacted into federal law, nor were states like California, Florida, and Texas. Other states, like Massachusetts, adopted the champerty ban but took it away later. Others, such as New York and Illinois, now interpret the champerty ban so narrowly that it would not typically apply to business litigation finance agreements.
For example, a Delaware court determined last year that the champerty concept did not apply to a commercial litigation funding arrangement, making it one of the last significant judicial centers to decide on the matter.
For these reasons, it is important for counsel to investigate locally pertinent statutes, court rules, and case law. Furthermore, understanding the counterparty’s pre-investment procedure and trustworthiness as a source of financing can potentially save you money once your case resolves and avoid substantial financial losses.
Consider working with a credible company that is similarly dedicated to upholding the highest standards of ethics and ultimately highlighted by the obligation of competence.
There’s a lot of chatter these days about how litigation finance capital may lead to a conflict between the attorney’s obligations to their client and responsibilities to the funder. According to one theory, lenders put attorneys in a practical problem because they force them to choose between upholding their clients’ interests and appeasing investors.
Although some of these funding fads get some attention, the client is always the lawyers’ exclusive obligation when a third party funds a case. Legitimate funding companies often include a clause in funding agreements requiring the attorneys to operate in line with their ethical obligations and applicable regulations. Despite this, it is a fact that any legitimate litigation funding company would want to ensure that their interests and those of their client are entirely aligned. No funder wants to put a client in a position where they stand to benefit little to nothing from the case’s result.
Why? Because the funder has no control or influence over the decisions made during the arbitration or litigation. They cannot because doing so jeopardizes the investment.
The Bottom Line
Given the ethical concerns in regard to litigation finance, many attorneys are already well-versed in dealing with them; they’re not discouraged from looking into litigation funding because of ethical concerns.
However, like any new trend in the legal and financial services industry, consider the awareness of any potential ethical pitfalls. A law firm’s and an individual plaintiff’s plan to increase the number of damages they can get from a defendant still heavily rely on litigation funding. Corporate claimants may be able to obtain the capital they require by financing their litigation to cover related costs and other expenses while it is being litigated.
To learn more about your litigation financing possibilities, get in touch with Baker Street Funding.