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ABA Adopts Best Practices for Third-Party Litigation Finance

August 4, 2020 | Posted in : Ethics & Professional Responsibility, Fee Splitting / Sharing, Litigation Financing / Funding

A recent American Lawyer story by Dan Packel, “ABA Adopts Best Practices for Third-Party Litigation Finance” reports that the American Bar Association’s House of Delegates overwhelmingly voted to approve a new set of best practices for litigation funding arrangements, updating their guidance on the increasingly popular tool for the first time since 2012.  The report, which outlines a list of issues lawyers should consider before entering into agreements with outside funders, cleared the body by a vote of 366 to 10.

While the document avoids taking a position on the use of outside funding, it recommends that lawyers detail all arrangements in writing, while making clear the non-recourse nature of the investment.  Lawyers are also advised to ensure that the client retains control of the matter.  “The litigation should be managed and controlled by the party and the party’s counsel,” the report asserts.  “Limitations on a third-party funder’s involvement in, or direct or indirect control of or input into (or receipt of notice of), either day-to-day or broader litigation management and on all key issues (such as strategy and settlement) should be addressed in the funding agreement.”

The report also cautions attorneys against providing advice to funders about the merits of any given case, warning that this could raise concerns about the waiver of attorney-client privilege and also expose lawyers to claims that they have an obligation to update this guidance as the litigation develops.

Zachary Krug, a former Quinn Emanuel Urquhart & Sullivan litigator who now works as a senior investment adviser with Woodsford Litigation funding, suggested this concern was misguided.  “Courts have been fairly consistent in protecting such communications under the work product doctrine,” he said in an email.

He also cautioned that the guidance could backfire in an environment where critics of litigation funding are already arguing that the availability of outside capital may lead to an increase in unmeritorious lawsuits.  “If our concern is making sure good cases get funded—and bad ones don’t—this seems like a problematic and short-sighted approach,” he said.

The report aims to stay neutral on a number of other contested issues surrounding the practice of litigation funding. In a controversial 2018 ethics opinion, the New York City Bar Association warned that paying funders through attorney fees could violate ethics rules over fee splitting.  “Positions on fee splitting, however, are far from unanimous; the New York City Bar Opinion is not the ‘law of the land’ outside of its reach, nor are opinions or approaches that contradict the New York City Bar Opinion,” the report said.

Likewise, opponents of the practice, namely business groups led by the U.S. Chamber of Commerce, have pushed for rules requiring mandatory disclosure of funding arrangements during litigation.  The report does not take a stance on whether disclosures to judges or adversaries should be obligatory.  But in a footnote, it urges lawyers to be prepared for the prospect of arrangements being scrutinized.

“A careful lawyer will assure that the written undertakings accurately reflect that the client retains control of the litigation, that disclosures to the funder are limited so as not to create risks of waiver of attorney-client privilege or work product, and that the attorney retains and protects his or her ability to exercise independent professional judgment,” it said.