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:
ETHICAL CONSIDERATIONS IN COMMERCIAL LITIGATION FINANCE
CLE Presentation • © Copyright 2014 Lake Whillans Capital Partners, LLC All Rights Reserved

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?
HOW TO SEEK FUNDING
• 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?
HOW TO SEEK FUNDING
• 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 CONCERNING
INVESTMENT STRUCTURE

Is the structure legally permissible?
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.

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?

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
weinstein@lakewhillans.com
Lee Drucker
drucker@lakewhillans.com

Ethical Considerations in Litigation Finance

Ethical Considerations in Litigation Finance

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