It is undeniable that litigation funding is taking the legal world by storm. In 2017, 36 percent of
Funding companies advertise their services to a wide-range of players, including individual plaintiffs pursuing claims against a corporate defendant with deep pockets (often referred to as "David v. Goliath" lawsuits by those in favor of litigation funding), class action plaintiffs, plaintiffs engaging in expansive litigation requiring significant out-of-pocket expenses, and plaintiffs' lawyers and law firms. The advances received from the funding company can be used to fund litigation or for non-litigation related expenses, such as the payment of rent, groceries, and other necessities by individual plaintiffs. Id. at p. 5. While litigation funding may allow greater access to "justice," it is clear that litigation funding is rife with potential ethical issues and dilemmas, including the potential for inappropriate relationships between lawyers and funding companies, third-party control over litigation, and possible interference with the attorney-client privilege. Id.
The Ongoing Debate: How Litigation Funding May Interfere with a Lawyer's Independent Judgment
Rule 5.4 of the Model Rules of Professional Conduct (the "Rules") prohibits a lawyer from sharing legal fees with a nonlawyer and from permitting any person who recommends, employs, or pays a lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services. ABA MODEL RULES OF PROFESSIONAL CONDUCT, 5.4(a) and (c). The purpose of the foregoing rule is to "protect the lawyer's professional independence of judgment." Id. at Comment 1.
In 2018, the
In essence, the
While those in favor of litigation funding argue that there is no ethical difference between a non-lawyer's security interest in a contract right (fees not yet recovered from the lawyer) or accounts receivable (fees earned by the lawyer) and that regulation of such relationships undermines the ability of non-wealthy people to prosecute civil claims, it is not irrational to worry that litigation funding companies may be improperly influencing a lawyer's representation of her clients.
To better illustrate the control that a third-party funder may exercise over a pending litigation, let's consider a real-life example from Gbarabe v. Chevron, 14-cv-00173-SI (N.D. Ca. 2014), where plaintiffs' counsel entered into a funding agreement with Therium Litigation Funding LLC ("Therium"). Id. at Declaration of
Pursuant to the Gbarabe funding agreement, plaintiffs' counsel agreed that they (1) would provide accurate information regarding the litigation to Therium; (2) would not fail to disclose any information, document, or evidence relevant to Therium's decision to enter into and remain bound by the agreement; (3) would prosecute the case according to the litigation plan and budget in the agreement and would not make changes thereto without Therium's consent; (4) would not hire any experts without the prior approval of Therium; and (5) use all "reasonable endeavors, consistent with the professional conduct of the Claim in accordance with the terms of this Agreement, to recover the maximum possible Contingency Fee in respect to the Claim." See Litigation Funding Agreement, at p. 6-7. The funding agreement also allowed Therium to receive traditionally privileged attorney-client information, challenge any invoice for services that it did not consider "reasonable," and terminate funding for any material breach of the agreement. Id. at pp. 8-10.
If we unpack the legal terms in this agreement, we can easily see that it allows Therium (a non-party to the litigation) to exercise a significant amount of control over the litigation and the litigation strategy. For example, while the agreement does not specifically state that Therium has the ability to "control" the decisions being made in connection with the litigation, the agreement allows Therium to pull funding if it doesn't agree with any decision, including the overall litigation strategy or the experts hired. The terms of the agreement essentially ensure that counsel will run every decision by Therium in an effort to maintain the funding needed to continue with the litigation.
Another cause for concern is the fact that plaintiffs' counsel owes a contractual duty to Therium, which is independent from the duties owed to the plaintiffs. Id. at p. 6, ¶ 3.1.2 (stating that the lawyers must "comply diligently with the terms of, and their obligations under this Agreement."). Because plaintiffs' counsel must jump through certain hoops to fulfil their contractual obligations owed to Therium, there is a potential that counsel would be unable to fulfill their duty of independent judgment owed to their clients. For example, counsel would most likely discuss the hiring of any expert with Therium and may even decide to forego hiring an expert they believed critical to their clients' case if they knew Therium did not approve of the proposed expert to be hired. In fact, one of plaintiffs' expert witnesses testified at his deposition in the Gbarabe case that his report had not yet been provided because plaintiffs "were putting the money in place for the work to proceed." Ben Hancock, How Jones Day Unmasked a Litigation Funding Deal and Won,
Additionally, the funding agreement requires the lawyers to recover the largest possible fee as soon as reasonably possible, which suggests that counsel was in communication with Therium regarding settlement offers made and the acceptance of any such offers and could promote prolonged litigation and the consideration of interests other than the best interest of their clients. Moreover, the fact that the lawyers had a financial stake in the outcome of the litigation beyond the recoupment of traditional legal fees suggests that a potential conflict of interest existed under Rule 1.7(a), which prohibits a lawyer from representing a client if there is a significant risk that the lawyer's own interests or the lawyer's duties to a third person will materially and adversely affect the representation of the client. (Model Rules of Professional Conduct, Rule 1.7(a)). There is no question that lawyers who are parties to funding agreements such as that in the case of Gbarabe v. Chevron could have a financial interest in the outcome of the litigation that interferes with their duty to provide honest, impartial advice to the client.
Additionally, the repayment terms of the funding agreement in Gbarabe v. Chevron could have influenced settlement recommendations made by
As you can see from a review of the funding agreement in Gbarabe, litigation funding agreements between lawyers and the funder have the potential to allow a non-party to influence and exercise control over various aspects of a pending litigation. While some litigation funding agreements may not be as far reaching as the terms in the agreement in Gbarabe, it is clear that the potential for influence by a non-party with a stake in the litigation should at the very least be discoverable in litigation and properly examined by the opposing party and the court.
How to Ensure that Litigation Funding Agreements Are Not Improperly Influencing the Trajectory of Your Litigation
Not every agreement involving a third-party funder will be relevant to your litigation or will disclose a relevant conflict, but, as you can see from the foregoing, it is imperative that defense counsel identify potential funding agreements and obtain copies of the agreements during discovery. To do so, defense counsel should incorporate questions about potential funding arrangements and agreements in their discovery to all plaintiffs, including individual plaintiffs. The request for such information and the receipt of any and all documents bearing on the issue of third-party funding are essential to the fairness of all parties involved in litigation.
However, if litigation funding is not discoverable in your state, parties can ask that the litigation funding agreements be disclosed to the court. For example, United States District Judge
In addition to discovering the third-party funding relationship and the role that it may play in your litigation, it is also imperative that we continue to educate other lawyers, courts, and state legislatures on the potential ethical concerns with regard to third-party ligation funding. Right now, a number of states have either made changes or are considering making changes to the Rules so as to allow third-party funding while also ensuring that the funder does not inappropriately influence a lawyer's legal representation of her clients. See Report to the President by
Originally Published by DRI's In Transit Newsletter, Volume 24 Issue 1
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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