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The Ethics of Litigation Financing: An Overview

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The Ethics of Litigation Financing: An Overview

This course is an advanced review of the legal ethics issues raised by litigation finance and how these have been resolved. We will cover ABA Model Rules, court decisions, bar opinions, and state rules (where appropriate) involving the following topics: attorney competence, scope of authority & control, communicating with the client, fee sharing, disclosure, privilege & confidentiality, and conflicts of interest. Attendees will leave this lecture with substantive knowledge of the ways litigation finance has developed without contravening attorney ethical rules.

Transcript

- Welcome to The Ethics of Litigation Finance, An Overview. My name is Giugi Carminati and I am Vice President of Business Development at LexShares, a litigation finance company. I am a former litigator with experience in complex commercial litigation, civil rights, family law, and international arbitration. And after over a decade in practice, I joined LexShares in my current position. Before we begin, I'm going to provide a brief disclaimer. So this presentation does not contain legal or investment advice. LexShares does not warrant the accuracy of any information contained herein. Nothing in this presentation should be deemed an endorsement of any particular investment opportunity. Furthermore, nothing in this presentation should be understood as supporting the practice of litigation finance in any particular jurisdiction. Each litigation finance transaction should be evaluated individually with the advice of counsel. Let's begin. This presentation is going to follow a roadmap. First, we are gonna have a litigation finance recap, and then we are going to talk about the ethics of litigation finance, going into a number of issues that include attorney competence, scope of authority and control, communicating with the client, fee sharing, disclosure privilege and confidentiality, and finally, conflicts of interest. To start off, I want to remind you that this is not a CLE for beginners. I am going to assume a basic understanding of litigation finance. And should you want to learn more about it, there is going to be an additional CLE published on this same platform, which is Litigation Finance 101. And in addition, always, always, always, always feel free to call me or email me and even set up a meeting to talk about litigation finance, because I actually do enjoy talking about litigation finance with people, and it also happens to be my job, so glad to do both of those things. All right, so let's jump in. What is litigation finance? Litigation finance is when a third party, a non-party, invests money in litigation, usually for the purpose of advancing the claim in return for a share of the recovery. There are, broadly speaking, two types of litigation finance: consumer litigation finance and commercial litigation finance, and this presentation will focus on the latter. The first question you may want answered is why litigation finance? Well, litigation finance is similar to other types of financing in that we frequently use financing for a variety of things, such as real estate, cars, businesses, boats, appliances, furniture and even a plastic surgery, right? You are sitting there with probably a wallet full of financing, which is your credit cards. Why not litigation? We know that access to justice depends on access to capital. We know that lawsuits are expensive and sometimes we know that that cost is prohibitive. We also know that better resources means better results. In that vein, litigation finance can be used for attorney hourly rates, expert fees, eDiscovery software, computer forensics, depositions, jury consultants, in court presentations, and a myriad of other resources, ranging from additional staff, additional attorneys, private eyes, you name it. If it advances the case, then litigation finance can be used for it. Litigation finance in the United States is a very rapidly maturing industry. Litigation finance has proliferated, subject to varying levels of regulation. The US legal market is the largest one in the world. There are over 13 million state cases filed every year. There are over 300,000 federal cases filed every year, and there are tens of thousands of private arbitrations filed every year. There are dozens of litigation financing companies in the United States, including some household names among financial institutions, including Elliott Management and Fortress. This is when financial institutions that do other things other than litigation finance include litigation finance as an investment strategy for their assets. There is no federal regulation of litigation finance in the United States, and in fact, there is no uniform regulation industry-wise. However, there are a patchwork of state regulations, which obviously will become more relevant as we try to understand the ethics of litigation finance. When it comes down to types of investments, one way to think about it is six different types of investments, that each tend to have their own quirks, their own criteria. So the first one is single case commercial litigation. This is known recourse funding for legal fees, litigation expenses, and even working capital for the plaintiff, the company that is engaging in this type of litigation. This is for a single case. And the case types include breach of contract, breach of fiduciary duty, key tab, theft of trade secrets, patent infringement and the investment is largely stage agnostic. It can be before filing, it can be after filing. It can be a during summary judgment. It could even be on the eve of trial. It could actually also be on appeal. The next type of investment is portfolio and complex financing. This is when the finance company is funding a portfolio of multiple matters, which are cross collateralized. And this often calls for custom financing solutions, addressing complex needs of corporations and law firms. The third type of investment is for international arbitration, and this is when an investment company may be called upon to invest in a matter across multiple forms and across multiple jurisdictions, and litigation finance companies vary in whether they are or are not willing to do so. And so that is definitely something you would want to discuss, especially if you're talking about foreign enforcement or enforcement against a foreign country. The fourth type of investment is intellectual property cases. This is when a in litigation finance company finances plaintiffs to protect intellectual property. It helps unlock capital that can be used to pursue assertion campaign, assertion of a patent or intellectual property right, or to be reinvested for the operating expenses of the entity while it fights out its patent decision. And again, this is somewhat of a niche-y area of litigation finance, and you would want to find a company that understands the risks and the process and what it takes, as some have a bigger appetite for this than others. The fifth type of litigation finance investment is law firm funding, and this is very similar to portfolio financing, but it's when a law firm wants to reduce the overall risk and this entails collateralizing their entire portfolio, and this will allow them to release obtained capital that they can use to grow that portfolio, to find additional staff, to fund expenses and to push forward the portfolio litigation. You will see this a lot in mass tort context. And these arrangements can be both recourse and non-recourse, and again, the cases are cross collateralized. And finally, the sixth type of investment to keep in mind is the post-settlement monetization. This helps claimants and law firms expedite payment of awards and fees, and it eases collection pressure and alleviates cash flow concerns between the time that a judgment is rendered and a judgment is enforced. Now that we have covered the six types of investments available, I want to provide a very brief reminder of what litigation financing looks like in single case and portfolio examples. And as I said, this class assumes a working knowledge of litigation finance, so I am not going to go into this in great depth. But just as a refresher, in a single case example, what you're looking at is, let's assume that a company like LexShares agrees to do a $1 million investment, right? Okay. So typically that investment will represent about 10% of the expected recovery or less, right? So the smaller the percent of recovery as opposed- Sorry, the smaller the percentage of the investment compared to the expected recovery, the better it is for everybody, the more safe it is for everybody. Of that 1 million, you could, for example, have $700,000 go towards the attorney. Depending on the engagement structure, the capital can be used for hourly fees or costs, right? So the attorney gets paid out of that amount. And then the plaintiff could receive $195,000 in working capital or for personal expenses. And then there would be about a $105,000 that would go towards fees and expenses incurred by LexShares, which is the initial cost of the money administration funding, closing fees and other expenses. Let's say then that a $10 million settlement goes in. The way the money would be divided, assuming that the attorney was entitled to $3 million, you would be looking at $3 million to the attorney, $5 million to the plaintiff, and then about $3 million to the litigation finance company, such as LexShares. And then obviously, the terms and the structure are bespoke on a case by case basis and will reflect the estimated risk, profile size, time to adjudication, among other factors. That was a single case example. So let's imagine what that would look like for a portfolio example. Actually, it's really similar. The portfolio is looked at together. There is an assessment made. Now definitely, the attorney will have their own assessment about how much money is going to be made on this case. But the investment, the litigation finance company will make their own assessment, and they will say, "Yeah, I think there's about a 10 to one or even better ratio of amount invested to amount to be recovered by the plaintiff in the case." So on a $5 million investment, you would maybe look at 3.95 going to the attorney, half a million going to marketing, and that's really common. And then, you know, another $550,000 would go to the litigation finance company, again, to include administration funding and closing fees and expenses. Now let's say that there's an $80 million settlement that comes in. Well, in that case, the attorney will get $32 million, the plaintiffs will get $33 million and then LexShares will get about $15 million, and again, that is, you know, bespoke on a case by case basis, looking at the portfolio, so on and so forth. All right, so that is basically what litigation finance looks like. And I now am going to give you a brief history of litigation finance. And again, very brief for purposes of this particular lecture. Litigation finance was originally not allowed, and we're talking Middle Ages because of champerty and maintenance. So champerty is maintenance for profit and maintenance is when a stranger to the lawsuit provides funding for the litigation and those were not allowed. And they actually were based in English common law. They come from antiquity and it was really based on the fact that feudal Lords did not want each other riling up lawsuits with no merit just to drain each other's resources basically by using, you know, individuals that maybe did not have as much power over their lives to kind of stand in as patsies. And after independence, each state adopted some version of English law and some but not all states adopted prohibitions against champerty. And in fact, nowadays there's actually 31 states where champerty is either, the doctrine against champerty right? Is either abolished or they were never adopted to begin with. And even where there are champerty laws on the book, they can be interpreted in ways that are so, so, so, so, so narrow that they really don't apply to litigation finance at all. So while there used to be some ethical concerns around champerty and maintenance, those are overall largely gone. There are four states where champerty still applies to invalidate litigation finance agreements, and these would be Alabama, Kentucky, Missouri and Mississippi. But in the rest of the United States, you are either dealing with states that literally just allow litigation finance agreements, have abolished or never adopted the doctrines against champerty or maintenance or interpreted so narrowly that it's actually no longer relevant to the conversation. Okay, so now we are going to move into the anatomy of reviewing an ethical issue for purposes of this lecture today. All right, now that we have the basics, let's talk about how we are going to address analysis of ethical issues in litigation finance. This is how we're going to do it for each of the identified potential ethical issues. First, we're going to identify the ethical issue raised by litigation finance. Second, we're going to review the applicable model rule, ABA model rules of professional conduct. Sorry, I have to repeat that. Second, we are going to review the applicable model rule, the ABA model rules of professional conduct were adopted in 1983. They serve as models for the ethics rules of most jurisdiction and states either adopt them wholesale or modify them and then adopt them. And so, while they're not binding, they are certainly persuasive authority. Three, we are going to review other authorities on the same topic, and that will include Bar opinions, court opinions and legislation. I've said this before, I'm gonna repeat it now. We are going to be looking at six issues of ethics. First, attorney competence, second, scope of authority and control, third, communicating with the client, fourth, fee sharing, five, disclosure privilege and confidentiality, six, conflicts of interest. Okay, let's jump in. Attorney competence. All right, so first, what is it, right? It's the ability to properly negotiate a litigation finance agreement on behalf of a client seeking litigation finance. Great. It's also the ability to recognize a lack of knowledge or expertise as the litigation finance agreements and advise clients to obtain separate counsel. Rule 1.1 of the model rules tells us why this is the case, right? Because a lawyer shall provide competent representation to a client and competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation. So at times, even though we are dealing with litigators, with lawyers, they will call in a deal lawyer who has experienced litigation finance or financing agreements, and they are called in to help negotiate the agreement with the litigation finance company. Issue number two, scope of authority and control. An attorney has the duty to maintain independent professional judgment, and what does that mean? That means that the attorney controls the strategy and that the attorney controlling the strategy does so for the benefit of the client. But we also know that it is the client who controls settlement. So where does this come from? This comes from Model Rule 1.2, which states that a lawyer shall abide by a client's decisions concerning the objectives of representation and as required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued. A lawyer may take such action on behalf of the client as is impliedly authorized to carry out their client's representation. A lawyer shall abide by a client's decision whether to settle a matter. And we know this in a criminal case, the lawyer shall abide by the client's decision after consultation with the lawyer to plead, waive jury trial, or whether to testify. Okay. So ABA Formal Opinion 484 has an interesting, an important piece of language regarding litigation financing and scope of authority. It states the lawyer should advise the client that the client is to remain in charge of the lawsuit, as well as explain and take steps to assure that the financing entity will not direct or regulate the lawyer's professional judgment. So how do we ensure that's the case? Well, the lawyer has to maintain independence from the litigation finance company, preferably in writing, and the funding agreement itself should be drafted to ensure that the client retains control of the litigation, including for example, decisions as to whether to settle or discontinue the litigation, as opposed to proceeding to trial or verdict, and that the lawyer maintains professional judgment. So the litigation finance company cannot be the one to dictate when and how to take a deal or settle or decide whether or not to proceed to trial. Now, the litigation finance company may choose to withdraw any remaining capital that they had promised if certain things happen as outlined in a agreement, but they cannot direct and dictate the litigation. That has to be and has to remain a question for the lawyer when it comes to legal strategy and the client when it comes to settlement. The third topic I said I would cover today is communications with the client. So some things to think about are does the client fully understand the litigation finance agreement and how has that information been communicated to them? So as promised, let's go back to the rule, Model Rule 1.4 states that a lawyer shall reasonably consult with the client about the means by which the client's objectives are to be accomplished. B, a lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding their representation. All right, but what does that mean? Well, what was interesting is that ABA Formal Opinion 484 regarding litigation finance actually mimicked that language. So if you wanna compare it, Model Rule 1.4 B says, I'm repeating it, a lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation. ABA Formal 484 says a lawyer who is willing to allow a client to finance the lawyer's fee must quote, explain the arrangement to the client to the extent reasonably necessary to permit the client to make informed decisions about the funding. So when it comes to communication, we are going to be looking at those same opinions to understand if the communication was adequate. So what would we do in practice? What would be a best practice? Well, the litigation finance arrangement should be spelled out in writing for sure. The writing should make clear whether this agreement is recourse or non-recourse. That means whether in case of non-payment, there is a permission to go after assets or whether it is non-recourse, and therefore the financing company cannot go after any business or personal assets, other than the proceeds of the cases that were collateralized and those options are available. In a non-recourse situation, the collateral are the cases themselves and only the cases, and so proceeds to repay can only come from those cases. The writing should also make clear how the funder will be compensated. What are their fees? How much are they making from when, where? The writing should make it clear who is responsible to pay the funder? Is it the client or is it the law firm and from what source? So the recovery after trial settlement or any others and when. So is repayment triggered after the receipt of judgment or settlement funds? Is it at a certain time, et cetera, et cetera? Another thing that the writing should explain is how the lawyer's fee will be paid by the finance company or not. So for example, where the lawyer's fee is paid by the finance company and the finance company remits directly funds to the lawyer, or how the client is expected to pay the lawyer's fee, where the finance company disperses the funds to the client, okay? This is the idea of if the finance company sends money one direction, we don't want the client to later say, "Oh, I thought that money was for me. I didn't know how to pay my lawyer out of it." Or other way, right? The lawyer says, "Oh, I spent it all on expenses and fees. I didn't, you know, or third parties. I thought the client still had to pay my hourly fees." Or anything of the sort, right? So you wanna make sure that we understand how the money flows. Another thing that the writing should make clear is the lawyer's obligation to maintain the confidentiality of client information with respect to the finance company or broker. We wanna make sure that that is covered. Okay, next topic, fee splitting. So first, why do I even talk about fee splitting? They're not splitting fees, are they? Well, traditionally, lawyers cannot split fees with non-lawyers. We know that much. The issue is only relevant in the context of law firm funding, right? So if litigation finance arrangement is with a client with a company that is a plaintiff in a case, this is not gonna be part of the conversation. But if the law firm is the one receiving the funding, for example, in a portfolio deal, then the issue of fee splitting may need to be addressed. So when a law firm receives funding from a litigation finance company, the repayment typically comes from the proceeds of resolved cases. Some practitioners and scholars have therefore raised the issue of whether or not this is fee splitting. First, let's start with why is there a prohibition on fee splitting, right? So the public policy against fee splitting is rooted in preventing the unauthorized practice of law and the control of cases by non-lawyers. Fee splitting is a nuanced area of law which would warrant, frankly, a lecture of its own. But what I can say here today is that there has been a liberalization trend on this issue. First, the term fee splitting is actually not defined and you may want to look at some articles by Professor Sebok of the Cardozo Law School, who has written extensively on this topic. Second, there is a recognition that future earned fees are an asset subject to collateralization. And when that is recognized, then that muddies the idea of fee splitting. I mean, are we really splitting fees if I'm collateralizing a future asset? And that again is a point that Anthony Sebok makes. Third, there has been a marked trend to recognize that litigation finance is not fee splitting, notably in California. And fourth, however, some jurisdictions have outright done away with the prohibition and I'm looking at you, Arizona. So where does this prohibition come from? Where is it written? Well, let's take a look at Model Rule 5.4. Model Rule 5.4 says a lawyer or law firm shall not share legal fees with a non-lawyer except that an agreement by a lawyer with the lawyer's firm partner associate may provide for the payment of money over a reasonable period of time after the lawyer's death to the lawyer's estate or to one or more specified persons. Okay. Two, a lawyer who purchases the practice of a deceased, disabled, disappeared lawyer may pursuant to the provisions, pay to the estate or other representative lawyer the agreed upon purchase price. Okay. Three, a lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit sharing arrangement. And four, a lawyer may share court awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter. So none of those exactly cover litigation finance, right? So the rule is not going to give us an exception that applies. But that doesn't mean that's the end of the analysis. A really good case study consists of opinions that have been coming out of New York. In New York, Rule 5.4 is basically a copy of Model Rule 5.4, which I just read to you. And rule 5.4 prohibits fee splitting with non-lawyers. All right, we're all on the same page. However, two New York Supreme Court cases have rejected the application of Rule 5.4 in the context of litigation finance agreements. Things are getting interesting. The two cases are called Lawsuit Funding LLC, versus Lessoff, L-E-S-S-O-F-F, and Hamlin Capital VII, LLC versus Khorrami. So Lawsuit Funding, LLC versus Lessoff involved a law firm that had obtained litigation finance in exchange for a portion of the contingent legal fees that it was expected to receive from the settlement or adjudication of five matters. So a small portfolio deal. The court, citing a case called PNC Bank V Delaware, which is a Delaware Superior Court case from 1997, concluding that litigation finance is not fee splitting. And I'm going to read you the passage from the case. It is a little bit long, but I think it's worth listening to. "A law firm is a business, albeit one infused with some measure of the public trust, and there is no valid reason why law firms should be treated differently than an accounting firm or a construction firm. The rules of professional conduct ensure that attorneys will zealously represent the interests of their clients, regardless of whether the fees the attorney generates from the contract through representation remain with the firm, or must be used to satisfy a security interest. Parenthetically, the court will note that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney's accounts receivable. It is in fact, a common practice, yet there is no real ethical difference whether the security interest is in contract rights, fees not yet earned or accounts receivables, fees earned, insofar as rule of professional conduct 5.4, the rule prohibiting the sharing of legal fees with a non-lawyer is concerned." I really like that passage for its clarity. I think it focuses in on the fact that a litigation finance company is a finance company and that banks and lenders have been lending money to law firms and law firms are securing it with what? Their revenue and what is their revenue? Fees, and that has never been called fee sharing. And so I think that was really putting substance over form. And that is an important way to think about and look at this issue of fee sharing. The same case, same court, still in Lawsuit Funding, LLC versus Lessoff also found the following, quote. "There is a proliferation of alternative litigation financing in the United States, partly due to the recognition that litigation funding allows lawsuits to be decided on their merits and not based on which party has deeper pockets or stronger appetite for protracted litigation." I love that quote too. I love it because it identifies the fact that while we want to trust our judicial system, it is still very much driven by who has more money or who has access to capital to pursue a meritorious claim. And so it is in no small part that I truly believe that litigation finance is funding justice. And I love the fact that the New York court was able to see that. Now we're gonna turn to Hamilton Capital VII versus Khorrami. In that particular case, the funding challenged was a line of credit that entitled the litigation funder to a percentage of the law firm's gross revenue in consideration of money loaned to the firm, and the New York Supreme Court similarly found that obtaining a credit facility secured by a law firm's account receivables is not fee splitting. And again, I'm gonna quote it, 'cause this is a great passage. "While it is well settled that actual fee share agreements are illegal and unenforceable, the case law cited by defendant does not support the proposition that a credit facility secured by a law firm's accounts receivables constitutes impermissible fee sharing with a non-lawyer. To the contrary, as Justice Branston explained, courts have expressly permitted law firms to fund themselves in this manner. Providing law firms access to investment capital where the investors are effectively betting on the success of the firm promotes the sound public policy of making justice accessible to all regardless of wealth. Modern litigation is expensive and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm's accounts receivables helped provide victims their day in court. This laudable goal would be undermined if the credit agreement were held to be unenforceable. The court will not do so." This is a 2007 case. So what do we do? What are the best practices in this case? Well, let's talk about the questions we should be asking. We know that there is no fee splitting when banks lend to contingency law firms and secure their loans against law firms' account receivables. So why should litigation finance arrangements be viewed any differently? Here are some questions that scholars, courts and the Bar have and will continue to explore. Is there a difference between recovering a multiple of the amount invested versus a percentage of the expected recovery? How is it different for a bank to collateralized AR, accounts receivables and a litigation financing company to collateralize future revenues from a portfolio? Does it truly make a difference whether a law firm leverages the future of a portfolio versus the future of a single matter? And is there a difference between collateralizing future hourly work and future contingent recoveries? Those questions are food for thought. In the meantime, here is some best practices. Collateralize several cases in a portfolio funding arrangement. The more you collateralize several cases, the more likely it is that you're not splitting fees because no single case can be attributed to the fees that are being paid. Second, ensure the wording of the litigation finance agreement does not look like a partnership or is allowing the unauthorized practice of law. We make it clear who's doing what, we make it clear that the finance company is there to finance and the law firm is there to lawyer, and that those roles are separate. You should always evaluate your jurisdiction sensitivity to fee splitting. Jurisdictions do have variations on what they will and will not accept. And use a form for your agreement that is aligned with the permitted types of law firm financing in your jurisdiction. Next topic. This one is a big one, confidentiality, privilege and disclosure. All right, well, first of all, what do I mean by each of those three terms? Confidentiality, okay. So it's the client's authorization to share information with the funder and two, the contractual obligation to maintain confidentiality of information exchanged with the funder. That's confidentiality. Privilege or work product, which we're treating together, even though one is a privilege and one is a doctrine basically that protects work as a confidentiality doctrine. But overall, both of them are a non contractual confidentiality safeguard which operates as a matter of rule and protects information exchanged between an attorney and their client. These rules determine when and to what extent does the attorney privilege or the work product doctrine protect information between the funder and the law firm and/or client? And the reason we bring it up is that there could be waiver if this is not recognized by the courts or not protected, and so we wanna be careful. And finally, disclosure. When do attorneys or their clients have to disclose the existence of a litigation finance agreement? Let's start at the top. Confidentiality requires a client's consent, not only to share the information, but to enter into confidentiality agreements on behalf of the client. It is contractual in nature, and it is usually governed by a nondisclosure agreement. So when you email a litigation finance company for the first time, the first document that is going to be exchanged substantively is going to be an NDA. There are certain things that you want to look at in an NDA. You want to look at the scope of the NDA. What information does it cover? You want to look at who the signatories are, and that means do you want the lawyers to sign? Can one lawyer sign on behalf of the entire law firm? Is the client having to sign? Sometimes there's a broker involved, so is the broker's signature enough or do you also want a signature by the law firm or the client themselves? That's up to you to decide, but definitely something you wanna think about. You wanna look at the timing of signing this NDA. Is it early enough in the process that it makes sense? Are you exchanging this NDA after two months of exchanging information? And you wanna look at termination of the agreement. When and how does it terminate and what happens to the information exchange when it does terminate? The next topic that I told you we were going to talk about is privilege. So privilege is found in Model Rule 1.6, which provides that a lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by Paragraph B. And then under Paragraph C, it says a lawyer shall make reasonable effort to prevent the inadvertent or unauthorized disclosure of or unauthorized access to information relating to the representation of a client. Now let's talk about work product, and work product, while it is in the rules of procedure of several states, really gets fleshed out in court decisions. And there have been court decisions about whether or not litigation finance agreements consist of work product. Let's start with Arizona. And this is Continental Circuits, LLC versus Intel Corp. The case is from 2020 and the court said, quote, "The litigation finance agreements therefore satisfied that because of tests and constitute work product, work product protection is not waived merely because work product is shared with another person or entity," end quote. Similarly, the northern district of Illinois in 2014, stated that litigation finance agreements and communications concerning those agreements are work product, but they are not attorney client privilege communications. In 2012, 10 years ago, the eastern district of Pennsylvania held that communications with funders and funding agreement drafts were protected as work product and protected by the attorney client privilege under the common interest exception, which I thought was an interesting twist. The eastern district of Texas in 2011 concluded that documents shared with potential funders were privileged. So as you can see, the trend has definitely been towards giving work product protection to litigation finance agreements and communications with litigation finance companies. Now, there are some similar cases for the attorney client privilege, and I'm gonna share those with you. The decisions here are a little bit more mixed, but that is because courts will tend to go for the work product protection and not the privilege, because the privilege is a communication exchanged with the client. So the analysis of attorney client privilege focuses on whether the client and the third party to whom the privilege information had been disclosed were engaged in a common enterprise and whether the information shared relates to the enterprise's goal. So in Florida, the answer to that was yes, 2016 case called Energy Oil Trading, quote, "Florida Statute Section 90.502 C2 protects communications with those to whom disclosure is in the furtherance of their rendition of legal services to the client." On the other hand, to contrast that, in Delaware, the answer was no. This was a 2010 case holding after brief analysis that the patenty and the litigation finance companies did not have a common interest, which rendered the attorney client privilege and apparently work product protection unavailable. Another no on attorney client protection of litigation finance communications is from New York. An E. Profit V Strategic Vision, which is a 2020 case. "The identity of a person providing litigation finance, whether a private individual or a corporation or an insurance company, is not protected by the attorney client privilege or attorney work product doctrine." All right, so now we're gonna go to the third section of the confidentiality privilege disclosure section, and that is disclosure, right? So defendants have been eager to get their hands on litigation finance documents so they can bring the funder into the discovery process or muddy the waters in some other way. And there are some states that require some degree of disclosure for litigation finance arrangements. Notably, these are Illinois, New Jersey, Wisconsin, West Virginia and Delaware. And I should have said this, so Illinois in federal court, New Jersey in federal court, Wisconsin in state court, West Virginia in state court and Delaware in federal court. In California, there's a very interesting case that came out in 2016 called Yaiguaje V Chevron Corp, which is from, I said 2016. And it's centered on whether the plaintiff's class action claims would've required disclosure of the litigation finance agreement. So the case itself was, it was a plaintiff's class action against the defendant for damages related to an exploratory gas well explosion and the northern district of California in that case compelled the named plaintiff to produce his litigation finance agreement to the defendant. And this was then translated into a local rule in the northern district of California, which now requires that across the board in class actions. So having shown that there is a trend towards protection, ABA best practices provide a little bit of guidance. This is from ABA House Resolution 111 A, 20 A at 11. And it says, quote, "The careful lawyer should assume that the litigation funding arrangement may well be examined by a court or the other party at some point in litigation. Disclosure may be required in many contexts. It could be required one, in jurisdictions that do not find such arrangements protected by work product or return client privilege, or those that require disclosure by court rule or discovery order, two, in a subsequent dispute regarding payment or three, in which a jurisdiction in which loans to clients are prohibited." So while there is a trend in a certain direction, for sure, we still have to be cautious when we are exchanging information, especially electronically. We are now moving onto the final topic of this lecture, and this is conflict of interest. We all know that attorneys have a duty of loyalty to their clients. And when a law firm obtains litigation financing, this relationship may cause tensions with the client. When portfolio financing is involved, the possibility of tensions and even concrete conflict of interest may arise if the lawyer or a single client begins to have difficulties with the funder involving one or of a group of matters. And when a litigation finance company funds several matters for law firms or funds the law firm directly, there may be a perceived conflict between the attorney and the client. However, traditionally, interests are aligned. I wanna break down these statements that I just made because there's a lot packed into there. If a litigation finance company is funding a portfolio, that portfolio will most likely involve a variety of clients, and some cases may be better than others. And the concern is that lawyers may start, there's no better word, horse trading, right? Well, this case is not as good, that case is better. And the litigation finance company, this idea, which is a little bit of a red herring, is that the litigation finance company and the lawyer might get together and start kind of trading off cases against each other to maximize the return on a portfolio. It may also be that, again, this is a concern, I'm not saying that it's true, that a litigation finance company and the lawyer may get crossways on one deal, which may somehow imperil flexibility or willingness to work together on another case, which would, you know, negatively impact the client who had nothing to do with it and is just caught in the crosshairs of this souring relationship. Okay. So let's break those down a little bit. First of all, reputable litigation finance companies are always going to stay out of litigation. The portfolio is an asset as a whole and the lawyer and the litigation finance company behave with each other as professionals would. And it is no different again from a bank loaning money to the lawyer, right? In the end, it is lawyer's responsibility to be able to handle their cases and do so responsibly. And what is important to keep in mind is that across the entire portfolio, litigation finance companies and attorneys have aligned interests because people in this industry are expecting to get revenue, especially when you're dealing with a non-recourse loan, where the only thing that matters is success on the case. Both the litigation, all three, the litigation finance company, the client and the lawyer want to see excellent outcomes on their cases. And so that's why we conclude this portion by talking about the fact that, in the end, interests are aligned. In the end, the litigation finance company wants the relationship with the lawyer to work out, 'cause that is what's best for them. The lawyer wants the relationship with the litigation finance company to work out, and in the end, they will find a way to work through whatever it is that they're having an issue with because their interests are aligned only if they're working towards the same goal, which is delivering success to the client. And in that respect, then the client's interests are perfectly aligned as well. So I wanna take a little bit of time to talk about the ABA model rule on this topic. So ABA Model Rule 1.7 A2 says A, except as provided in Paragraph B, a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. And it says that a concurrent conflict of interest exists if A, there is significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person, or by a personal interest of the lawyer. And this is where non-recourse versus recourse loan could actually make a difference, because in a non-recourse situation, it is not the lawyer's personal interests that are at stake. It is the collateral itself, right? And so as long as the funder is collecting against the collateral, it is not the lawyer's personal assets that are at risk. But evidently, this is something that lawyers have to keep in mind and have to ensure that they are keeping themselves in a position where there is not even the appearance of conflict or the appearance of undue pressure, just honestly, as they would with a bank. I wanna share with you some policy considerations of litigation finance, because there is somewhat of an overlap between policy implications and ethics as can be seen by the New York decisions, which squarely talked about policy issues regarding meritorious litigation and the ethical analysis of whether this is or is not fee splitting. There are some pros from a policy perspective to litigation finance. What are they? The pros are one, greater access to justice. Deeper pockets does not mean now necessarily that you'll get away with whatever you want. Litigation finance means that less moneyed companies and individuals are able to vindicate their rights. Two, it creates better outcomes for litigants because it aligns outcomes with case merit. If you have access to capital, you have access to the presentation of facts, the collection of evidence and the lawyers and team that will give the best presentation to the facts as they exist. Three and relatedly, it creates a better access to resources, lawyers, trial presentation, consultants, jury consultants, experts, eDiscovery vendors and the such. Fourth, for sure, there is a filtering function for meritorious cases in the justice system, because those cases will get access to capital while unmeritorious ones will starve, and that will really help level out the playing field with meritorious cases. Four, the litigation finance shifts the risk to a party that is better equipped to handle that risk. A repeat player, if you wish. And lastly, it levels the playing field between the Davids and Goliaths of the world. Certainly as an attorney, I saw that on a daily basis. I saw how hard it was for people who did not have access to resources to go up against companies or let alone the government itself. And so litigation finance levels that playing field, which is a net positive. Some people have talked about the cons of litigation finance, and I want to address those. There is a concern that third party litigation finance will facilitate frivolous lawsuits. I can tell you that is not the case. Working at a litigation finance company, there's one very simple reason that's not the case. Because otherwise, litigation finance companies would not be able to make money. The interests in a lawsuit are only aligned if the underlying case is meritorious and likely to succeed. And so a frivolous lawsuit fails because it is not likely to succeed, and so it is less likely that it will obtain financing. There is a concern that third party litigation finance will increase or inflate the cost of litigation by making capital more accessible. Well, I'll tell you what. Litigation finance is already extraordinarily expensive, and that was not litigation finance's fault. What I can tell you is that if both parties have money, and if both parties know that there is money on the other side to keep this fight going, both of them have a incentive to sit down and talk it out. So in fact, what we may well see, and we would need data, obviously, is that we may well see that cases resolve more quickly and therefore cost less money because there's none of this grinding of parties down. There's no advantage in throwing money into useless discovery for months and years on end because the other side's just gonna keep up and everybody's just throwing away money. So actually, there would be a counter argument to that is that possibly it's gonna drive down cost. There is a concern that third party litigation finance will be predatory and usurious, and that is in fact a concern, but it is more a concern in the consumer litigation finance rather than commercial because commercial litigation finance, given its name, deals with commercial counterparties, law firms and companies that are sophisticated enough to negotiate for themselves and are not at a disadvantage in the negotiations. There is also a concern that third party litigation finance will create improper incentives and conflicts of interest. We've talked about that at length, and the fact is that reputable companies have and will continue to ensure that they do not meddle with the litigation itself. And there is a concern that third party litigation finance will lead to a loss of confidentiality and/or privilege. And that is definitely something that we have addressed in this lecture. One, there's non-disclosure agreements that are usually put in place early, that are broad and that are very strong in their language. Second, the case law has trended towards allowing work product protection, and in some cases, attorney client privilege under the common interest option for communications with litigation finance companies. And third, while there are in fact courts that have required disclosure, the scope of that disclosure varies. And overall, while there will have to be disclosure with a litigation finance company, there can also be somewhat of a careful disclosure. For example, lawyers do not have to disclose their mental impressions or their strategy. They can share things that are public record, public knowledge and things that would be, you know, in line. And then it is up to the litigation finance company to perform the internal due diligence and review of the case to determine its strengths and weaknesses with a rigorous review process. So while there definitely have been policy implications, they are things that have been addressed and continue to be addressed, and certainly should not deter individuals and companies with meritorious claims from seeking access to this tool to pursue their claims against defendants. And now for some concluding remarks. All right, I am going to move into concluding remarks at this point. What have we learned about the ethics of litigation finance? Well, first of all, we have learned that there is fragmented jurisprudence, but we've also seen that there has been increasingly consistent case law, and that case law is pointing towards what? It's pointing towards the acceptability of litigation finance. It's pointing towards the fact that litigation finance is not fee splitting and is not fee sharing, and that is especially true when you're dealing with an investment in several cases at once with a law firm. What we have also seen that there has been a trend towards protecting communication with litigation finance companies under the work product doctrine. Although there have been some formal rules implemented for disclosure of the existence of litigation finance agreement, but again, the scope of that disclosure is varied and would affect how much has to be disclosed or not. And we have seen overall that given the fact that there are dozens of litigation finance companies, and that number is growing, that there is a growing acceptance of litigation finance in the United States. Second concluding remark, it is very important to understand whether the model rules and ethics opinions have or have not addressed litigation finance in your jurisdiction, and if they have, how they have done so. Third concluding remark, you would have to clearly understand and explain to the client whether this is a client deal or an attorney deal. And the why of that is something obviously that we've covered, but just to summarize it, you wanna make sure that the client understands whether they're getting the money or the law firm is getting the money. You wanna make sure the client understands what the money is for. You wanna make sure the client understands whether the lawyer is going to have to get paid out of that money or out of other funds. You wanna make sure the client understands how expensive and how the money that they're receiving has been priced. And you wanna the client to understand if it's collateralized against their future recovery, how much of that recovery is going to be taken up to repay for this litigation finance investment. And that's really, really important certainly, because that communication with a client is critical. It's also about competence. It's also about duty of loyalty. The more clarity there is, the better it is down the line. Fourth, you want to be sure to identify who has control and maintain a clear separation of powers, right? So the lawyer stays in control of strategy of litigation like they would've no matter what, regardless of the fact that there is now litigation finance in play. And the client stays in control of settlement. And that's really important because you don't want either the litigation finance company or the lawyer pressuring the client into an early settlement, because, you know, they want their return on the investment. And again, reputable litigation finance companies will not do that. So if you run across the litigation finance company that tries to do that, that's a red flag. And you wanna make sure that that separation of powers is clearly identified to everybody from day one and that separation of power is maintained all the way through the case. And then finally, beware of conflicts. Whether these are real or apparent, you want to make it clear that every case is its own independent case, whether it belongs to a portfolio or not, and that the lawyers' duties, first and foremost, are to their clients and that that duty cannot be trumped by the existence of a litigation finance agreement. And here, as I've said earlier, but it's worth repeating, the recourse or non-recourse nature of that arrangement is going to be pretty critical to that determination. Thank you so much for joining us today for the CLE on the ethics of litigation finance. My name is Giugi Carminati. I am an attorney and former litigator. I am now Vice President of Business Development at LexShares, which is a consumer litigation finance company operating in the United States. I really welcome you to email me at [email protected] And if you want any additional resources, for sure, you can look at what you will find on this website, but I also invite you to check out LexShares' attorney resource center, which is at lexshares.com/resources, where you will find articles and white papers as well as litigation finance guides, which I think you would find very informative. They are very educational rather than being promotional. And we really strive to put out additional information that you may find helpful or useful. Again, thank you again for being here with me, listening to this CLE and I very genuinely hope to hear from you soon. Thank you so much, bye.

Presenter(s)

Giugi Carminati
Space lawyer, eDiscovery attorney, legal project manager, and former litigator
Livable Law

Practice areas

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Alabama
    Pending
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    • 1 professional responsibility
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