ABA 20/20 Commission Studies Third-Party Funding
[Originally published in NYPRR May 2011]
NYPRR has published several articles (June 2005, July 2010 and February 2011) about the funding of litigation by third parties who have no other interest in the matter than to secure a substantial return on investment. The business of alternative litigation funding and the many issues it raises have troubled the Bar and the courts, especially as the industry has grown. In one recent case, the plaintiff in a personal injury action who had obtained $30,000 from a funding source sued his own lawyers for malpractice and breach of fiduciary duty. Other cases have involved claims of usury by the funding companies, and claims that the companies were subject to discovery by the defendant.
The industry has drawn the attention of the American Bar Association Commission on Ethics 20/20, which has formed a Working Group to study the impact of ALP on legal ethics. The date for the close of public comments was Feb. 15, 2011. In its requests for comments, the Commission asked:
The Questions of the ABA Working Group
The American Bar Association Commission on Ethics 20/20 is assessing the professional implications of a growing trend (ALF) in which a variety of individuals and corporate entities are providing financing for litigation. The Commission and the Working Group expect to do further research, take testimony at public hearings, and use the comments received in response to the invitation in this paper to develop any proposals or reports on ALF. This includes considering whether any amendments to existing ethics rules as a result of this emerging ALF industry are necessary or appropriate. To that end, the Commission invites comments on any issues posed above and the following specific questions:
1. May a lawyer share confidential information with an ALF supplier consistent with the lawyer’s duty of confidentiality under Model Rule 1.6 and the law of agency? This question encompasses both confidential information that is privileged and the broader category of information that includes privileged information plus information that is confidential but is not privileged.
a. With regard to privileged confidential information, can a lawyer be confident that sharing this information with an ALF supplier will not destroy the privilege? How certain should the lawyer be that sharing will not lose the privilege? What is the lawyer’s duty to counsel the client on the risk of loss of privilege?
b. May a lawyer confidently assume that privileged information shared with an ALF supplier will remain privileged or does the level of confidence the lawyer needs to have before sharing require a change in the common interest doctrine?
c. With regard to non-privileged confidential information, are there any precautions the lawyer must or should take before sharing this information with an ALF supplier beyond informed client consent?
d. Will sharing information protected by Rule 1.6 require a change in the language of Rule 1.6?
e. Is there any reason why ALF suppliers cannot intelligently assess whether to invest in a matter if it has no access to any confidential information in the lawyer’s possession? If it has no access to privileged confidential information?
f. What does the lawyer’s duty require him or her to do to insure that any such sharing protects such information against further dissemination to others?
g. …after an ALF supplier has made an investment in a matter, can the client withdraw the lawyer’s authority to share further confidential information with the ALF supplier? What should the lawyer tell the client about that?
2. May a lawyer who is representing a client on a matter also have an equity interest in the ALF supplier that is funding the client?
a. Does this situation present conflicts of interest for the lawyer that cannot be waived?
b. If not, does the client require independent legal advice whether to enter such a transaction and the terms? Does current Rule 1.8(a) now adequately protect the client or would an additional rule be needed?
c. Will the lawyer’s investment unacceptably undermine the lawyer’s ability to give disinterested advice on whether or not to settle (and for how much) and other management of the matter?
d. What is the effect of this situation on the answers to question 1? Is it possible to protect privileged or non-privileged confidential information, where advisable or where the client chooses, if the lawyer is also an investor in the ALF supplier?
e. Does this raise the prospect of a lawyer recovering so large a part of the client’s recovery — for example 75 percent of the recovery or more, whether the lawyer is working for a contingency fee or other fee — as to be unreasonable under Rule 1.5?
f. To the extent ALF is meant to allow the client to meet personal living expenses while the action is pending, does this violate Rule 1.8(e)?
g. Does this situation violate Rule 1.8(i) by giving the lawyer a “proprietary interest” in the client’s claim or the subject matter of the litigation?
h. Do any of these answers change when the lawyer in a firm that is representing a client does not have an interest in the ALF supplier but other firm lawyers do have individual investments in the ALF supplier that is making the investment? if so, can law firms avoid stricter controls by having different groups of lawyers invest in different ALF suppliers such that any matter can be handled by an individual lawyer who is not an investor in the ALF supplier funding his or her client’s matter?
3. Should a law firm be permitted to represent a client on a matter in which an ALF supplier has invested and concurrently represent the ALF supplier on an unrelated matter? Should a law firm be permitted to represent a client and also represent the ALF supplier on its investment in the same client’s matter? If the answer to either question is yes, under what conditions and what if any client consents are required?
4. What duties does a lawyer have to counsel the client when the client identifies an ALF supplier? What duties does a lawyer have to counsel a client when the lawyer suggests an ALF supplier, and in particular when the lawyer recommends a particular ALF supplier? Specifically, how if at all should a lawyer’s duties vary depending on whether the client is legally and financially sophisticated (a Fortune 500 company) or an individual with a personal injury claim who is inexperienced in dealing with lawyers and the legal system?
5. Will payment of a portion of a client’s recovery to an ALF supplier be consistent with Rule 5.4’s prohibition against sharing legal fees with a nonlawyer? Does the answer depend on how the arrangement is constructed?
6. What disclosures should a lawyer be required to make about his or her relationship to an ALF supplier in which the lawyer (and the lawyer’s associates) has no financial interest? For example, the ALF supplier may be the source of other work for the law firm. The ALF supplier may provide a benefit to the law firm for recommending it such as a finder’s fee. Should a lawyer be allowed to accept any such benefit?
7. What if any role should a lawyer allow an ALF supplier to have to participate in decisions during the conduct of the matter, including but not only in settlement decisions?
8. Traditionally, many law firms have advanced the cost of litigation and may do so with recoupment contingent on recovery. Rule 1.8(e)(1). Law firms may also be permitted to charge interest on these advances. An ALF supplier can substitute for this funding and thus free law firms from the risk of non-recovery. However, in the event of recovery, the client will be responsible not only for repayment of the advance (possibly plus interest), as now, but for the much larger profit to the ALF supplier. As such, in some circumstances, the rise of ALF suppliers may be disadvantageous to clients. Further, a client who shops around may find law firms that are willing to advance the costs of litigation and others that expect the client to go to an ALF supplier. What duty should a law firm that is unwilling to advance the cost of litigation have to inform the client that competing law firms may be willing to do so and to explain how that will benefit the client in the particular circumstances?
9. What if any protections should legislation that authorizes ALF suppliers require to avoid excessive fees to the ALF supplier and predatory practices?
10. Is ALF proper in financing class action law fees for plaintiffs? If so, what protections for the class should be established?
11. To what extent are the ethical issues presented by ALF similar to those arising in more traditional instances in which an entity other than the named party for both finances and bears some portion of the risk of the litigation (for example, those arising out of the “tripartite relationship” between defendant, defense counsel, and liability insurer)?
12. What lessons, if any, can be drawn from foreign experience (including without limitation that of the U.K. and Australia) with ALF?
13. With regard to enforcement:
a. Should a party in litigation be able to challenge the opposing party’s alternative litigation financing via a disqualification motion or other procedure?
b. Should a client be able to challenge its lawyer’s acceptance of alternative litigation financing via a challenge to the fees or otherwise?
DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.
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