On November 13, 2020, Frankfurt Kurnit held its Third Annual Ethics Summit. The Summit consisted of three hour-long panels, earning the attendees three ethics CLE credits in New York and California. Below is a summary of the Litigation Funding panel. Click the following links for summaries of the Aggressive Litigation and Settlement Tactics paneland Ethics Game Show panel.

If you would like to receive an invitation to next year’s Ethics Summit, please send an email to etintle@fkks.com to be placed on our Ethics and CLE distribution lists.

Dollars and Change:  The Ethics of Litigation Funding

The second panel of the day focused on the ethics of litigation funding, with a special focus on recent decisions, ethics opinions, and rule amendments on this subject. The panel featured Prof. Anthony Sebok of Benjamin N. Cardozo School of Law and Ronald C. Minkoff, Tyler Maulsby, and Viviane Scott of Frankfurt Kurnit.

Here’s a brief summary of some of the legal and ethical points the panel discussed:

Introduction to litigation financing..

Ron Minkoff began the program by focusing on Judge Denise Cote’s order in Hyland, et al. v. Navient Corp., et al., Civ. No. 18-cv-9031-DLC-BCM (S.D.N.Y. Oct. 9, 2020), where she refused to grant attorneys’ fees to the plaintiffs because some of those fees had already been paid by a third party, the American Federation of Teachers (“AFT”). Though pointing out that this may have resulted as much from plaintiffs’ failure to disclose the AFT’s involvement as from any hostility to third-party funding, it indicates that courts are still suspicious of third-party involvement in funding litigation—something which has been true since the Middle Ages and the development of the law of champerty. Litigation financing has real advantages in allowing access to the courts, but risks and disadvantages as well, such as third-party control of litigation and possible intrusion into the attorney-client privilege. The Panel would explore those issues as they relate to the various types of litigation funding.

Tyler Maulsby described the various types of litigation financing: client side vs. lawyer side; personal injury vs. commercial large case funding; recourse vs. non-recourse, etc.

An ongoing debate within the New York City Bar Association regarding litigation funding.
When the Professional Ethics Committee of the New York City Bar Association evaluated the ethical propriety of litigation funding in a formal opinion in 2018, it stirred controversy by concluding that such funding is a clear violation of Rule 5.4(a)’s  prohibition on sharing of legal fees with a non-lawyer. Viviane Scott discussed one key concern leading the Committee to its conclusion in the opinion: that the specter of repayment in a litigation funding arrangement affects a lawyer’s independent judgment, regardless of whether such funding is secured by a fee in one or more lawsuits or whether repayment depends on the amount of a lawyers’ fees. According to Scott, this concern has been hotly debated, with detractors asserting that the opinion failed to recognize that litigation funding arrangements are tantamount to bank loans, and that banks could hold equally substantial sway over a lawyer’s independent judgment in various contexts. Those same detractors might be pleased to find that the opinion has had little effect on case law regarding litigation funding arrangements for now.  

Yet the debate continues as to how litigation funding comes in line with the Rules of Professional Conduct. As Prof. Anthony Sebok discussed, the City Bar has recently formed a working group to propose potential amendments to Rule 5.4(a) that would carve out exceptions for most—or perhaps only some—litigation funding arrangements.

How much should a lawyer disclose to a litigation funder?
An additional, ever-growing concern in litigation funding arrangements is how much a lawyer may tell a litigation funder. Maulsby discussed the rules regarding disclosures in litigation funding relationships, which become increasingly difficult to follow depending on the needs of the litigation funder and the factual dynamics of the case. Maulsby pointed out that cost-conscious litigation funders—particularly in the context of funding a single case—may have the legitimate desire to dig into the merits of the litigation. This potentially raises confidentiality issues and concerns about undue pressure and influence by litigation funders on an attorney’s independent judgment.  Maulsby also cautioned practitioners to “stay aware of privilege concerns,” especially where funders request to receive regular updates on the litigation.  

The role of litigation funders in increasing access to legal services, with help by certain states in amending professional ethics rules.
One undeniable benefit to litigation funding arrangements is the potential to increase the access to legal services for parties with limited resources. Prof. Sebok discussed those benefits, and some states’ recent moves to embrace those benefits by amending their rules of professional conduct. Arizona, for example, has recently removed its version of Rule 5.4 and replaced it with a mechanism for the Arizona Supreme Court to monitor alternative business structures. This has left a void in regulating fee-sharing with non-lawyers, such that fee-sharing can no longer be monitored or prohibited in a state like Arizona.  With California and Utah on a similar path to dismantle their versions of Rule 5.4, Prof. Sebok discussed whether the rule should be broken up to account for various types of litigation funding arrangements and alternative business structures. For now, state mechanisms for monitoring alternative business structures will, according to Prof. Sebok, yield the benefit of declaring what types of litigation funding and fee-sharing arrangements are prudent.