Litigation finance aims to promote equity in our judicial system and provide access to the courts, regardless of any financial disparity between litigants. Attorneys and clients in the U.S. are turning more and more to funding to obtain the financial resources to bring meritorious claims to trial, which is especially important in the current economic climate.
On August 3, 2020 for the first time since 2012, the ABA published Best Practices for Third-Party Litigation Funding to assist attorneys entering into a litigation funding arrangement. The guidelines serve an important purpose: to educate the legal community about the use of funding, and to protect attorneys and clients’ independent judgment and control of their claims. But they oversimplify the issues and often mislead as to the risks involved. Without clarification and input from the legal finance community, the result may be to prevent access to the courts by frustrating the ability of clients to obtain funding.
Below are a few instances in which the guidelines overstate the risks or promote restrictive practices that undermine the underwriting process and thus, the use of funding itself.
Work Product Protection
The ABA warns litigants that they should “assume some level of disclosure may be required at some point” and that there is a “likelihood” that deal documents will be “examined by readers whose interests are not fully congruent with those of the lawyer and client.” Its warnings about disclosure, based in part on the potential waiver of privilege, are ominous. Regarding privilege, they disregard the body of case law that has developed on the issue of work product waiver. As a result, the ABA’s recommendations may serve to frustrate necessary information sharing between clients and funders.
To prevent privilege waiver, the ABA advises attorneys to share only public information with funders, not opinions about the underlying claims of a case. Attorneys are cautioned not to answer questions about potential case weaknesses of either side to the dispute, their impressions of a court’s rulings, or whether there is relevant information that has not been shared with the funder. Instead, the guidelines imply that attorneys and their clients should limit exposure by submitting a “bare-bones” application that restricts the information a funder can review.
But if clients and funders cannot discuss substantive information about a case, funders are left unable to properly assess a case’s merits and weaknesses, and clients may be foreclosed from receiving funding altogether. This is unnecessary. The very strong weight of authority that has developed in federal and state jurisdictions allows an attorney to share work product material with a funder without that disclosure resulting in disclosure to the adversary, so long as the necessary confidentiality protections, such as a robust non-disclosure agreement, are in place.
An NDA will protect the communications and documents being exchanged in a confidential manner during the evaluation and diligence phase. While attorneys should avoid sharing attorney client communications with a funder, this need not extend to the sharing of work product information to the extent necessary for a client to obtain funding.
No Reliance Clause
The ABA recommends a broad “no reliance” clause in litigation investment agreements, in which funders disclaim reliance on any “advice, opinions, or representations” made by the client or its counsel. It also recommends that funders not seek an attorney’s impressions as the case progresses and the funder seeks to monitor its progress. The ABA asserts that this guideline is intended to guard against fraud claims and prevent privilege waiver. But the effect would be to restrict a funder’s ability to make an informed investment decision, which might limit the ability of claimholders to obtain funding at all. And as just noted, the concern about waiver misunderstands the case law.
A funding agreement should clarify that trial counsel and the funder are not entering into an attorney-client relationship and that the funder is not seeking counsel’s legal advice. But given the nonrecourse nature of funding, obtaining material information related to claims is critical to a funder’s ability to assess a case. Without it, a funder cannot make a meaningful investment decision. Moreover, a funder must have access to information about material developments throughout the life of a case, not just at the deal stage. With protections such as an NDA in place, such information sharing is appropriate and necessary to protect the parties to a funding transaction.
For context, consider Preferred Capital Funding of Nevada, LLC v. Howard, et. al., No. 19 C 6245, 2020 WL 127952, at *1 (N.D. Ill. Jan. 10, 2020), recently filed in the Northern District of Illinois. The case involves a dispute about a significant misrepresentation by trial counsel to a litigation funder. Specifically, while seeking funding for claims by NFL players for damages related to potential brain injuries, counsel made false statements about the medical diagnoses of the players and the qualifications of the physicians evaluating them. Preferred Capital invested in the claims based on these misrepresentations and counsel then convinced the players to put the money into a fund which it used for its own personal purposes. Ultimately, the funder lost its investment, as the players did not have injuries that qualified them for recovery. In instances such as this, the no reliance clause proposed by the ABA would §hurt claimholders, by significantly impairing the funder’s ability to recover, and thus making it less likely that the funder would assist the claimholders bring their case.
The guidance regarding fee sharing also presents problems. Here, the ABA references a controversial 2018 New York City Bar Association advisory opinion—yet the ABA entirely omits mention of a subsequent blue ribbon working group of that very same Bar Association that questions and casts strong doubt on the vitality of that advisory opinion. The six-page 2018 advisory opinion that the ABA mentions expressed the view that certain litigation funding transactions between lawyers and funders violate Rule 5.4 of the New York Rules of Professional Conduct, which prohibits fee-sharing between lawyers and non-lawyers. But the 97-page report by the working group that the ABA did not discuss—which was comprised of 24 leading academics, ethicists, lawyers, dispute-resolution specialists, and litigation funders and a federal judge—concluded that funding arrangements between funders and law firms benefit clients, and they recommended that the fee sharing rule should be amended to expressly permit such arrangements.
Furthermore, in its discussion of fee sharing the ABA also fails to mention that at the time of the 2018 opinion, the New York courts had already recognized and enforced the kinds of funding agreements the 2018 opinion condemned. By failing to mention the working group’s conclusions and the body of New York legal precedent that runs counter to the 2018 opinion, the ABA makes it seem as if fee sharing remains an unsettled topic in the world of litigation finance. This is not the case.
As the use of litigation finance becomes more prevalent, attorneys and their clients need clear guidance to ensure access to funding through transparent transactions that maintain client control over the litigation and protect the client’s rights. But this can be accomplished by reference to caselaw and ethics rules already in place, as well as clear written agreements delineating the parameters of the transaction and the intent not to waive privilege. There is no need to adopt the restrictive practices recommended by the ABA, which as written could have a chilling effect on the use of funding and the access to justice that it promotes.
Wendie Childress is Portfolio Counsel at Validity Finance in Houston. Amber Stewart is a rising 2L law student at The University of Chicago Law School and was the 2020 Equal Access Fellow at Validity Finance.
 See generally Continental Circuits LLC v. Intel Corp., 435 F. Supp. 3d 1014 (D. Ariz. 2020); Odyssey Wireless, Inc. v. Samsung Elecs. Co., Ltd, No. 315CV01735HRBB, 2016 WL 7665898 (S.D. Cal. Sept. 20, 2016); US ex rel Fisher v. Homeward Residential, Inc, No. 4:12-CV-461, 2016 WL 1031154 (E.D. TX. Mar. 15, 2016); US v. Ocwen Loan Servicing, LLC, No. 4:12-CV-543, 2016 WL 1031157 (E.D. TX. Mar. 15, 2016); Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711 (N.D.Ill. 2014); Mondis Tech., Ltd. v. LG Electronics, Inc., Nos. 2:07–CV–565–TJW–CE, 2:08–CV–478–TJW, 2011 WL 1714304 (E.D. TX. May 4, 2011).