The ABA’s Best Practices for Third-Party Litigation Funding come up short
Eight years ago, the ABA issued its Commission on Ethics 20/20 White Paper on Alternative Litigation Finance Informational Report to the House of Delegates (the “20/20 White Paper”). The 20/20 White Paper represented a culmination of a multi-year process that drew on extensive input from the litigation finance industry, academic ethicists who work closely with commercial litigation financiers, and other stakeholders. It provided helpful guidance on ethical issues that may arise for attorneys representing clients seeking litigation funding. As such, it was well-received and proved invaluable to counsel navigating a burgeoning industry.
The litigation finance industry has grown exponentially since 2012. In response, the ABA recently endeavored to supplement its 20/20 White Paper with its August 2020 Best Practices for Third-Party Litigation Funding (the “Best Practices”). The Best Practices document’s stated aim is to help lawyers negotiating and entering into funding arrangements to avoid ethical pitfalls and protect privileged and confidential client information. Despite these worthy objectives, the Best Practices document does not accurately reflect how commercial litigation funding works in a number of important respects, leaving the professionals who actually work in the commercial litigation finance area puzzled at its contents. The ABA does not appear to have engaged in the same level of meaningful consultation with commercial litigation funding industry leaders and other stakeholders as it did in preparing its 20/20 White Paper.
Much like the critical reaction to the New York City Bar Association’s (“NYCBA”) July 2018 Formal Opinion No. 2018-15 regarding fee splitting, the public criticism sparked by the Best Practices document regrettably provides more valuable guidance for practitioners than the report itself. We hope the ABA will consider re-engaging with industry leaders in any future endeavors relating to litigation finance. In the meantime, we offer observations about what the Best Practices document got right, and we endeavor to provide practical insights for attorneys seeking well-informed guidance on fulfilling their ethical duties when using commercial litigation finance.
Reliable, Though Basic, Guidance
The Best Practices document provides reliable guidance on certain basic points—e.g., the litigation funding agreement should be in writing, ensure the client retains control of the case, and address potential disagreements between the client and the funder on litigation and settlement strategy. Any responsible funder should follow these uncontroversial guidelines and any legal practitioner will recognize them as common sense. Omni Bridgeway’s written term sheets and funding agreements set out all material terms of the transaction clearly and in most cases, leave control over litigation strategy and settlement with the client and its attorneys. (One notable exception when such control would not be left with the client, for example, would be when a funder is purchasing a claim or judgment in its entirety. The circumstances of a claim or judgment purchase, however, were not raised or considered in the Best Practices document.)
The Best Practices document also appropriately advises attorneys to evaluate the transparency of a litigation funder. That includes considering whether the funder is audited by a respected firm and whether the funder is willing to provide complete and accurate information about its financial condition and ongoing budget updates during the litigation. As a publicly traded, Ernst & Young audited, and well-capitalized company, Omni Bridgeway welcomes this emphasis on funder transparency.
Areas that Regrettably Miss the Mark
The commercial litigation finance industry primarily is comprised of a finite group of large companies that prioritize ethics. That focus is critical for any benchmark player in a burgeoning industry, where sustainability is paramount. One would expect the authors of a report advising lawyers on navigating the complex issues that may arise in litigation funding would, in fact, consult with those commercial funders who address them the best. Unfortunately, Omni Bridgeway is aware of no such industry leaders contacted in advance of the drafting of the ABA’s Best Practices document. Below are a few of many examples where this lack of consultation detracts from the advice delivered in the Best Practices document.
First, the Best Practices document often conflates the disparate consumer and commercial litigation finance spaces with little regard for their critical differences. Consumer litigation finance entails providing modest cash payments, typically to personal-injury plaintiffs and other individuals with small legal claims. Consumer funders typically do not spend much time on the merits of the claims; the focus usually is on verifying the existence of the claim and sometimes, that the defendant has insurance. The funding agreements are typically a form and the terms are not subject to much negotiation (if any). Most notably, the average size of these consumer transactions is under $5,000.
By contrast, commercial dispute finance companies devote substantial time and resources diligencing potential investments, and the law firms and corporate claimants who receive commercial dispute funding are represented by sophisticated legal counsel. And in stark contrast to consumer litigation funding, the typical minimum size of commercial dispute financing transactions is $1,000,000. Most transactions by the leading funders far exceed that minimum, reaching well into the tens and in some cases, hundreds of millions of dollars. As one would expect for financial transactions of this size, these financing agreements are heavily negotiated by counsel.
Yet the Best Practices document too often fails to consider the different considerations that arise in each context. For example, the notion in the Best Practices’ class action discussion that any commercial litigation funder would place a premium on the lead class lawyer’s track record and ability to “move the case forward” over “a detailed assessment of the facts underlying the claim” is sorely misplaced. While the capability of the lawyer is certainly a factor in every investment, the merits of the funded claim—class action or otherwise—are a critical focus in the investment vetting process of any reputable commercial funder.
Second, the Best Practices document overstates the risk that courts will order disclosure of the client’s confidential information, attorney work product, or the funding agreement; frankly, the jurisprudence in this area is presented inaccurately. The blanket statement that “financing companies should not ask for any non-public documents, so that privilege is not an issue” and the advice for lawyers never to share attorney work product with a funder does a disservice to the ABA’s members and to their clients seeking funding. The ABA’s admonition that a practitioner should assume the inevitability of disclosure is similarly misplaced. These unnuanced guidelines simply do not reflect the current state of the law, which requires any party seeking disclosure of funding-related materials to make a particularized showing of relevance—a standard that is rarely met in this context. Nor do they reflect the fact that the overwhelming majority of courts have also shielded communications with litigation funders from disclosure based on the attorney work-product doctrine.
Of course, as in every legal context, there are a handful of outlier decisions that run counter to the great weight of authority or reflect exceptional circumstances. But analyzing the risk of disclosure falls squarely within the lawyers’ independent professional judgement, which he or she should impart to his or her client. A lawyer should always take great care to protect the claimant’s confidential information and should never disclose strictly attorney-client privileged communications to a third party. But a prophylactic ban on the free flow of any nonpublic information to a funder will likely result in a reputable funder declining the opportunity. This discouragement of the free flow of information when the jurisprudence counsels otherwise also imperils the industry objective of funding only meritorious cases after robust scrutiny.
Third, the Best Practices document proposes rather draconian restrictions on the questions any lawyer would reasonably be expected to answer with respect to the prospects of a case. To be clear, no reputable commercial litigation funder would condition its deployment of capital on the legal advice or opinions of the claimant’s counsel. But the ABA goes a step too far when it attempts to restrict the flow of even innocuous views by the lawyers, including their views on the strengths and weaknesses of cases. That is not legal advice to the funder; rather, it is basic information needed to assist the claimant in securing financing for its campaign. Any reputable commercial litigation funder will gladly disclaim in writing any reliance on the client’s lawyers’ legal opinions in making its investment decision.
Fourth, the Best Practices document suffers from a number of other defects that could have been avoided with the input of leading commercial litigation funders. For example, the ABA touches upon the issue of fee splitting with an emphasis on the much-criticized NYCBA’s Formal Opinion No. 2018-15. Yet it fails to mention the NYCBA Working Group on Litigation Funding’s February 2020 Report, which calls for overhauling the fee-splitting rules to reflect the reality of today’s legal landscape and recognizes that both lawyers and claimants will benefit if lawyers have greater access to funding. In addition, the ABA cites an Australian class action decision for the proposition that the funder’s return may be paid by the class. But it ignores that Australia is an opt-in class action regime, unlike in the U.S. Therefore, it is routine for a litigation funder in Australia—where lawyers are not permitted to enter into contingent fee arrangements—to collect from the class proceeds. Indeed, financed class actions are often the only way that large scale wrongs can be redressed in Australia. That is not the case in the U.S. opt-out system, however, where commercial litigation funding of class actions is less common. And when it exists, the funder’s returns typically will be satisfied solely by the lawyers’ contingency fees, if awarded by the court. The ABA also appears to discourage even a commercial litigation funder’s “reasonable and necessary” oversight of expenses as “problematic.” That is not how the industry works, as the funder typically monitors the ongoing spend to assist the claimant in keeping the lawyers on budget. Most funded claimants view this as a significant “value add” in working with a litigation funder.
These and other deficiencies only serve to perpetuate misconceptions about the commercial litigation funding industry, not illuminate it.
A Call for Collaboration
The ABA’s recent Best Practices document unfortunately falls short of the high bar set by the ABA’s 20/20 White Paper. Omni Bridgeway is an enterprise comprised of experienced litigators and members of the ABA. Thus, we would welcome an opportunity to engage with the ABA and share our perspective on time-tested best practices for commercial litigation funders and the lawyers and claimants who utilize it. It is in the best interests of both practitioners and claimants for the ABA’s guidance to present an authentic view of how commercial litigation funding works and the best practices required to meet a high ethical standard.