Third-party litigation funding has increasingly become a scrutinized topic within the legal community over the last several years as the industry continues to grow exponentially. As the American Bar Association (“ABA”) prepares to conclude its Annual Meeting, held virtually this year in light of the COVID-19 pandemic, it will review and ultimately make recommendations for third-party litigation funding Best Practices for the first time.
The ABA House of Delegates is made up of 597 members from various bar associations at the state and local levels and is the body responsible for directing new policy that arises from the ABA. In its meetings on August 3 - 4, Delegates are set to review, among other things, proposed Resolution 111A which will set forth Best Practices for third-party litigation funding for use in the legal community. These practices should not be taken as rules governing the use of litigation finance, rather as issues for attorneys who seek to engage in a funding agreement to be consider before entering into a litigation funding agreement. Jurisdictional standards and state codes of ethics must be consulted for further clarification on the issue.
The proposal outlines Best Practices that are aimed at assisting lawyers seeking to apply for litigation financing whether “to provide legal fees for sophisticated, cross-border arbitration and litigation, to assist an individual plaintiff or claimant in a personal injury lawsuit or worker’s compensation claim, or any other litigation or arbitration context.”
Third-party funding is only one of many financing solutions available in the market. Other options attorneys or litigants may consider are:
- Traditional loans
- Corporate financing
- Equity-based financing
- Attorneys acting as funders (i.e. alternative fee arrangements or pro bono work)
As the litigation funding industry continues to expand, however, there exists a greater variety of new and innovative financing products for attorneys to choose from.
What is Not Addressed?
The ABA Best Practices are not meant to directly address:
- If litigation funding should be permitted, and in what case;
- Disclosure issues, other than to state that an attorney should reasonably expect some level of disclosure will be required, but does not opine on to what extent; and
- Any underwriting standards of litigation funders
Though there are a vast number of nuanced options in terms of financing, some of the ABA Best Practices are constructed to apply, generally, to all third-party funding situations. The following is an overview and is not meant to be an exhaustive list:
- The agreement between the funder and attorney (or law firm) should be obtained in writing. The written contract should outline:
- The non-recourse nature of the funding;
- Repayment terms and who will be the party responsible for repayment;
- Where the repayment is to be sourced from;
- Timeframe for repayment; and
- Termination or withdrawal options for each party.
The ABA stresses that as the discoverability of litigation funding arrangements is still an unsettled matter in many jurisdictions, some level of documentation may be discoverable by opposing counsel.
- In obtaining financing, the lawyer, or the litigant themselves, must ensure that the client is always in complete control of the litigation
- The ABA recommends that attorneys entering into litigation funding agreements be aware of what specific case information is required to be submitted to the third-party lender. Attorneys are cautioned from making definitive statements regarding certain case-related reports or from making predictions about the expected outcome of a case.
Other considerations the Best Practices call attention to include:
- Level of transparency required by both parties
It is important for the agreement to clearly set forth expectations as to information provided by the funder. This may include:
- whether the funder is audited at a given frequency;
- what reporting will be provided by the funder; and
- a statement of agreement to provide accurate and non-misleading information.
- Professional responsibility
An attorney is solely responsible to follow the rules of professional responsibility and code of ethics specific to his or her own jurisdiction. Notably, he or she should maintain independent professional judgement at all times and avoid any conflicts of interest that may arise due to the financing agreement. In addition, the attorney is tasked with avoiding any interference that may occur by:
- Client referrals to funders;
- Influencing settlement agreements;
- Fee sharing; and
- Third party payment of fees.
- Considerations for special types of funding
The ABA Best Practices also outline guidance for several different unique funding situations as outlined in Resolution 111A. An attorney who is actively seeking financing to fill a particular nuanced need should reference this section of the Best Practices to help ensure he or she is making the best decision under the specific circumstances surrounding the funding.
The ABA Best Practices compiled for review by the House of Delegates were intended to help attorneys navigate the ever-changing area of third-party litigation finance. By identifying potential problem areas from the start and taking steps to mitigate any risk to the attorney, and especially to his or her clients, third-party litigation financing can be effectively obtained and managed through the use of the Best Practices. The upcoming conclusion to the ABA Annual Meeting will be the forum at which official adoption of these new guidelines will be decided.