What is Litigation Funding?

Third-party litigation funding occurs when a litigant receives funding in exchange for an interest in any potential recovery, according to the ABA. The litigant may receive funding from capital markets, insurance markets, private funds, or nonprofit organizations. Litigation funding can be a powerful tool because it carries the litigant or their attorney financially until the case is settled fairly. More than half of the $17 billion investment in litigation globally was deployed in the United States, according to Swiss Re Institute.

Consumer vs. Commercial Litigation Funding

Consumer and commercial litigation funding differ from each other. Consumer litigation funding is usually a non-recourse cash advance in a personal injury case. Consumers receive the money as a cash advance and pay it back from the settlement or judgment. If the consumer loses the case, they keep the cash advance. Consumer litigation funding is generally for smaller amounts. Consumers also have little experience with the legal system or negotiating contracts or settlements.

On the other hand, commercial litigation funding is typically a non-recourse investment in commercial lawsuits. According to a recent Bloomberg article, commercial litigation funding has grown during the pandemic and grows as the economy recovers. As law firm expenses rise, many boutique and mid-sized law firms may seek litigation funding. Cases related to supply chain disruption will particularly interest investors, the article suggests.

Concerns About Direct Funding for Law Firms

Agreements between law firms and third-party funders are legal, but the firms must consider specific concerns.

Fee Splitting

A New York State Bar rule outlaws non-recourse arrangements between lawyers and non-lawyers where the lawyer will pay back the money only if they receive legal fees from the lawsuit or when payment is based on a percentage of costs. However, other jurisdictions do not agree and feel fee-splitting arrangements are proper as long as the client controls the lawsuit and the lawyer remains independent.

Referral Fees

Attorneys should not pay referral fees to funders, nor should funders pay referral fees to attorneys, according to the ABA.

Client Confidentiality

Because funders are investing, they often want access to case information to evaluate potential. However, client information is confidential. The ABA says that “no attorney should disclose confidential client information to a litigation funder without client consent.” 

Conflict of Interest

If the lawyer or a single client begins experiencing difficulties with the funder on other issues, the potential for conflict of interest exists.

Class Action Lawsuits

In class action cases, potential funders determine to invest based upon assessing the lead lawyer’s ability to move the case forward. When the court chooses a lead lawyer, aspirants may want to disclose the availability of funding because it assures adequate financial resources to complete the case. In certain types of class action suits, such as securities or consumer class actions, a sophisticated lawyer will work with a funder. In this situation, many localities require that the parties disclose the arrangement.

Ethical Considerations of Litigation Funding

Third-party litigation funding also brings with it ethical considerations. Because funders are investing, they want to maximize the return. Sometimes, the claim is made that this potentially could lead to the funders becoming more involved in decisions made during the litigation process and could pose an ethics concern if not appropriately managed. It also could potentially affect how a lawyer litigates a claim.

Professional Independence

ABA ethics rules require that attorneys maintain professional independence throughout the process, making decisions based upon sound case management and client needs.

Fee Sharing

The ABA also counsels against situations where the funder shares the attorney’s fees, fearing these also will affect how the attorneys handle the litigation.

Interfering with Professional Judgment

The ABA also says that the lawyer must not allow the funder to sit in on settlement discussions or otherwise interfere with their professional judgments.

Client Confidentiality

Attorneys also should ensure they don’t disclose client information to the funder without client permission, the ABA says.

Best Practices When Involving Litigation Funding in Cases

Despite the potential challenges, litigation funding can have positive implications when attorneys follow ABA best practices.

Review our guide to the best litigation funders here.

Client Control

The attorney’s priority is always the client. If the attorney or the client is using third-party funding, the attorney should make the client aware of the potential risks and ensure the client controls the case.

Court Disclosure

The lawyer should disclose the terms and details of any litigation finance.

Funding Agreement

As with any legal document, a litigation funding agreement should include clear, transparent writing and address termination or withdrawal and day-to-day case management and control issues. The contract should always leave control in the hands of the client.

Maintain Professional Responsibility

The attorney must ensure that they cross no ethical lines.

Litigation Funding Considerations for Class Action Lawsuits

As third-party funding is used more often, the size of awards in US cases is also rising. According to the Swiss Re Institute, the median award rose 26 percent for general liability cases between 2010 and 2019. When litigation funding is used for class action cases, lawyers should take extra care to ensure the funder does not influence the case. They also should assume funding arrangements will be disclosed during the case.

Reach Out for Litigation Help

If your law firm is litigating a mass tort or personal injury case, reach out to Case Works for case management help. We can provide the additional support you need without hiring extra staff. Contact us today to learn more about our services and solutions.

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