For more than two decades, using other people’s money to litigate—called litigation funding or litigation finance—has been a growing part of the landscape. It’s one of several economic forces or trends that have reshaped the delivery of legal services in the United States.
Litigation funding comes in several forms.
First, this world is divided primarily into two categories—funding provided to individual consumers, usually for personal injury claims, and funding provided to businesses and businesspeople who are claimants in commercial litigation. The litigation funding business now appears to involve more than $13 billion, with most of those funds invested on the commercial side.
There is overlap: funding of lawyer marketing for mass torts, while involving consumer claims, is really more like commercial funding, and funding of an individual patent holder’s infringement claim has attributes of both consumer and commercial funding but is more commercial in nature.
Second, on each side of the market, there is funding that is provided directly to claimants, and funding provided to lawyers and law firms.
Each of these various market sectors involves real ethics issues for lawyers whose clients or firms are being funded.
Last year, the venerable Association of the Bar of the City of New York’s ethics committee issued an opinion with the most up-to-date guidance for lawyers, focused mostly on client funding. (Formal Opinion 2024-2: Ethical Issues Arising from Advice to Clients on Client-Funder Litigation Funding Agreements (June 2024).) It offers a great summary of the issues and a great resource for a lawyer whose client is thinking about, soliciting or has obtained funding. I recommend it.
Having represented many law firms and clients seeking funding, as well as funders, for over 20 years, I’ve developed a mental checklist of these issues. The New York opinion covers many of these, but this new guidance leads me to believe it’s time to share the items I worry about in my practice.
The first issue for any lawyer representing a funded client is simple: should they include in the scope of their representation advice to the client about funding.
There are good reasons for and against, but the most important thing is that the lawyer consider those reasons and reach agreement with the client on whether the lawyer will advise on them. And do, please, put this in writing.
Arguing for giving such advice is the lawyer’s likely deep knowledge of the claim and the client. Arguing against is the fact that the trial lawyer is generally not a transactional lawyer, may not know the funding market well, may not be prepared to advise on how good the terms of the proposed deal are and may even have a conflict of interest, since they often have an interest in the outcome by virtue of a contingent fee agreement.
As to consumer litigation funding, almost two dozen states have some form of statutory or other regulation of litigation funding. They are all intended as consumer-protection measures and regulate subjects such as rates, disclosure to funded persons, and other terms, and they vary a great deal among jurisdictions. Any lawyer advising their client will need to know the applicable ones well.
Virtually none of this regulation touches commercial or lawyer and law firm funding. But other commercial law could.
Increasingly, states and individual courts have imposed disclosure requirements on parties using litigation funding. Many of these provisions have been adopted at the behest of the U.S. Chamber of Commerce, and the Chamber continued to push for federal legislation and a uniform federal courts disclosure rule. Any lawyer representing a client using funding will want to be sure they understand whether such rules apply and their reach.
In all litigation funding, a lawyer needs to be very sensitive to the possibility of conflicts of interest. The new New York opinion offers solid advice on these issues.
For example, generally, the lawyer cannot have an interest in the funder and should not represent the funder, certainly not in negotiations with the lawyer’s client.
But here’s even more important advice: any lawyer whose client is using funding needs to fully understand the business terms of the funding deal, before or even after it has been signed, to assure herself that the interests of the funder, the funded party and the lawyer are aligned, to the greatest extent possible. For example, all three need “skin in the game.” And if any non-monetary remedies (e.g., injunctive relief) are sought, real discussion may be needed to align interests.
An important consideration for any lawyer or law firm funding is the prohibition on fee-sharing with nonlawyers—it applies to funders. (Yes, regular readers remember that Arizona is the exception.) All funders should know this prohibition. If yours doesn't, consider another funder.
Thus, one focus must be on whether the payment formula for the funder’s fee violates this prohibition. No percentages of the attorney’s fees, for example.
Perhaps the most important concern for any lawyer using funding, or whose client is using funding, is appropriately protecting client confidential information.
Funders have a legitimate interest in obtaining some information about funded claims.
With client consent, lawyers are permitted to share some otherwise confidential information with funders, certainly where it is in the client’s interest and where the client has agreed to this sharing. That information should be limited to publicly available information or work product–protected information but should not include information protected only by the attorney-client privilege. Lawyers have an obligation to get their clients’ consent to these disclosures, whether in their engagement agreements or later.
To protect any information shared, a key element of any funding agreement is a confidentiality commitment from the funder to the funded party. Often, these confidentiality obligations begin in a nondisclosure agreement (NDA) that predates the signing of the funding agreement.
Any lawyer representing a funded client needs to know how their client’s funding agreement treats confidential information. They also should carefully review and offer input on those terms before signed, if possible.
If you have no clue what champerty and maintenance are, join the vast majority of lawyers.
These ancient common law doctrines limit the ability of nonparties to assist in prosecuting or defending a lawsuit. The law on these subjects is a patchwork—some states have case law; some have statutes; some never adopted these doctrines.
The good news is that, generally, the litigation funding market has adopted terms and structures that avoid issues of champerty and maintenance, but they are issues any lawyer representing a client with funding should consider.
Which brings us to funding agreement terms that affect client decision making, including possible control of settlement.
Generally, funding agreements ought to expressly disclaim any right or authority to make any decisions concerning the handling of the litigation or settlement and affirming that the party has the sole such right. The ethics rules demand that lawyers recognize and honor the client’s autonomy in decision making.
In part to avoid allegations of champerty, almost all funders include such provisions as a matter of course.
In the interest of full disclosure, there is some thinking that some parties are allowed under the law to cede control of their claims to a funder in some jurisdictions under some circumstances. My advice: don't try this at home without thorough research and do insist that any funder who asks for control to justify it to the funded party’s lawyer.
Armed with this checklist, the New York opinion, and good research on local law, a lawyer should be able to address litigation funding issues for their clients and their firm.
