In February 2020, the New York City Bar Association’s specially assembled litigation funding working group dismissed some of the leading arguments against the litigation funding industry in the US.
In 2018, the Professional Ethics Committee of the New York City Bar Association issued “Formal Ethics Opinion 2018-5: Litigation Funders’ Contingent Interest in Legal Fees” (the “Opinion”), which set forth a cautionary interpretation of ethical rules applicable to litigation funding in the US. The Opinion advised that litigation funding transactions between lawyers and funders, at least as they have typically been structured, have breached Rule 5.4 of the New York Rules of Professional Conduct, which prohibits fee sharing between lawyers and non-lawyers. The Opinion limited itself to a technical interpretation of the correct application of the rule. It explicitly declined to examine whether Rule 5.4’s effective prohibition on non-recourse funding in the litigation funding context went too far in promoting Rule 5.4’s intended purpose, i.e. to protect attorney independence.
Not surprisingly, the Opinion shook up the litigation funding industry. Law firms had exhibited a growing tendency to seek the non-recourse capital from litigation funders in exchange for a share of their contingent interest in pending litigation, as opposed to traditional recourse capital from banks.
Notably, while the New York City Bar Association’s opinions have no binding authority, they are often viewed as persuasive by judges and other legal authorities and are thus given serious consideration by members of the broader legal community. From the outset, the Opinion proved to be controversial. For starters, the Opinion was criticised for not accounting for the commercial and economic reality of law firms and claimants. Experts characterized the Opinion as an extremely narrow interpretation of ethical rules.
Following heavy scrutiny of the Opinion, the New York City Bar Association established an ad hoc working group on litigation funding that included industry specialists, funders, leading academics in ethics and law, and a former federal judge, amongst others. The working group was tasked with exploring potential revisions to the general ethics rules in connection with litigation funding. In February 2020, the working group issued a report to the president of the New York City Bar (the “Report”) containing two main recommendations:
- Legal ethics rules should be amended to explicitly permit funding agreements between lawyers and funders: “Lawyers and the clients they serve will benefit if lawyers have less restricted access to funding”
- Rejection of mandatory disclosure of commercial litigation funding agreements in court litigation.
In other words, the first conclusion recognizes the positive influence of litigation funding in the legal system and supports one of our main convictions: less restrictions to funding benefit clients, lawyers and ultimately facilitate access to justice.
The special working group concluded its recommendation to amend Rule 5.4 by noting that many of the concerns referenced in the Opinion regarding the interaction between funders and law firms (e.g., threat to attorney independence) were already addressed by existing confidentiality and client interest rules.
The relevance of the Report for the litigation funding industry in the US cannot be overlooked. The Report signals the first time that a special task force has been mandated by a bar association to specifically review and consider the appropriateness of litigation funding.
It is encouraging that litigation financing is being taken seriously enough to merit this level of consideration. Even more encouraging for the industry is that the Report recommends amending the New York Rules of Professional Conduct to facilitate the offering of litigation funding. This is a strong and positive message that the litigation funding industry has an important role to play in the legal system. A player that is here to stay.
As part of our global funding approach, at Deminor, we regularly receive funding requests from claimants and law firms in the US. We are encouraged by these developments and believe that they will open the door to more partnership opportunities in the US with plaintiffs and specially law firms who now have more clarity on the ethical concerns of their relationship with funders.
We expect this tendency to continue to grow in the coming years as further light is shed on the industry and given the capital constraints that law firms and claimants may face given the current economic situation.
Written on May 14, 2020 by
Legal Counsel of Deminor Recovery Services.
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