The Innovation of Litigation.

No money? No problem! Questions every attorney should consider before entering into a litigation funding agreement (Part 2)

Part 2 of this litigation funding series answers potential questions that an attorney would (or should!) ask before entering into a financing contract with a third party. This article offers a counterbalance to what may seem an easy answer to all of an underfunded plaintiff’s worries by raising several issues regarding grey areas, unanswered questions, and ethical pitfalls that may lay in wait for an unsuspecting attorney. For part 1 of this series, click here.

Cost could no longer be a barrier to a plaintiff’s day in court. The ABA reports that litigation funding is on the upswing, especially in big civil cases. Third parties can now contribute millions of dollars for legal fees and other expenses in anticipation of a portion of large recoveries. Even though litigation funding is gaining traction in many parts of the U.S., most attorneys still hesitate to enter into these agreements. Only time will truly tell whether litigation funding is all that it promises, but in the meantime, here are 3 questions that every attorney should ask before entering into a litigation funding agreement.

What state AM I in?

Although litigation funding is increasing, its growth has not been proportional among the states. State regulations, legislative restrictions, and decisions by state supreme courts have resulted in a wide range of approaches to funding by third parties. One agreement may be upheld as valid in one state yet considered illegal in another. This discrepancy requires attorneys to perform in-depth research into the case law, regulations, and the state bar’s published ethical opinions before risking an agreement, especially if managing large cases that involve several different jurisdictions.

For attorneys practicing in Texas, there may be good news for your clients! The Lone Star State recognizes and provides few limitations on litigation funding. As Cornell Law Professor W. Bradley Wendel recently noted in The Advocate, a publication of the Texas Bar Association Litigation Section, the Texas Disciplinary Rules of Professional Conduct prohibit attorneys from obtaining a proprietary interest in the subject of litigation under Rule 1.08(h) but place no such restriction on third parties. Subsection (e) even allows for attorneys to receive compensation from third parties to the claim with the client’s informed consent.

Can A third-party funder select representative counsel?

From an ethical perspective, clients possess the right to select their own counsel. Practically, however, this does not mean that a client could not be persuaded toward particular representation if the person with the purse strings were to make a recommendation or have a strong opinion. This would still be within the limits of many states’ codes of ethics. For example, under the comment section of Rule 7.06 of the Texas Disciplinary Rules of Professional Conduct, the committee notes that while it is best practice for the client to select a party based on recommendations from disinterested parties, many clients select representation based on referrals from other attorneys or business associates.

Are communications to third-party funders PRIVILEGED?

So far there have been no definitive answers from either Texas courts or the legislature regarding this question, but many legal commentators strongly argue that parties will not waive attorney-client privilege by communicating with the third-party investors to the suits. Keeping privileged status will be critical for the existence of the litigation funding industry, as investors cannot accurately access the strength of the case without having access to its details. The Litigation Finance Journal theorizes that attorney-client privilege will remain under the Common Interest Doctrine since both the litigant and the litigation funder will have a potential or existing common interest in the legal matter. This theory is partly based on language in Mondis Technology, Ltd. v. L.G. Electronics, where the federal district court ruled that privilege was waived because the third party had differing economic interests from the party. This could be a warning that before the litigation funder actually invests in the suit, communication is not privileged. However, after the financial commitment is made to the outcome of the case, the interests between the party and financier are aligned and privilege is less likely to be waived.

In this situation, the work-product privilege provides greater assurances of protection because it protects the legal strategies and mental processes of an attorney created in the anticipation of litigation. There is a trend of courts upholding the work-product privilege under the policy that it would be unjust to force a potential plaintiff to choose between necessary funds and protection of the attorney’s trial strategy since details of the case are necessary to attract potential investors. One possible solution is to have all parties sign a non-disclosure agreement.

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