Funding Insights — Article
Five Common Misconceptions About Litigation Funding
Over the past decade, litigation funding has become an increasingly mainstream resource for attorneys and clients who have meritorious legal claims but lack the capital to adequately pursue them.
Case in point: a September 2021 poll of legal professionals and third-party funders showed that 88% of responding lawyers believe litigation finance enables better access to justice. University of Iowa College of Law professor Maya Steinitz, a legal scholar recognized as a leading authority on the industry, has even called the emergence of litigation funding “likely the most important development in civil justice of our time.”
Thus, a basic working knowledge of this growing field can serve to benefit litigators of all backgrounds as well as the various clients they represent.
Litigation funding is generally defined as a “non-recourse civil litigation advance contract” making funds available to litigants or their attorneys in the course of litigation. See, e.g., Ohio Rev. Code § 1349.55. The ABA has authored one paper and one resolution specifically addressing the advantages and challenges of litigation funding in the modern legal field. Informational Report to the House of Delegates (ABA Commission on Ethics 20/20) (Feb. 2012); Resolution 111A, ABA House of Delegates (Aug. 3-4, 2020).
These documents, in conjunction with a growing body of state bar ethics opinions, make it clear that litigation funding is becoming more entrenched in the legal sector and that it is here to stay. See Litigation Funding Ethics: An Attorney’s Primer, LexShares. Its treatment by courts is also becoming more consistent.
Despite growing interest in litigation funding, however, there are common misconceptions about the advantages and impact of obtaining such funding for litigants and their attorneys. These misreadings are explored in greater detail below.
1. If I, as an attorney, accept money from a litigation funding firm, I have an absolute obligation to repay the funder.
False: most commercial litigation funding arrangements are completely non-recourse and are not structured like traditional loans.
When a litigation funder provides funding for a case, they are providing capital up front in exchange for a stake in the outcome of the litigation. Further, that transaction is generally non-recourse, meaning that the only asset securing the investment is the litigation itself. These arrangements often function similar to a contingent fee, wherein the funding recipient (e.g., the attorney or plaintiff) is not obligated to repay the funder if no proceeds are recovered from the lawsuit. If the case reaches a positive outcome, then the funder is typically owed a portion of the settlement or any damages awarded.
2. Litigation funding can’t help my clients because they need capital for business operations, not to cover attorney’s fees.
False: litigation funding can serve a variety of financing needs.
While litigation funding often covers attorney’s fees, it can also be used to provide operating capital for business parties during litigation and to cover litigation costs beyond attorney’s fees. When seeking a third-party funding partner, be sure to identify how outside capital could best support your and your client’s goals during litigation.
3. Accepting money from a litigation funder will add a decision-maker to the litigation.
False: litigation funding companies should not attempt to control the litigation.
A litigation funder is a partner in litigation, but for practical and ethical reasons, the vast majority of funders prefer to remain passive partners with no direct involvement in the underlying lawsuit. While most funders will periodically communicate with counsel regarding case progress once an investment has been made, litigation strategy should remain within the purview of the attorney, and settlement decisions remain solely in the client’s hands.
In other words, partnering with a litigation funding firm should not interfere with the relationship between lawyers and clients. This approach is consistent with the ABA House of Delegates’ Resolution 111A, which provides that “funding agreements should be drafted to assure that: (a) the client retains control of the litigation (including, for example, decisions as to whether to settle or discontinue the litigation as opposed to proceeding to trial or verdict); and (b) that the lawyer retains independent professional judgment.” ABA Res. 111A (2020) at 11-12.
4. Litigation funding documents are going to be discoverable in court, adding complications to my case.
False: numerous courts have held that litigation funding documents are generally not discoverable.
In fact, an in-depth review of current case law found that U.S. courts did not allow for significant discovery in 43 of 52 cases analyzed. Several decisions throughout the country have either held that the existence of a litigation funding agreement is irrelevant to the claims and defenses between parties (and therefore not discoverable), or that funding-related documents and communications are protected under the work product doctrine. While court treatment of litigation funding differs from state to state, assuming that litigation funding documents are always discoverable would be in error.
5. Engaging a litigation funder waives attorney-client privilege.
Usually not: While litigation funders may review confidential case materials, they should not need to review attorney-client communications to accurately assess most matters.
Furthermore, the attorney is allowed to disclose confidential information to third parties if the client gives “informed consent.” The client is free to tell the funder anything other than what the client and the attorney said to each other, which could waive the privilege. As a result, the client can discuss a great deal about the case, so long as they do not disclose privileged discussions they had with their lawyers.
For instance, the Northern District of Illinois has held as follows:
When counsel submits materials to secure funding for a litigation matter, that production does not substantially increase the chance that opposing counsel would obtain the information. Litigation funding communications are designed to be confidential. Otherwise, no counsel would ever memorialize on paper the relative merits and the chances of success of a piece of litigation and apply for litigation funding. Similarly, if litigation funding companies did not maintain confidentiality of documents provided by attorneys about their evaluation of the case, these companies would run out of clients fairly quickly. The Court holds that these materials are protected by the attorney work product doctrine.
Fulton v. Foley, No. 17-CV-8696, at *4 (N.D. Ill. Dec. 5, 2019) (citing Miller UK Ltd. v. Caterpillar, Inc., 17 F.Supp.3d 711, 742 (N.D. Ill. 2014) (holding the opposite); Doe v. Society of Missionaries, No. 11-cv-02518, 2014 WL 1715376, at *4 (N.D. Ill. May 1, 2014)).
Similarly, in Cont'l Circuits LLC v. Intel Corp., 435 F. Supp. 3d 1014, 1021 (D. Ariz. 2020) an Arizona court held that “the [litigation funding] agreements … satisfy the ‘because of’ test and constitute work product.” In 2012, the Eastern District of Pennsylvania conclusively determined that communications with funders and funding agreement drafts were protected as work product and protected by the attorney-client privilege under the common interest exception. Devon IT, Inc. v. IBM Corp., 2012 WL 4748160, at *1 (E.D. Pa. Sept. 27, 2012).
And over a decade ago, the Eastern District of Texas concluded that documents shared with potential funders were privileged. Mondis Tech., Ltd. v. LG Elecs., Inc., 2011 WL 1714304, at *2-3 (E.D. Tex. May 4, 2011). And while these decisions rely on the work product doctrine, certain other states have found that the common interest doctrine preserves the attorney-client privilege when attorneys communicate with funders. See In re Int'l Oil Trading Co., 548 B.R. 825, 834 (Bankr. S.D. Fla. 2016) (“Florida Statutes § 90.502(c)(2) protects communications with those ‘to whom disclosure is in furtherance of the rendition of legal services to the client.’”).
Based on this case law, overall, while litigation funding does add some complexity to issues of privilege and discoverability, it is also a powerful tool in a law firm’s arsenal, whether it be to shore up a client that is fighting for its survival or allowing litigants full access to judicial determination of their disputes, despite a financially uneven playing field.