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Regulations & Trends — Article

3 Attorney Ethics Considerations For Litigation Funding

Matthew Oxman

Vice President of Business Development & Investments


  • Recently-published ethics opinions have added to a growing body of advisory materials that attorneys may consult when working with a third-party funder.
  • These analyses particularly highlight an attorney's duty to protect privileged information, maintain professional independence, and provide adequate counsel when representing a client who seeks litigation funding.
  • Knowledgeable attorneys have the opportunity to ethically manage the involvement of a passive third party in the litigation process.

In recent years, the growth of the litigation finance industry has generated volumes of written analysis and opinions. In particular, various attorney professional associations have focused on ethical issues, namely the obligations of counsel when their clients are seeking to fund litigation with outside capital.

In 2020, for example, the American Bar Association, the State Bar of California and the New York City Bar Association each published commentaries focused on ethical considerations in litigation funding. These opinions have bolstered a growing body of advisory materials that attorneys may consult before approaching a third-party funder. They have also crystallized the most significant ethical issues for attorneys to bear in mind when entering a litigation finance transaction.

Three common themes emerge from these publications: An attorney representing a client seeking litigation finance (1) has a duty to protect privileged information when communicating with litigation funders; (2) must consistently exercise independent judgment on behalf of the client; and (3) has a responsibility to provide adequate guidance concerning the potential benefits and drawbacks of any proposed litigation finance transaction.

These points are all worthwhile items for counsel to evaluate when clients are pursuing third-party funding.

1. Safeguarding Privileged Materials and Communications

In order to properly evaluate a case's merits prior to investment, a litigation funder must review and discuss numerous relevant documents with the transacting parties. While most claims assessments should only require nonprivileged materials, there may be exceptional situations in which a third-party funder requests privileged information.

Recently, both the California bar and the New York City bar explored the implications of prospective funding recipients sharing privileged communications with a third party, as well as the related importance of nondisclosure agreements.

In its 2020 ethics opinion,[1] the California bar noted that most courts contemplating the question have held that work product does not lose its protected status when shared with third-party funders, as waiver only occurs "where the otherwise protected information is divulged to someone with no interest in maintaining confidentiality."

It cited the 2014 U.S. District Court for the Northern District of Illinois case of Miller UK Ltd. v. Caterpillar Inc.,[2] in which the court ruled that an attorney's disclosure of case details to a funder did not "substantially increase the likelihood" that an adversary would obtain the materials where confidentiality agreements were in place.

The California bar further stated that executing a confidentiality agreement "will decrease the risk that a court will find that work product is waived" and keeps with the attorney's duty to confidentiality. In a lengthy report[3] published last year, the New York City bar similarly recommended that an NDA be in place before disclosing any nonpublic information to a funder.

Signing NDAs before beginning negotiations is standard practice for many commercial litigation finance firms, as a way of safeguarding confidential information.

Adversaries seeking disclosure of funding-related documents must additionally contend with the issue of relevance. The New York City bar observed that several attempts to discover the existence of a litigation funder or the details of the third-party arrangement have been deemed irrelevant "absent a showing of special circumstances."

However, attorneys should still closely monitor whether local court procedures mandate the disclosure of funding agreements. A local rule[4] recently adopted by New Jersey's federal court, for instance, compels litigants to disclose nonrecourse arrangements with any financially interested third parties. Certain state jurisdictions, including Wisconsin and West Virginia, have enacted similar disclosure requirements, and others may follow suit in the future.

Another key consideration is the inconsistent application of common interest protections in a litigation funding context. Some courts have determined that litigation funders and the claim owners share a common enterprise, and thus can share privileged information with third parties without waiving attorney-client privilege.

Others have held that the mutual interest is purely financial and a common legal interest does not exist. Generally, the common interest exception carries more weight after a litigation funding agreement has been ratified, at which point the parties' shared concerns may be more apparent.[5]

Lastly, ABA Model Rule 1.6[6] — a version of which has been adopted in all states[7] — requires that a client give their informed consent before a lawyer may reveal information related to the underlying legal work with another party.

The rule also stipulates that a lawyer make reasonable efforts to avoid inadvertent disclosure of client information. The California bar adds that attorneys should educate their clients regarding the risks of privilege waiver when they share nonpublic information.

2. Independent Professional Judgment

Numerous commentaries on the ethics of litigation funding advise that an attorney take steps to render candid advice as stipulated under Model Rule 2.1.[8] In essence, the economic factors created by the addition of a third, albeit passive, party should not compromise or influence the lawyer's duty to advocate for his client's legal interests.

This dovetails with ABA Rule 1.7(a)(2), which prohibits representation of a client if there is a significant risk the attorney-client relationship will be materially limited by the lawyer's responsibilities to another party.

ABA Resolution 111A[9] adds that the litigation funding arrangement must keep control of the case in the client's hands — a provision of most standard commercial funding agreements.

RELATED: Aligned Incentives: The Key Ingredient of Client-Directed Litigation Funding

Nevertheless, attorneys should ensure contracts: (1) do not confer any right of interference or transfer a cause of action to a new party, and (2) address "what happens to the funding  arrangement if, down the road, the client and the funder disagree on litigation strategy or goals." Reputable funders prefer to passively invest in claims and will therefore comply with these requests.

Ethics Rule 5.4,[10] which prevents the sharing of attorney's fees with nonlawyers, may also apply in certain jurisdictions. Specifically, subrule (c) prohibits any person who subsidizes legal services for another "to direct or regulate the lawyer's professional judgment in rendering such legal services."

Critics have argued that this rule applies to attorney funding arrangements, in which a lawyer or law firm receives nonrecourse capital directly in exchange for a portion of the outcome of multiple contingency engagements.

However, state bar associations have begun to reevaluate the relevance of Ethics Rule 5.4 in funding transactions. The California bar, for instance, concluded that a funder may directly pay a lawyer's legal fees so long as there is written consent, protection of privileged information, and "no interference with Lawyer's independent professional judgment or relationship with Client."

And in its 2020 report, the New York City bar offered two proposals that, if adopted, would alter Ethics Rule 5.4 to allow the sharing of legal fees "with an entity in exchange for the entity's providing financing" under certain conditions. In explaining its belief that the rule should be revised, the working group concluded that "lawyers and the clients they serve will benefit if lawyers have less restricted access to funding."[11]

Attorneys should further note that Ethics Rule 5.4 is a frequent subject of debate as reform advocates call for permitting nonlawyer ownership of law firms. Reform advocates have argued that nonlawyer ownership should be permitted. One state, Arizona, fully abrogated Ethics Rule 5.4 in August 2020. Another, Utah, has implemented a regulatory sandbox that permits state-licensed alternative business structures.

As a result of these actions, the language of Ethics Rule 5.4 may become less restrictive relative to third-party funding arrangements in affected jurisdictions.

3. Duty of Competence

ABA Model Rule 1.1 insists that a lawyer possess "the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation."

In matters that involve litigation funding, this obligation would extend to understanding how the industry operates along with any relevant local rules and regulations. Current U.S. regulation of litigation finance remains a patchwork, as state and federal views of these arrangements often differ.

For instance, some states still recognize the antiquated common law doctrine of champerty and maintenance, whereas a growing list of others has effectively deemed them obsolete by law or in practice. A minority of jurisdictions have capped the fees a third-party funder may charge or treated nonrecourse funding arrangements as loans that are subject to local usury laws.

For these reasons, we strongly encourage counsel to research locally relevant statutes, court procedures, and case law when considering litigation funding.

Furthermore, the onus is put on attorneys to fully grasp the counterparty with whom their client would contract. This includes gaining an understanding of the funder's personnel, its track record, its typical preinvestment process, and its credibility as a source of capital.

Ultimately, this duty of competence underscores the importance of working with a reputable funder that is equally committed to meeting the highest ethical standards.

In Conclusion

"Opportunities exist to contract with litigation funders," the California bar writes, and as illustrated above, the most common ethical principles that apply when approaching a funder have become more apparent in recent years.

Litigators should understand these responsibilities when providing information to a third-party funder and discussing legal strategy with a client. Attorneys with skill and sophistication are typically equipped to navigate the involvement of a passive third party in the litigation process, while simultaneously maintaining an objective view of the case's merits and the legal strategy that would best promote the client's interests.


[1] The State Bar of California, Formal Opinion No. 2020-204
[2] Miller UK Ltd. v. Caterpillar, Inc. 17 F. Supp. 3d 711 (N.D. Ill. 2014)
[3] Report to the President by The New York City Bar Association Working Group on Litigation Funding
[4] N.J. L.R. 7.1.1
[5] Alternative Litigation Finance and the Attorney-Client Privilege, Denver University Law Review, Vol. 92, No. 1, 2015
[6] ABA Model Rule 1.6: Confidentiality of Information
[7] Variations of the ABA Model Rules of Professional Conduct, E.R. 1.6
[8] ABA Model Rule 2.1: Advisor
[9] Best Practices for Third-Party Litigation Funding
[10] ABA Model Rule 5.4: Professional Independence of a Lawyer
[11] Report to the President by The New York City Bar Association Working Group on Litigation Funding

Matthew Oxman

Vice President of Business Development & Investments