ANALYSIS: Firm Lawyers Wary of Portfolio Litigation Financing

Results from Bloomberg Law’s 2019 Litigation Finance Industry Survey reveal that law firm lawyers who are interested in litigation financing for their matters are substantially more likely to have obtained funding or be interested in obtaining funding for a single case than for a portfolio of cases.

This holds true across law firm sizes. Lawyers in small, medium, and big law firms all prefer single-case funding to portfolio funding.

It also holds true across almost all practice areas. Of the five practice areas in which firm lawyers said they are most interested in obtaining funding, single-case funding was preferred over portfolio funding in four of them.

Portfolio funding arrangements for law firms involve a funder providing capital to a law firm in exchange for a return on the fees expected from a bundle of cases. These arrangements offer a variety of benefits, including diversification of business risk, access to larger amounts of capital, and funding opportunities for cases that otherwise would not be good candidates for third party financing.

So, why does portfolio funding lag behind single-case funding in preferred funding structures?

One possible reason is that lawyers want to avoid any appearance of ethical violations. Specifically, they may not want to risk running afoul of rules against fee-sharing. As our survey revealed, ethical implications are a top concern for lawyers considering litigation funding: more lawyers said they had ethics concerns when considering funding for the first time (45%) than any other initial concerns listed in the survey.

Even though portfolio funding is a relatively common and accepted practice in the industry, there is some question in the market about the ethical implications of the practice. This has been especially true since a 2018 New York City Bar Association opinion suggested that law firm portfolio funding arrangements violate New York Rules of Professional Conduct Rule 5.4, which prohibits lawyers from sharing legal fees with nonlawyers. Specifically, the opinion (which is advisory and not binding) states that certain funding arrangements—namely, those in which a lawyer’s future payments to a funder are contingent on the receipt of legal fees received in one or more specific matters—run afoul of this ethics rule (although the future of this rule might be in flux).

In contrast to portfolio funding, in which capital is provided straight from litigation funders to law firms, single-case funding usually puts money in the pocket of the claimant and, in doing so, avoids any sharing of fees between lawyers and funders. Lawyers’ caution surrounding ethics issues, then, might help explain why portfolio funding is less preferred by the litigating attorneys, despite the extra benefits that it offers.

It is also worth noting that single-case financing is the more traditional method of litigation funding, which may play an additional role in its prominence over portfolio funding in the eyes of law firm lawyers.

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