NY City Bar Group Backs Change to Aid Litigation Finance (1)

March 2, 2020, 9:51 AMUpdated: March 2, 2020, 9:47 PM

A New York City Bar Association group studying litigation finance has released a report endorsing the practice where third parties invest in lawsuits for a share of returns and has proposed changes to the state’s rules of professional conduct to regulate portions of the burgeoning industry.

The report said lawyers and clients will benefit from “less restricted access to funding” that they say could be accomplished by changes to Rule 5.4 of the state’s rules of professional conduct. It also said plaintiffs in most circumstances should not be required to disclose third-party interests in their lawsuits.

The report was written by a group of 25 lawyers, law professors, and litigation finance executives, following 17 months of studying the industry. The working group will present its report to the New York City Bar Association on March 12. Any changes to New York’s Model Rules of Conduct face a long road, including review by the New York City Bar Association’s Committee on Standards of Attorney Conduct.

The report is a long-awaited response to a controversial opinion issued in 2018 by the New York City Bar Association that said litigation finance could violate rules prohibiting fee sharing with non-lawyers. That report was criticized by a number of lawyers and legal ethicists including Anthony Davis, a Clyde & Co partner well-known for representing lawyers on professional responsibility matters, and Anthony Sebok, a professor at Cardozo School of Law, who called for it to be rescinded.

That did not happen, but the opinion’s impact on the litigation finance industry was also not as dramatic as initially feared. The opinion did not stamp out litigation funding in New York, a hub for the industry, or lead to disciplinary actions against lawyers. It has limited some funders from pursuing deals in New York that pay them through a law firm’s fees rather than a client’s share of a litigation award.

Litigation finance has grown in the U.S. to more than 40 finance firms with nearly $10 billion in dedicated capital, according to a recent survey by Westfleet Advisors. Funders spent $2.3 billion on cases from mid-2018 to mid-2019, the survey found.

Opponents of litigation finance, notably the U.S. Chamber of Commerce, have said fee-sharing agreements between lawyers and funders should be banned. They have also supported laws requiring litigants disclose a financier’s interest, though those have failed to pass.

Harold Kim, president of the Chamber of Commerce’s Institute for Legal Reform, said in a statement that allowing fee-sharing between attorneys and non-attorneys would only benefit plaintiffs’ lawyers and litigation funders.

“This proposed change to New York’s ethical rules would encourage plaintiffs’ lawyers to file as many lawsuits as possible and make it easier for funders to exercise control over the lawsuits they invest in,” Kim said. “The proposals won’t increase access to justice for plaintiffs and should be swiftly rejected.”

The New York working group’s mandate did not authorize it to override the 2018 opinion, which was authored by the bar association’s committee on professional ethics. The chair of that committee when the opinion was authored, Fordham University School of Law professor Bruce Green, was a member of the working group.

The report is seen by some as way to provide comfort to New York lawyers wary of entering into litigation finance agreements. It pertains only to litigation finance deals struck between law firms and litigation funders. Agreements between clients and finance firms were not part of the 2018 opinion.

Two Paths Forward

The working group was split on how Rule 5.4 should be amended, putting forth two options, one of which will likely be viewed as more favorable to the litigation funding industry.

The report said not all members of the working group would support both proposals.

Both would allow law firms to enter into agreements with funders backed by single cases, which is a shift from the predominant structure. Firms typically enter agreements with funders backing numerous cases under what is known as a “portfolio” deal.

But the more restrictive proposal would allow law firms to use funds from litigation finance firms only to pay for legal fees from specific client matters, while the other would allow use of those funds for general firm business.

Two other major differences in the proposals concerned how funders can participate in matters and whether law firms needed to obtain written, informed consent from clients to share fees with a funder.

The more restrictive proposal prohibits funders from direct or indirect participation in decision-making and requires law firms to obtain written, informed consent from clients to any financial arrangement they enter.

The other allows funders to participate in cases “for the benefit of the client” and does not require law firms to obtain client’s informed consent for fee-splitting deals. They would be required to inform the client in writing that they are sharing fees.

(Adds statement from Institute for Legal Reform in paragraphs eight and nine)

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com

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