One of the many issues that the ABA Commission on Ethics 20/20 has been trying to tackle is alternative litigation funding (ALF). The Commission has described ALF as ranging from:

… sophisticated investments in major cases such as critical patent litigation, with the investors seeking returns akin to venture capital returns, to support of personal injury litigation. ALF is presently characterized by spreading the risk of litigation to investors via various methods, including, predominately, nonrecourse or limited recourse financing.

As recently reported by ABA Journal, The Commission issued a draft white paper (PDF) concluding that there is not a need for any adjustment in the rules of professional conduct for lawyers relating to ALF. However, The Commission also recognized that many lawyers may not be familiar with the interplay between ALF and rules of professional responsibility. Here are some of their thoughts:

  • An attorney must always exercise independent professional judgment on behalf of a client, and not be influenced by financial or other considerations.
  • An attorney must not permit a third party to interfere with the exercise of independent professional judgment.
  • Attorneys must be vigilant to prevent disclosure of information protected by Model Rule 1.6(a), and to use reasonable care to safeguard against waiver of the attorney-client privilege.
  • Lawyers must fully explain the terms of funding transactions and ensure that clients are aware of the risks these transactions present.
But when millions of dollars are at stake, it seems difficult to see how folks aren’t influenced by financial considerations, how financing companies wouldn’t interfere to some extent, and whether unsophisticated clients can truly understand the nature and impact of funding transactions.

Consumer Legal Funding

One segment of ALF, which has recently gained significant attention is consumer legal funding (CLF). Consumer legal funding, provides money to consumers with pending lawsuits, most often personal-injury claims but including other individual-client causes of action such as employment discrimination and securities fraud, and who are usually represented by counsel.

In the Rand Corporation’s report Law, Finance, and Capital Markets, it was noted that there are ethics concerns about the level of fees related to these transactions and whether parties understand the implications of the contracts they sign. The paper also notes that plaintiffs’ attorneys are concerned that consumer legal funding has significant effects on client settlement behavior.

You don’t have to search very hard on Google to recognize that lawsuit funding is big business.

Clearly, I’m not an expert on this subject. I am, however, very curious about the experiences of attorneys with regard to alternative litigation financing generally, and consumer legal funding specifically.

Have you participated in a transaction like this? Have you recommended it to a client? What impact, if any, did it have on the litigation?

On the surface, and with attention to the rules of professional responsibility, these arrangements seem to be completely acceptable ways for litigants to get access to money to fund their lawsuits. Upon further review, even with reasonable diligence, it seems that lawyers could very easily get themselves into hot water. They also raise issues related to Usury, Champerty and maintenance,  and Unconscionability.

To me, it seems that one of the obvious consequences of an increase of these arrangements is that attorneys without the means to litigate expensive cases are able to do so. Said another way, inexperienced attorneys who have just recently been admitted, and would otherwise have to refer complex and expensive matters, might now have the ammunition to handle these cases themselves. Uh-oh.

While still only in draft status, any lawyer that participates in any form of ALF is well-served in reading The Commission’s white paper.

Gyi Tsakalakis
Gyi Tsakalakis helps lawyers earn meaningful attention online because that's where clients are looking. He tends to write about legal marketing technology. He misses coaching football and is happy to discuss various strategies and techniques of defensive front seven play.

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