Key Takeaways from the Latest Dealmakers Event
Last week, Dealmakers hosted a virtual event titled 'Law Firm-Funder Partnerships in a Time of Economic Uncertainty.' The event was sponsored by Validity Finance, and featured a panel of speakers including Alanna Clair (AC), Partner at Dentons, Jordan Goldstein (JG), Partner and GC at Selendy & Gay, Joshua Libling (JL), Portfolio Counsel at Validity, and Reed Oslan (RO), Partner at Kirkland & Ellis. The panel was hosted by Bob Robertson (BR), Strategic Advisor at Dealmakers. Below are some key takeaways from the event: BR: Let's discuss the genesis of the Working Group's report (the rebuttal to the NYC Bar's controversial opinion that litigation funding may violate fee-sharing), and what the key takeaways are. JG: Rule 5.4 generally prohibits fee sharing between firms and non-lawyers. The purpose of the rule is to protect the professional independence of attorneys. The committee determined that litigation funding of firms or cases where fees are split might violate Rule 5.4. But this doesn’t include funders who work with the client rather than the attorney. The NYC Bar opinion is relevant in terms of persuasive authority, but not enforcement. The working group looked to see if Rule 5.4 needed to be revised. All members wanted to amend this rule to allow firms to work directly with funders. The disagreement was regarding disclosure and consent for clients, and to what degree funders could lend input to lawyers. There are two different proposals outlined—and the group was evenly split between them. Members disagreed on the exact parameters of informed consent. The consensus though, was that Litigation Finance can and should be permitted under ethical rules. The takeaway is that some disclosure will be needed, but there’s leeway in terms of when and how much information should be disclosed. BR: There’s a broad spectrum of opinions on Litigation Finance. How will the current economic climate impact those perceptions? RO: In 2008-2009, litigation funding was hard to find. At the same time, we had a significant uptick in demand in my own firm. This drove the growth of lit fin for many years. Today, I see more of the same. The US has a well-developed Litigation Finance industry. It’s a perfectly valid form of funding, and the demand for risk-sharing will be far greater than it was in 2008. Litigation funders are going to do quite well on this. JL: If you start by looking at the problem from the client and firm perspective, they have a need for revenue, but don’t have capital for payouts. Clients pressure firms, firms look to relieve pressure. Taking that capital and shifting the risk to increase liquidity is becoming more central to a firm’s business model. RO: Litigation Funders can act in ways that law firms can’t. Example: providing capital directly to clients during a case. I see an increase in demand for that kind of financing that can happen based on the value of a case. JG: Funders can also fund just the expenses rather than the whole case. Experts, vendors, etc. Lit fin can bridge the issue for clients with complicated cases. BR: Some funders are willing to enter into single-case transactions with law firms, as long as the return is structured as a multiple, while others are more apt to secure portfolio funding to address Rule 5.4 concerns. What is the panel's reaction? RO: In terms of what I've seen in the market over the years, I think the funders want to get as many portfolio funding deals as they can, to get more money into a portfolio to diversify their returns. And there are times where law firms and clients prefer one-off deals. So I've seen both. There are more single-case deals than portfolio deals, because there simply aren't that many large meritorious portfolios of claims to invest in. BR: How can firms ethically secure funding for themselves and clients? What’s the road map? AC: We’re likely to see a higher number of firms and cases turn to Litigation Finance. So it’s more important than ever not to get sloppy with ethics. There’s a fairly defined roadmap now, unlike in 2008. Work product protects materials, mental impressions of counsel etc. Sometimes work product has to be shared with funders, which carries risk. Executing an agreement to define what will be shared and with whom should be common. There should be an agreement in hand before any information is shared. Communique with the funder is essential to ensure that they can give informed advice. There’s nothing inherently unethical about this relationship. In terms of independence, those paying the lawyer’s fees aren’t allowed to influence their professional judgment—their primary duty is always to the client. RO: We don’t share work product with funders. We’re really careful in not sharing anything that might someday come out. We just don’t do it because not every judge will rule appropriately on this. JG: This law is still developing and there are states that are outliers in terms of disclosure rules. There are proposals moving through congress that would require disclosure in a greater number of cases. Clients should be informed, though this could be more complex in a portfolio sharing situation. Shopping different funding situations is not unethical. The devil is in the details. I’d urge clients to err on the side of informing their clients.
