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Select Ethical Issues Present in Litigation Funding

The following article was contributed by John J. Hanley, Partner at Rimon Law. 

Litigation financing is on the rise in the United States and provides some claimants a valuable means for paying the costs of pursuing a legal claim. Lawyer involvement in litigation financing transactions raises many ethical issues for a lawyer such as competence, duty of loyalty, the potential waiver of privilege and interference by a third party, to name a few.

Competence

The first rule for lawyers under the New York Rules of Professional Conduct (the “NY RPC”) is competence.[1]  Lawyers and law firms should tread carefully when considering undertaking client engagements in a subject area in which they do not have the requisite knowledge and skill to provide competent representation of their clients. Official Comment 1 to Rule 1.1 provides in part that factors relevant to determining whether a lawyer has the requisite knowledge and skill in a matter include the relative complexity and specialized nature of the matter, the lawyer’s general experience, the lawyer’s training and experience in the filed in question, and the preparation the lawyer is able to give the matter.[2]

This does not mean that lawyers cannot deal with matters in which they are initially unfamiliar.  Indeed, the American Bar Association points out in comments to Rule 1.1 that “[a] lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar. The analysis of precedent  . . . and legal drafting are required in all legal problems. Perhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve, a skill that necessarily transcends any particular specialized knowledge. A lawyer can provide adequate representation in a wholly novel field through necessary study.”[3]

According to the New York City Bar Report to the President by the New York City Bar Association Working Group on Litigation Funding: “[a] lawyer whose client seeks third party funding should determine at the outset whether he or she has the transactional experience and sophistication required to negotiate a beneficial agreement with the funder or whether a specialist in the field should be involved.”[4]

Competence in litigation finance includes familiarity with various litigation financing structures and privileges against disclosure, among others.[5]  For example, the structure may involve different types of collateral, different means of financing legal fees and expenses, the manner in which funding is disbursed and the return structure of the financing.  A lawyer concentrating her or his practice on litigation funding may also be better able to determine “market” terms of the financing.

Duty of Loyalty and the Lawyer’s Financial Interests

Of course, the lawyer is the client’s fiduciary and agent who owes his or her client undivided loyalty and is forbidden from putting her interest above that of the client. The New York State Bar Association, Committee on Professional Ethics reminds lawyers that their financial interests must not interfere with the representation of the client.[6] Ordinarily, there is nothing adverse to a client about a lawyer getting paid for legal services[7] but in a litigation funding transaction the lawyer could have a personal interest in respect of the transaction. For example, the litigation funding agreement may facilitate payment of a portion of the lawyer’s fees or ensure certain expenses borne by the lawyer will be repaid.[8] The American Bar Association posits that if a lawyer has a relationship with a litigation funder that creates a financial interest for the lawyer . . . it may interfere with the lawyer’s obligation to provide impartial, unbiased advice to the client (the “ABA Report”)[9].

The ABA Report goes on to say that a lawyer with a long-term history of working with a particular funder may have an interest in keeping the funder content which would create a conflict even in the absence of an explicit agreement. The NY RPC, specifically Rule 1.7(a)(2), like the Model Rules of Professional Conduct, prohibits a lawyer from representing a client if “there is significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, property or other interest.” Additionally, Rule 5.4 of the NY RPC, and its analogous provisions in other jurisdictions, requires that a lawyer maintain independence[10].  Consequently, such lawyer, representing a client in a matter for which litigation funding is sought, in general may be able to represent the client with respect to the litigation funding agreement but should disclose the lawyer’s relationship with the funder and receive the client’s informed written consent.

Communication and Confidentiality

Rule 1.4 of the NYRP Conduct requires a lawyer to communicate promptly, and provide complete information, to the client regarding the matter, and to reasonably consult with the client about the means to achieve the client’s objectives.[11]

Reputable litigation funders are usually careful to provide in the litigation finance documents that the funder will not be involved in discussions between the lawyer and client regarding the matter, and that the funder will not direct or control the litigation. In certain circumstances an inexperienced lawyer may consider involving the funder in discussions about case strategy, but caution is in order. If a party other than client and the attorney is involved in communications involving legal issues or the case, the attorney-client privilege and confidentiality of communications is likely breached and the attorney may be guilty of legal malpractice. Indeed, Rule 1.6 of the NYRPC requires that a lawyer not knowingly reveal confidential information, or use that information to the disadvantage of the client or advantage of the lawyer or a third person, subject to certain exceptions.[12]

Conclusion

An attorney who represents a client in a matter that is to be funded pursuant to a litigation funding agreement should consider the ethical implications discussed in this Insight, among others, before representing the client in the funding agreement. Counsel would avoid all of the ethical considerations that may arise by referring the client to an outside attorney experienced in litigation finance.

[1] N.Y. Rules of Prof’l Conduct R.1.1.  The California Rules of Professional conduct and the American Bar Association Model Rules of Professional Conduct (“MRPC”) also make this the number one rule.  Indeed, all fifty states and the District of Columbia have adopted legal ethics rules based at least in part on the MRPC.
[2] N.Y. Rules of Prof’l Conduct R.1.1, Comment [1].
[3] Available here ABA Comment to Rule 1.1
[4] Report to the President by the New York City Bar Association Working Group on Litigation Funding (February 28, 2020).
[5] Others includes, without limitation champerty, maintenance, barratry, usury and required disclosures.
[6] N.Y. Comm. on Prof’l Ethics, Formal Op. 769 (November 4, 2003).
[7] The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2020-204.
[8] Id. At 3.
[9] American Bar Association, Informational Report to the House of Delegates Commission on Ethics 20/20.
[10] N.Y. Rules of Prof’l Conduct R.5.4.
[11] N.Y. Rules of Prof’l Conduct R.1.4(a).
[12] N.Y. Rules of Prof’l Conduct R.1.6(a). See also the American Bar Association’s Model Rule 1.6.

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Commercial Regulatory Issues

CJC Extends Deadline for Submissions to Litigation Funding Review 

By Harry Moran |

Following the publication of the Civil Justice Council’s (CJC) Interim Report and Consultation for its review of the litigation funding sector in October 2024, there have been no new developments as funders eagerly await signs of action from the new government. 

An article in The Law Society Gazette covers the news that the Civil Justice Council has adjusted the consultation period for its review into third-party litigation funding, extending its deadline for submissions to 3 March. This schedule adjustment sees the deadline pushed back by over a month, with the original deadline having been set for 31 January. The decision to adjust the deadline does not appear to have been driven by any developments from the government or ongoing matters in the courts, with the Gazette reporting that the extension “will allow for greater engagement with stakeholders ahead of the submission deadline.”

The full list of consultation questions and cover sheet can be found here, with all submissions needing to be completed by 11:59 pm on 3 March. 

According to the CJC’s website, the deadline “the extension will not adversely affect the finalisation of the full report”. It has been previously stated that the publication of the full and final report will take place some time in the summer of this year, with this latest update offering no guidance on a more specific timeframe within that period.

The Interim Report published on 31 October 2024 can be found here.

Commercial Regulatory Issues

Georgia Governor Announces Tort Reform Package and New Litigation Funding Rules

By Harry Moran |

The battle over the future of regulations governing third-party legal funding looks set to rage on in 2025, as yet another state government has announced proposed legislative reforms that include new rules targeting consumer litigation funders.

In a release from the Office of the Governor, Georgia Governor Brian P. Kemp announced his support for a tort reform package for the state, aiming to enact sweeping changes across a range of legal policy areas. The package contains a variety of legislative reforms including measures targeting the calculation of medical damages in personal injury cases, the elimination of double recovery of attorney’s fees, and significant reforms for third-party litigation funding.

  • When it comes to litigation funding, the legislation seeks change in the following areas:
  • Prohibiting “hostile foreign adversaries” from funding litigation to obtain trade secrets or advance their own political interests.
  • Preventing litigation funders from “having any input into the litigation strategy or from taking the plaintiff’s whole recovery”.
  • Increasing transparency around the involvement of litigation funders for all parties involved in litigation.

In the announcement of the tort reform package, Governor Kemp provided the following comment:

“As I said in my State of the State address earlier this month, our legal environment is draining family bank accounts and hurting job creators of all sizes in nearly every industry in our state.

After months of listening to our citizens, businesses, and stakeholders across the spectrum, it is clear the status quo is unacceptable, unsustainable, and jeopardizes our state's prosperity in the years to come. This tort reform package protects the rights of all Georgians to have access to our civil justice system, and ensures that those who have been wronged receive justice and are made whole. I look forward to working with our partners in the General Assembly to pass this comprehensive and commonsense package, and achieve meaningful progress on this important issue during this legislative session.”

Commercial Deals

LCM Releases Trading Update for First Half of 2025 Financial Year

By Harry Moran |

Due to the naturally confidential nature of matters involved in legal funding, it is no surprise that outside observers rarely get a detailed view of the successes and failures of individual litigation funders. However, for those publicly listed funders, we are afforded regular glimpses into the financial workings of their investments.

In a trading update published by Litigation Capital Management (LCM), the litigation funder shared some details on their performance in the first half of the 2025 financial year, covering the six months up to 31 December 2024. LCM revealed that during this period they had achieved four case wins and incurred three case losses, with the result being an aggregate multiple of invested capital (MOIC) of 3.7x on realisations.

Among these four case wins, LCM reported that one of these was a successful international arbitration claim brought against the Republic of Poland, whilst the losses included a trial loss in the Queensland Electricity case. LCM also revealed that during the first half of FY25, there were A$25 million in new commitments compared to A$90 million in H1 FY24. The funder explained that “while the period saw fewer quality opportunities meeting our rigorous investment criteria”, this was to be expected as part of the usual “ebb and flow of opportunities”.

Patrick Moloney, CEO of LCM , provided the following comment on the results: 

“While the first half of FY25 has been a period of mixed results, we are pleased with the strong realisations achieved and the ongoing progress of our portfolio.  The high multiple on invested capital reflects the value we continue to generate from our disciplined approach to dispute financing.  We remain confident in our ability to deploy capital effectively and to deliver attractive returns for our stakeholders as we move into the second half of the financial year.”

More details can be found in the full trading update.

The following article was contributed by John J. Hanley, Partner at Rimon Law. 

Litigation financing is on the rise in the United States and provides some claimants a valuable means for paying the costs of pursuing a legal claim. Lawyer involvement in litigation financing transactions raises many ethical issues for a lawyer such as competence, duty of loyalty, the potential waiver of privilege and interference by a third party, to name a few.

Competence

The first rule for lawyers under the New York Rules of Professional Conduct (the “NY RPC”) is competence.[1]  Lawyers and law firms should tread carefully when considering undertaking client engagements in a subject area in which they do not have the requisite knowledge and skill to provide competent representation of their clients. Official Comment 1 to Rule 1.1 provides in part that factors relevant to determining whether a lawyer has the requisite knowledge and skill in a matter include the relative complexity and specialized nature of the matter, the lawyer’s general experience, the lawyer’s training and experience in the filed in question, and the preparation the lawyer is able to give the matter.[2]

This does not mean that lawyers cannot deal with matters in which they are initially unfamiliar.  Indeed, the American Bar Association points out in comments to Rule 1.1 that “[a] lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar. The analysis of precedent  . . . and legal drafting are required in all legal problems. Perhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve, a skill that necessarily transcends any particular specialized knowledge. A lawyer can provide adequate representation in a wholly novel field through necessary study.”[3]

According to the New York City Bar Report to the President by the New York City Bar Association Working Group on Litigation Funding: “[a] lawyer whose client seeks third party funding should determine at the outset whether he or she has the transactional experience and sophistication required to negotiate a beneficial agreement with the funder or whether a specialist in the field should be involved.”[4]

Competence in litigation finance includes familiarity with various litigation financing structures and privileges against disclosure, among others.[5]  For example, the structure may involve different types of collateral, different means of financing legal fees and expenses, the manner in which funding is disbursed and the return structure of the financing.  A lawyer concentrating her or his practice on litigation funding may also be better able to determine “market” terms of the financing.

Duty of Loyalty and the Lawyer’s Financial Interests

Of course, the lawyer is the client’s fiduciary and agent who owes his or her client undivided loyalty and is forbidden from putting her interest above that of the client. The New York State Bar Association, Committee on Professional Ethics reminds lawyers that their financial interests must not interfere with the representation of the client.[6] Ordinarily, there is nothing adverse to a client about a lawyer getting paid for legal services[7] but in a litigation funding transaction the lawyer could have a personal interest in respect of the transaction. For example, the litigation funding agreement may facilitate payment of a portion of the lawyer’s fees or ensure certain expenses borne by the lawyer will be repaid.[8] The American Bar Association posits that if a lawyer has a relationship with a litigation funder that creates a financial interest for the lawyer . . . it may interfere with the lawyer’s obligation to provide impartial, unbiased advice to the client (the “ABA Report”)[9].

The ABA Report goes on to say that a lawyer with a long-term history of working with a particular funder may have an interest in keeping the funder content which would create a conflict even in the absence of an explicit agreement. The NY RPC, specifically Rule 1.7(a)(2), like the Model Rules of Professional Conduct, prohibits a lawyer from representing a client if “there is significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, property or other interest.” Additionally, Rule 5.4 of the NY RPC, and its analogous provisions in other jurisdictions, requires that a lawyer maintain independence[10].  Consequently, such lawyer, representing a client in a matter for which litigation funding is sought, in general may be able to represent the client with respect to the litigation funding agreement but should disclose the lawyer’s relationship with the funder and receive the client’s informed written consent.

Communication and Confidentiality

Rule 1.4 of the NYRP Conduct requires a lawyer to communicate promptly, and provide complete information, to the client regarding the matter, and to reasonably consult with the client about the means to achieve the client’s objectives.[11]

Reputable litigation funders are usually careful to provide in the litigation finance documents that the funder will not be involved in discussions between the lawyer and client regarding the matter, and that the funder will not direct or control the litigation. In certain circumstances an inexperienced lawyer may consider involving the funder in discussions about case strategy, but caution is in order. If a party other than client and the attorney is involved in communications involving legal issues or the case, the attorney-client privilege and confidentiality of communications is likely breached and the attorney may be guilty of legal malpractice. Indeed, Rule 1.6 of the NYRPC requires that a lawyer not knowingly reveal confidential information, or use that information to the disadvantage of the client or advantage of the lawyer or a third person, subject to certain exceptions.[12]

Conclusion

An attorney who represents a client in a matter that is to be funded pursuant to a litigation funding agreement should consider the ethical implications discussed in this Insight, among others, before representing the client in the funding agreement. Counsel would avoid all of the ethical considerations that may arise by referring the client to an outside attorney experienced in litigation finance.

[1] N.Y. Rules of Prof’l Conduct R.1.1.  The California Rules of Professional conduct and the American Bar Association Model Rules of Professional Conduct (“MRPC”) also make this the number one rule.  Indeed, all fifty states and the District of Columbia have adopted legal ethics rules based at least in part on the MRPC.
[2] N.Y. Rules of Prof’l Conduct R.1.1, Comment [1].
[3] Available here ABA Comment to Rule 1.1
[4] Report to the President by the New York City Bar Association Working Group on Litigation Funding (February 28, 2020).
[5] Others includes, without limitation champerty, maintenance, barratry, usury and required disclosures.
[6] N.Y. Comm. on Prof’l Ethics, Formal Op. 769 (November 4, 2003).
[7] The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2020-204.
[8] Id. At 3.
[9] American Bar Association, Informational Report to the House of Delegates Commission on Ethics 20/20.
[10] N.Y. Rules of Prof’l Conduct R.5.4.
[11] N.Y. Rules of Prof’l Conduct R.1.4(a).
[12] N.Y. Rules of Prof’l Conduct R.1.6(a). See also the American Bar Association’s Model Rule 1.6.