Recently, litigation finance has gained acceptance by investors, attorneys, clients and courts. Litigation finance took another step forward when the American Bar Association (ABA) adopted a resolution (“ABA Resolution”) discussing and outlining best practices to assist lawyers considering third-party litigation funding, an important recognition of its prevalent role in the legal industry. The full ABA Resolution can be found here.
What is Litigation Funding?
Litigation funding, also called litigation finance, is a financing tool used by attorneys and their clients to manage the cost and risk involved in litigation. For clients, outside financing can provide the capital needed to pursue litigation, so they do not to forego meritorious claims because of lack of funds. Litigation finance also gives claimants a broader choice of attorneys, as some firms are willing to take some risk on meritorious matters but are not well structured to take cases on a full contingency basis. For attorneys and law firms, third-party finance can help manage and spread the risk of their contingency matters.
Commercial claims are often complex, and the financing of commercial claims requires rigorous evaluation of all aspects of the claims. Commercial cases commonly include disputes relating to contracts, torts, intellectual property, antitrust and class actions, among others.
Benefits of Litigation Funding
Litigation is notoriously expensive with the cost and duration often unpredictable. Accordingly, litigation finance provides several benefits to plaintiffs, law firms, and investors:
Benefits for Plaintiffs
• Financing for legal expenses and litigation costs removes the expense from plaintiffs’ P&L
• Access to top legal talent and firms
• Non-dilutive capital secured only by the litigation outcome
• Allows reallocation of capital from legal expenses to business operations
Benefits for Law Firms
• Working capital for litigation and other related fees
• Reduces risk that clients will be unable to pay for legal services
• Enables firms to offer more flexible payment arrangements
• Business development tool to attract clients with meritorious claims who are unable or unwilling to pay current hourly rates
Benefits for Investors
• Ability to invest in a new asset class with significant risk distribution across many uncorrelated investments
• Capital markets and broader economic conditions do not impact legal claims
• Larger historical returns than traditional asset classes
• Faster liquidity versus other alternative investments
ABA’s Best Practices in Litigation Funding
The best practices section of the ABA’s Resolution includes the following subsections:
A lawyer who is willing to allow a client to finance the lawyer’s fee must explain the arrangement to the client to the extent reasonably necessary to permit the client to make informed decisions about the funding. The ABA Resolution discusses several important issues that should be considered in the context of disclosure. For example, the client must fully be informed of and understand the relationship between the attorney and litigation finance provider, how funds will be paid, the costs and benefits of the transaction, potential conflicts, and any confidentiality issues that can arise from the firm obtaining outside funding.
- Documentation and Structure
Documenting the nature of the relationship is critical to meeting the best practices. The ABA Resolution addresses issues of financing terms, termination, transparency, case management and decision-making. At all times, plaintiffs should retain key litigation decisions and control of the claim, including the decision to settle or pursue litigation. Attorneys must always maintain independent professional judgment and cannot be influenced by the fact they are receiving financing, nor should they share details of the case that could breach attorney-client privilege.
- Professional Responsibility
Attorneys are bound by the rules of professional responsibility in their jurisdiction – including conflicts of interest, interference, confidentiality and fees. None of the best practices set forth in ABA’s litigation finance guidelines supersede local ethics and rules.
- Privilege and Work Product
Client confidentiality is at the core of all attorney-client relationships. Finance providers are not privy to client information or work product created by the attorney in pursuit of the plaintiff’s claim without the proper consent of the client, and must be careful to protect and not unintentionally waive or otherwise impair the attorney-client privilege or work product protection.
As outlined in the American Bar Association Best Practices for Third-Party Litigation Funding:
“Lawyers should explain the doctrines of attorney-client privilege and work product to the client.”
“In general, the lawyer may not reveal confidential information about the representation to the financing entity, without the client’s informed consent.”
The ABA Resolution also addresses a number of issue-specific but potentially important topics such as class actions, portfolio funding, international arbitration and others.
The ABA Resolution on best practiced in litigation finance is an important step in recognizing the increasing and widespread use of litigation finance in complex commercial disputes. Litigation finance creates opportunities for plaintiffs and attorneys to pursue litigation without the risk of depleting working capital or personal funds. Outside financing also provides investors with a new asset class for greater diversification and higher returns.
As litigation finance continues to be increasingly accepted and used by claimants and attorneys, guidance and thoughtful discussion of its benefits and best practices by leading industry organizations like the American Bar Association is a welcome development.