Addressing Ethical Concerns Surrounding Litigation Funding

In 2022, large investment firms poured more than $3 billion into commercial lawsuits in the U.S., a 16% increase from the prior year and further evidence of Wall Street’s growing presence within the legal industry. While litigation funding can be an attractive option for individuals and businesses seeking additional financial support in their pursuit of legal claims, there are a number of ethical considerations that law firms must take into account when engaging in such arrangements.

Competence and Specialized Knowledge

One of the primary ethical considerations for law firms engaging in litigation funding is the overall requirement of competence. As emphasized in The New York Rules of Professional Conduct, lawyers have a unique obligation to possess the knowledge and skills needed to provide competent representation to their clients. This means that before seeking outside investment, lawyers will first need to determine whether they have the transactional experience and expertise required to negotiate beneficial agreements with third-party funders. 

While many lawyers may not initially possess specialized knowledge in litigation finance, this doesn’t necessarily mean that outside funding arrangements should be entirely off the table. In addition to conducting their own individual research, it may ultimately be prudent for lawyers to seek out specialists in the field who can help ensure the best interests of their clients are protected throughout the funding process. 

Duty of Loyalty and Conflicts of Interest

Lawyers owe a duty of loyalty to their clients, which means they have both a legal and ethical obligation to put the needs of their clients first and to avoid conflicts of interest wherever they might arise. One of the inherent pitfalls of litigation funding is that lawyers need to be particularly cautious in this regard, being careful not to let their own financial interest in the transaction compromise their impartiality and ability to provide unbiased advice and representation to the client. 

For example, if a lawyer has a personal, financial relationship with a litigation funder, this relationship should be disclosed to the client at the outset, and no agreement should be made without first obtaining the client’s informed written consent. Providing this transparency is crucial to maintaining the lawyer’s independence from third parties, as well as reinforcing trust in the client that their interests will be prioritized throughout the litigation process. 

Confidential Communication

Effective communication and maintaining client confidentiality are fundamental principles in the legal profession. Lawyers must be mindful of the potential impact on attorney-client privilege and confidentiality when engaging with outside investors. Fortunately, reputable litigation funders typically include provisions in their agreements prohibiting their involvement in discussions between lawyers and clients regarding the case.

However, lawyers still need to exercise heightened caution when involving funders in case strategy discussions. Should any information be revealed that breaches attorney-client privilege, even if revealed without intention, the lawyer risks becoming immediately exposed to potential malpractice claims.

Ensuring a Rigorous Due Diligence Process

Finally, while integrating specialized knowledge, ensuring transparency, and safeguarding confidentiality are all essential to effectively managing the involvement of third-party litigation funders, they should not be viewed as a replacement for a thorough due diligence process. As a rule, lawyers should never accept an outside investment before ensuring that a funder’s ethical standards and values align with those of the firm.

This means carefully evaluating everything from the funder’s investment track record to their personal and professional reputation and overall commitment to maintaining ethical practices in the industry. By being selective in the pursuit of reputable and ethical funders, law firms can better mitigate potential conflicts and concerns that may arise throughout the litigation funding process. 

Conclusion

Overall, as litigation funding continues to gain in popularity and reshape the modern legal landscape, law firms must be exhaustive in their efforts to address all ethical concerns associated with these alternative arrangements. This means being careful to consider issues such as competence, duty of loyalty, and confidentiality, in addition to performing rigorous due diligence and ensuring full transparency and effective communication throughout each step of the process. 

Ethical considerations should always be at the forefront of decision-making as it relates to all aspects of legal work, and litigation funding is no different. By continuing to prioritize integrity and client advocacy above all else, law firms can successfully navigate the complexities of litigation funding while upholding their ethical standards and professional obligations, and providing the best possible representation to their clients.