Litigation Finance –Practical and Ethical Dimensions

ABA EMERGING ISSUES IN HEALTHCARE LAWMARCH 8-11, 2017

Background & BasicsDEFINITIONS, TYPES AND USES

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Financing commercial litigation The financing of commercial litigation

takes many forms: Self-financing

Sale or assignment of claims

Sale of assets underlying claims (or related debt or derivative instruments)

Contingency fee counsel

Insurance and reinsurance

Commercial litigation financiers

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Commercial litigation finance – what and how

Projected value of litigation claims is used to obtain financing

Capital is provided on a non-recourse basis, in exchange for return tied to case outcome

Increasingly moving from single case funding to portfolio arrangements Provide capital to firm across pool cases

Because risk is diversified, particularly relevant for high-risk matters (patent, arbitration, bankruptcy)

Payment of litigation-related receivables can be accelerated

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Commercial litigation finance – who and why

Evolving into “corporate finance for law” Can be used to cover fees and expenses as well as

other client business and law firm capital needs

Used by firms to expand contingency fee or alternative fee practice, manage risk and cash flow

Financial burden is lessened for litigants with fee fatigue or in need of alternative fee structures

A useful tool for all firms regardless of business model (contingent or hourly)

Can be utilized by both claimants and defendants

Embraced by clients from small businesses to the Fortune and FTSE 500

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Client

Funder

Settlement or award proceeds

Lawyer success fee

(if any)

Client proceeds

Client proceeds

net of funder return

Funder return

Paym

ent o

f liti

gatio

n fe

es a

nd

expe

nses

on

beha

lf of

clie

nt

Flow of litigation proceeds based on

successful outcome

No change in relationship between client and firm

Litigation Opponent

Law Firm

Litigation funding agreement

Engagement agreement (discounted hourly or

hybrid)

Basic model for litigation funding

(litigant and funder)

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7Basic model for litigation

funding (law firm and funder)

Paym

ent o

f con

tinge

nt

litig

atio

n fe

es a

nd e

xpen

ses

Settlement or Award Proceeds

Client Proceeds

Law Firm Contingency

Fee

Flow of litigation proceeds based on

successful outcome

No change in relationship between client and firm

Client

Law Firm

Funder

Litigation Opponent

Payment of funder’s

return per funding agreement

Litigation funding agreement

Contingency engagement agreement

How clients use litigation finance Finance a single case or shifting cost and risk

of bringing major commercial litigation or arbitration Non-recourse funding of legal fees and expenses

Working capital for operations

Hybrid structures using a combination of recourse and non-recourse financing

Accounting advantages Improves operating cash flow by removing litigation cost

from above-the-line expenses

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How firms use litigation finance Non-recourse capital to the firm Functions as “hybrid contingency” for hourly

clients under pressure to reduce fees Enables hourly firms to pitch expanded service

without increasing cost Capital for individual large-dollar contingency

or alternative fee matters Reduce contingency risk for ongoing pre-trial litigation

Monetize expected fee after trial, pending appeal

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Ethical considerationsRELEVANT ETHICAL TOPICS AND RULINGS

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Main ethical considerations Chief areas of ethical consideration pertain to

Engaging an outside funder that will have a financial stake in the outcome of litigation

Sharing information that a litigation finance provider will require in order to invest in a matter without risking waiver of protected communications

Maintaining attorney’s independent professional judgment Presence of funder does not change attorney/client

relationship Litigation finance provider has no control over litigation strategy or

settlement decisions Funder may consider privileged information

Enter a Non-Disclosure Agreement (NDA) before any substantive discussions

Case law confirms attorney work product protection applies to funder communications and documents

Mixed case law but most likely common interest cannot be invoked to preserve privilege for atty/client communications shown to funder

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Champerty, maintenance, barratry & usury

Champerty Maintaining a suit in return for a financial interest in the

outcome Maintenance

Helping another prosecute a suit. “[T]he officious intermeddling in a suit, ‘for the purpose of stirring up litigation and strife, encouraging others to bring actions or make defenses that they have no right to make’”

Barratry A continuing practice of maintenance or champerty

Usury Charging interest at a rate that exceeds a maximum

rate provided by law for the particular category of lender involved

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Champerty Modern-day litigation has evolved since the ancient rule of

champerty and its cousins were created Even in states with champerty laws still on the books, they

are not being used to interfere with legitimate, good faith commercial litigation financing transactions as long as the supplier is not: Promoting frivolous litigation

Intermeddling with conduct of litigation

Engaging in “malice champerty” (supporting litigation with improper motive)

These concerns are not typically implicated with established commercial funders Funders want to win and seek meritorious cases

Funders are largely passive, do not control litigation

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Usury Charging interest at a rate that exceeds a maximum rate

provided by law for the particular category of lender involved

Usury only applicable where the underlying transaction constitutes a loan

Litigation funding arrangements are not “loans” and not usurious under New York law Obermayer Rebmann Maxwell & Hippel LLP v. West (D. Pa.

2015): Right to repayment contingent upon litigant’s success, arrangement is not a “loan” and usury inapplicable

Lynx Strategies v. Ferreira (N.Y. Sup. Ct. 2010): recovery contingent, not a loan and thus usury inapplicable

Dopp v. Yari, (D.N.J. 1996) (the majority of jurisdictions, including New York and California, permits collection of interest rates in excess of the legal rate when the collection is at risk and depends upon a contingency)

Many states exempt commercial (as opposed to consumer) transactions from usury laws

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Fee splitting Model Rule 5.4(a): With the listed exceptions, a lawyer or

law firm may not share legal fees with non-lawyers Rule 5.4 (a) is meant to protect independent judgment of

counsel. Comment 1 to Rule 5.4 states: “The provisions of this Rule express traditional limitations on sharing fees. These limitations are to protect the lawyer’s professional independence of judgment.”

No issue arises when a funder contracts with the client for a portion of any judgment or settlement

ABA White Paper: “No prohibited fee splitting would be involved if a lawyer repays interest on a loan to fund the litigation.”

Some courts hold that purchase of unearned contingent fees is neither a loan not fee-splitting. See, e.g., Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971 (NY Sup Crt 2013).

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Attorney work product The work product doctrine protects documents “prepared in

anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent).” Fed. R. Civ. P. 26(b)(3)

A document is protected by the work product if it “can fairly be said to have been prepared . . . because of the prospect of litigation.” 8 Charles Alan Wright et al., Federal Practice & Procedure, § 2024 (2d ed. 1994)

Extends to “dual purpose documents” – created for both litigation and business purposes

The core purpose of the work product doctrine is to protect the integrity of the adversarial process – eliminate unfair advantage by prying into adversary’s strategy. See Hickman v. Taylor, 329 U.S. 495, 516 (1947)

Broader and harder to waive than attorney-client privilege but can be overcome by showing of necessity

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Work product and litigation financiers

A party seeking financing often discloses work product to the potential financier, usually under an NDA

Courts have extended the work product “umbrella” to litigation finance providers

Parties obtain litigation funding to assist with litigation. Thus, the funding agreement and communications between the funder and the litigant are “prepared in anticipation of litigation.”

Every court to address the issue thus far agrees that the work product protection applies.

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Work product cases In the following cases, the courts found work product

doctrine protected documents from discovery and disclosure to the parties’ adversaries. Charge Injection Technologies, Inc. v. E.I DuPont de Nemours & Co. (Del.

Super. Ct. 2015).

Carlyle Investment Mgmt. v. Moonmouth Co. (Del. Ch. 2015).

Abi Jaoudi and Azar Trading Corp. v. CIGNA Worldwide Ins. Co. (E.D. Pa. 2014).

Miller UK v. Caterpillar (N.D. Ill. 2014).

Doe v. Society of Missionaries (N.D Ill. 2014).

Devon IT v. IBM (E.D. Pa. 2012).

Mondis Tech v. LG Electronics (E.D. Tex 2011). Possible exception – funding placed in issue:

Compare Gbarabe v. Chevron Corp.,(N.D. Cal. Aug. 5, 2016) with Kaplan v. S.A.C. Capital Advisors LP, (S.D.N.Y. Sept. 10, 2015).

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Attorney-client privilege A communication made between privileged persons in

confidence for the purpose of obtaining or providing legal assistance for the client remain confidential

Applicable evidentiary rules set by state statute and common law

Sacrosanct but can be waived Unlike the work-product doctrine, which is waived only when

information is shared with an adversary, disclosure to any third party generally waives the attorney-client privilege, unless an exception applies

Common interest exception may establish a non-waiver Separately represented parties with a common legal interest

may communicate directly with one another to advance their shared interest without waiving the attorney-client privilege.

As a practical matter, funders may simply avoid A-C privileged materials and instead rely on outside counsel due diligence, work product and publicly accessible materials and information

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Common interest exception and funders

Case law on common interest protection is less uniform to date than work product.

Litigation funding agreements and communications may be protected by the attorney-client privilege under the common interest doctrine: Walker Digital, LLC v. Google Inc., (D. Del. 2013) at *1

Devon IT, Inc. v. IBM Corp., (E.D. Pa. 2012) at *1 n.1

Xerox Corp. v. Google Inc., (D.Del 2011)

Rembrandt Techs., L.P. v. Harris Corp. (Del. Super. Feb. 12, 2009)

Common business interests in the outcome of litigation can constitute common legal interests. See, e.g., United States v. United Techs. Corp., 979 F. Supp. 108, 112 (D. Conn. 1997);SCM Corp. v. Xerox Corp., 70 F.R.D. 508, 514 (D. Conn. 1976)

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Common interest exception and funders But not all courts have found the common interest exception to

apply: Miller UK v. Caterpillar (N.D. Ill. 2014): Holding a shared rooting interest in the

‘successful outcome of a case’ was not a common legal interest. Notably, while the court held the A/C privilege was waived, work product protection applied to majority of documents.

Leader Tech v. Facebook, (D. Del. 2010): The court, in making numerous discovery rulings, stated that the common interest exception did not apply to privileged information that was provided to a funder. There was no common interest agreement or non-disclosure agreement in place. Ultimately materials were inadmissible.

Thema International Fund v. HSBC Institutional Trust Services (Ireland) Ltd [2011] IEHC 357: Disclosure of litigation funder and the amount funded was not permitted during discovery, but may be permitted later in connection with the issue of costs.

Courts’ diverging views on the common legal interest doctrine turns on whether they consider whether both parties’ interests relate to the outcome of that litigation, not whether their legal interest was the same. See, e.g.: Infinite Energy, Inc. v. Econnergy Energy Co., (N.D. Fla. July 23, 2008): “The

interest must, therefore, relate to litigation for this privilege to apply.”

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Duty of Confidentiality ABA Model Rule 1.6(a): “A lawyer shall not reveal

information relating to the representation of a client unless the client gives informed consent…”

Confidential information defined more narrowly by states: “Information that is a) privileged or b) likely to be embarrassing or detrimental to the client or c) information that a client has requested be kept confidential”

Counsel needs informed, written consent from client before disclosing confidential information to any third party, including a litigation funder

No evidentiary privilege is created by the rule

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Potential conflicts of interest Attorney may need to consider conflicts of interest when

working with a third-party funder if: S/he benefits financially from a litigation financing transaction

between the client and funder, as opposed to simply advising the client in connection with the transaction

S/he has an attorney/client relationship with the litigation financier. Model Rule 1.7

Standard conflicts analysis; Disclosure and written waiver advised

S/he receives a referral fee from litigation financier

Obtain written consent from client. Model Rule 1.7(a)(2)

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Potential conflicts of interest

Client-funder transactions – no likely conflicts Model Rule 1.8(e) relating to financial assistance to clients: No

implication when a litigation financier is involved, as opposed to attorney providing the assistance

Model Rule 1.8(i) relating to the acquisition of an interest in the client’s cause of action; not implicated when a litigation financier is involved

Contract between client and funder provides for payment to funder and attorney before client: ABA: “Simply paying a portion of the proceeds of a judgment or settlement

to a [litigation funder] holding a valid lien does not create a conflict of interest. A lawyer is required to deliver to a client or third party any funds in which the client or third party has an interest.”

Model Rule 1.7 cmt 13 and Rule 1.8(f) relating to disclosure and loyalty if the funder is paying the lawyer’s fees

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Control of counsel, strategy and settlement

Litigation funding arrangements should not vest control over litigation strategy or settlement with the funder Contract between client and funder giving the latter control

over settlement is probably not enforceable

Control over strategy may support a finding that a contract is champertous (where applicable) because the funder is engaging in “officious intermeddling.”

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Preserving independent judgment

Model Rule 5.4(c): “A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services to another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” In a contract between the client and a funder, the client

and not the funder pays the lawyer

Presence of a litigation funder does not change the lawyer’s duty to give client competent and independent advice

A delegation of the final decision on settlement to a litigation funder or other third party does not affect this duty: client always has the final decision on settlement

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Providing information to funder/client consent

Model Rules 1.6 and 1.7 Informing a client concerning litigation

funding generally and referring a client to a specific funder has been approved by various bar associations See, e.g., The Association of the Bar of the City of

New York Committee on Professional Ethics Formal Opinion 2011-2, Third Party Litigation Financing

There is no duty (yet) to advise a client that litigation funding may be available or to advise client on funding negotiations unless specifically requested

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Disclosure question

Judges will know when a case is being handled on a contingent fee basis.

Should judges also be advised of the role of a litigation funder?

Or is the litigation funder no different than a bank lender to a party that is self-financing the litigation as along as the party controls decision-making and settlement?

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Questions?

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Resources

Recent bar activities ABA Commission on the Future of Legal

Services, The Issues Paper Regarding Alternative Business Structures (2016)

ABA Commission on Ethics 20/20 Working Group on Alternative Litigation Financing (2011)

Association of the Bar of the City of New York Formal Opinion 2011-2012

Uniform Law Commission Study on Regulation of Lawsuit Loans (announced but no committee appointed)

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