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Litigation financing: Some words to the wise

By: Bridgetower Media Newswires//August 24, 2016//

Litigation financing: Some words to the wise

By: Bridgetower Media Newswires//August 24, 2016//

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By Thomas E. Peisch and Erin K. Higgins
BridgeTower Media Newswires

Recent years have brought an ever-great reliance on the so-called litigation-finance industry in consumer and personal-injury litigation and – in an even newer development – large commercial cases.

This burgeoning industry, which consists of a number of deep-pocketed entities, has no lack of champions who think it will change the litigation landscape far into the future.

Nor is it without enemies. The New York Times has reported, for example, that the Institute for Legal Reform – an affiliate of the U.S. Chamber of Commerce – has called it “the biggest single threat to the integrity of our justice system.”

Lawyers who involve themselves in such arrangements must be wary of certain ethical questions they are bound to encounter. Some of the most pressing among these involve confidentiality and conflicts of interest.

In a typical litigation-finance arrangement, a financing entity will advances a client the fees and expenses necessary to prosecute a case. In return, the entity will expect to get a share of any proceeds.

The client benefits from the arrangement by being spared the outlay and by, in effect, “laying off” some of the risk of seeing an adverse result. The litigation-finance entity, for its part, hopes for a return in excess of its investment.

Most lawyers understand that strict limits have been set on the disclosure of client information. Even so, complying with this duty can prove difficult when a litigation-finance entity is involved.

How, for instance, can this obligation be met when a litigation-financing entity might want to learn a lawyer’s opinion about particular matters within a case before making an investment decision?

In a further complication, lawyers are sometimes asked to disclose confidential information during negotiations leading up to the execution of a litigation-financing agreement. This can happen particularly when the lawyer’s client and the lending entity are in adverse positions.

Many states allow such information to be divulged once a lawyer has obtained his client’s consent. For that reason, any lawyer who is dealing with a financing entity would be wise to explain the risks of disclosing confidential information to a third party, and to obtain the client’s consent in writing before releasing any information sought by the financing entity.

A lawyer’s duty of competence usually requires lawyers:

(1) to provide only the information specifically required by financing entities as a condition of entering into a financing agreement, rather than everything they have in their clients’ files; and

(2) to insist that financing entities keep confidential any information that is disclosed to them. There should be strict limits set on the allowable use and distribution of the information, as well as provisions made for the destruction or return of the information if a financing agreement is not executed.

Cautious lawyers will also want to document that clients, by providing information to a third party, did not intend to waive any applicable privileges or work-product protections.

The next ethical issue arises from the question: With whom do lawyers’ fiduciary and other duties lie? It goes without saying that lawyers have duties of this sort to their clients. But do those duties also extend to “investors” in litigation?

It’s not difficult to identify places where the interests of a client might easily differ from those of an “investor.” Many litigation-financing entities employ a stable of skilled and experienced litigators who offer advice concerning “investments.”

As an example, take Buford Capital, a litigation-financing company with its principal office in New York. The company’s executive team consists of a number of corporate general counsel and a number of current or former partners in major law firms.

These professionals may have advice which differs from that offered by a client’s own lawyer. How does the lawyer reconcile such a difference, especially when he may feel under pressure to favor the financing entity, which is – in effect – paying his fees?

The tension here is most likely to arise when a settlement is being considered. The interests of the client and the investor may be in line when it comes to maximizing recovery. Yet, the client may have other, separate interests that are not shared by the investor. The client may have a desire, for instance, to vindicate a property right or restore his reputation in the marketplace.

When counterclaims are asserted, investors’ interests obviously diverge from clients’. Then there is the question of: Who should be benefiting from settlements – clients or investors?

Unlike contingency-fee agreements, litigation-financing agreements typically call for investments to be recovered “off the top.” Any financing entity that has invested in litigation will thus be interested in any settlement offer that results in a full repayment of principal and interest, even if the net result leaves the plaintiff (and plaintiff’s counsel) with a negligible recovery.

Ethical issues also arise if a financing agreement gives a financing entity control or influence over litigation decisions concerning outcomes other than settlements.

At least one major litigation-financing entity, Chicago-based Gerchen Keller Capital, appears to understand the difficulties presented by these rules of professional conduct. Its website declares that it never intrudes on clients’ tactical decisions or relationship with lawyers.

What do these ethical constraints mean for practicing lawyers?

First, as noted above, if lawyers are to enter into negotiations over financing agreements, they should advise clients of the risks and benefits that are inherent in litigation financing. Mention should be made, for instance, of the possibility that any confidential information shared with a third party (despite contractual protections) will be leaked into the public domain. Clients should also be told that they might end up getting less out of a settlement or judgment than the financers.

Second, lawyers should strive to ensure that litigation-financing agreements:

  1. provide maximum protection for clients’ confidential information;
  2. reserve clients the right to make all litigation decisions, including decisions regarding settlements and the selection of counsel; and
  3. expressly state that every party will have its own counsel, and disclaim any attorney-client or fiduciary relationship between a client’s attorney and a litigation-financing entity.

Thomas E. Peisch and Erin K. Higgins are partners at Conn, Kavanaugh, Rosenthal, Peisch & Ford in Boston, where they advise and defend lawyers and law firms on liability and ethical issues. The authors gratefully acknowledge the assistance of associate Katherine A. Kelter in the preparation of this column.

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