Litigation Finance Practical and Ethical Dimensions ABA EMERGING ISSUES IN HEALTHCARE LAW MARCH 8-11, 2017
2 Background & Basics DEFINITIONS, TYPES AND USES
Financing commercial 3 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
Commercial litigation 4 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 highrisk matters (patent, arbitration, bankruptcy) Payment of litigation-related receivables can be accelerated
Commercial litigation 5 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
Payment of litigation fees and expenses on behalf of client Law Firm Engagement agreement (discounted hourly or hybrid) Client Litigation funding agreement Client proceeds net of funder return Funder return 6 Basic model for litigation funding (litigant and funder) Lawyer success fee (if any) Client proceeds Settlement or award proceeds Flow of litigation proceeds based on successful outcome Litigation Opponent Funder No change in relationship between client and firm
Client Contingency engagement agreement 7 Basic model for litigation funding (law firm and funder) Payment of contingent litigation fees and expenses Law Firm Litigation funding agreement Funder Payment of funder s return per funding agreement Client Proceeds Law Firm Contingency Fee Settlement or Award Proceeds Flow of litigation proceeds based on successful outcome Litigation Opponent No change in relationship between client and firm
How clients use litigation 8 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
How firms use litigation 9 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
10 Ethical considerations RELEVANT ETHICAL TOPICS AND RULINGS
Main ethical considerations 11 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
Champerty, maintenance, barratry & usury 12 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 Usury A continuing practice of maintenance or champerty Charging interest at a rate that exceeds a maximum rate provided by law for the particular category of lender involved
Champerty 13 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
Usury 14 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
Fee splitting 15 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).
Attorney work product 16 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
Work product and 17 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.
Work product cases 18 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).
Attorney-client privilege 19 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
Common interest 20 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)
Common interest 21 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.
Duty of Confidentiality 22 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
Potential conflicts of interest 23 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)
Potential conflicts of interest 24 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
Control of counsel, 25 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.
Preserving independent 26 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
Providing information to 27 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
Disclosure question 28 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?
Questions? 29
Resources 30 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)