The Argument for Why Counsel Have an Ethical Duty to Inform Clients About Litigation Finance

Marla Decker

Recently, I met a General Counsel of a mid-cap company who had only just learned about litigation finance.  She was both intrigued about the possibilities that litigation funding could unlock for her company (as a company with an active litigation docket) and dismayed that she hadn’t heard of this option sooner: “Why haven’t my outside counsel told me about this?”

Our conversation reinforced that even though litigation finance is increasingly well-known among litigators, there remains substantial opportunity for education, especially among in-house counsel.  But the GC’s question also made me consider whether the pendulum has now swung from the industry’s early days when counsel questioned whether they were ethically permitted to inform their clients about litigation funding to a point where counsel now have an affirmative duty to inform their clients about litigation funding as an option to finance litigation costs?

Early Ethical Concerns

The increasing prevalence of funding in American commercial litigation and arbitrations makes it easy to forget just how cautiously many lawyers felt about litigation finance just a few short years ago.   For example, when I joined Lake Whillans in 2015, a common concern was over whether litigation finance ran afoul of traditional prohibitions against champerty, maintenance, and barratry.  In 2017, in response to our annual survey, a minority of respondents had first hand experience with litigation funding, and of those without experience, over 70% cited “ethical reservations” as the main reason for not using or recommending it.   In this year’s survey (and consistent with last year’s survey as well), nearly 2 out of 3 respondents now have first hand experience with litigation funding, and of the minority who don’t, a mere 12% wouldn’t consider using it in the future.

This quick evolution of perspective and experience has occurred for many reasons, including the rapidity with which litigation finance has been adopted by law firms large and small, favorable court decisions approving of the use of litigation finance, bar opinions providing guidance to lawyers on the ways in which they can ethically use litigation finance, and the many litigators who are now personally acquainted with funded cases.

The Duty to Communicate

In the early days of litigation finance in the U.S., it was not settled whether a lawyer could ethically inform a client about litigation finance let alone refer a client to a litigation funder.  That question was still being asked in 2012 when the American Bar Association Commission on Ethics 20/20 prepared the first comprehensive report on litigation funding (or what it called at the time “alternative litigation finance”).   The ABA Commission, after surveying the various state bar ethics opinions on the subject, concluded that “If it is legal for a client to enter into the transaction, there would appear to be no reason to prohibit lawyers from informing clients of [litigation funding and/or funders].”    However, neither the ABA nor the state bars went as far as requiring lawyers to do so.  But things have changed since then.

State bars have  increasingly given the practice their blessing, albeit while cautioning members to observe ethical duties such as competence, offering candid advice, and safeguarding client confidentiality.   As noted above, the courts have weighed in favorably.   And the industry of funders have done a good job educating at least law firm lawyers.  More lawyers have used litigation financing and it’s become increasingly rare to find a litigator who isn’t familiar with at least the broad strokes of litigation finance.

With such knowledge comes responsibility:  lawyers have an ethical duty to communicate, which requires the lawyer to “reasonably consult with the client about the means by which the client’s objectives are to be accomplished.”  ABA Model Rule 1.4(2).   It follows that if a lawyer is aware of litigation finance, and understands that their client might benefit from it or should at least consider it in order to meet their objectives, then in fulfilling the lawyer’s duty to communicate, lawyers should be educating their clients about litigation finance.

This concept finds support in a 2020 formal opinion from the State Bar of California’s Standing Committee on Professional Responsibility, which discussed the ethical obligations that arise when a lawyer represents a client whose case is being funded by a third-party litigation funder.  The opinion reasoned:

A lawyer also has a duty to communicate with the client about the means by which to accomplish the client’s objectives in the representation. Rule 1.4(a). To the extent the client’s ability to accomplish its objectives depends on the client’s ability to fund the litigation or fund the client’s personal expenses while proceeding with the litigation, the lawyer’s representation of the client may involve advising the client as to whether litigation funding would assist in accomplishing the client’s goals.

Although the Committee did not go so far as to state an affirmative duty to advise clients about funding options, it is not a great leap to infer such a duty, and I predict a growing consensus in the coming years around this point.   Consider in particular the scenario where a claimholder is poorly resourced (or constrained by other priorities) and is facing loss of claim.  If there is reason to believe that a funder could prevent the loss of claim, informing one’s client of that possibility would seem to fit squarely within the duty to communicate.

Further, a lawyer’s duty to provide competent representation may also require that lawyers educate themselves about the ways that litigation funding works, the various permutations, and  how it can benefit a client.  (Our primer on mastering litigation finance  is a good way to start, as is contacting us, or setting up a CLE for your firm or your clients).

Duties extend to all attorneys — not just litigators

While these duties may require litigators most directly to advise clients on at least the possibility of litigation funding (with the option to refer out to lawyers who are now specializing in this field), these obligations may not be limited to litigators.   Part of what makes litigation finance so useful for companies is that it can enable the monetization or financing of claims that the company is not able to pursue because of a shortage of resources.  In such a scenario, there may not be a litigator in the picture to advise the General Counsel about funding options; rather, general corporate counsel may be best placed to bring the matter to the GC’s attention.  Likewise, a restructuring lawyer advising a client on its options may likewise offer litigation financing as a way to right a financially unstable company.

For this reason, advice about litigation funding is not purely the domain of litigators.  Corporate and restructuring lawyers must be alert to potential claims and must be aware of how litigation finance works.  Where there is reason to believe a client could benefit from exploring funding options, raising that possibility is an essential element of a representation that meets professional responsibility standards.

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Counsel who wish to confirm that they understand litigation finance sufficiently to advise their clients about it are welcome to contact Lake Whillans.  We extend the same offer to in-house counsel who may be uncertain about how funding could benefit their company.  All of us have an obligation to keep abreast of the various flavors of litigation finance.

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The best way for companies and their counsel to determine if litigation finance is an attractive option is to discuss it with us.