Litigation Finance and State Bars — What Should Counsel Know? (Part II)

Marla Decker

In our last post, we examined how state law has addressed litigation finance, reviewing key cases in four states. We discussed the ongoing national trend towards removing perceived obstacles and clarifying that properly structured funding arrangements do not violate state law.

Naturally, counsel exploring litigation finance options should be mindful of case law in their jurisdiction. In addition, they should take note of any guidance issued by the relevant state bar on the compatibility of funding arrangements and professional ethics rules.  At Lake Whillans we always take care to structure our funding agreements to comply with both state law and professional responsibility obligations.

Mirroring the trend in the courts, bar associations have become increasingly accepting of litigation funding. Below we review the approaches of bars in two key states: New York and California. Counsel interested in this topic may also wish to consult our prior commentary on the American Bar Association’s compilation of Best Practices for Third-Party Litigation Funding.

New York

New York courts have for some time regularly enforced litigation contracts, including between funders and law firms. See, e.g., Hamilton Capital VII, LLC, I v. Khorrami, LLP, 2015 N.Y. Slip Op. 51199(U) (Sup. Ct. N.Y. County Aug. 17, 2015) (funder entitled to portion of law firm’s gross revenues); Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971 (Sup. Ct. N.Y. County Dec. 4, 2013) (enforcing law firm portfolio deal).

In 2018, the Professional Ethics Committee of the New York City Bar Association issued a formal opinion addressing the application of Rule 5.4 of the New York Rules of Professional Conduct (which generally prohibits fee splitting) to arrangements where funding is provided to law firms to finance a portfolio of cases. The committee opined that an agreement in which payments to a funder “are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters” would violate Rule 5.4’s prohibition on fee sharing with non-lawyers. (The committee did not address agreements between claimholders and funders.)

The NYC Bar opinion, while not binding on attorneys, was nonetheless met with fierce criticism, and the New York Bar Association assembled a Litigation Funding Working Group to study the issues further. In 2020, the Working Group released its long-awaited report, advocating changes to Rule 5.4 to facilitate access to litigation funding. The Working Group also recommended that there be no mandatory disclosure of funding in commercial litigation generally, although it did endorse disclosure in class and derivative actions.

Whether and when the Working Group’s recommendations will be adopted remains unclear. The next step with respect to potential amendment of Rule 5.4 is a review by the Bar Association’s Committee on Standards of Attorney Conduct. But in any case, the tone and conclusion of the working group’s work reflect the degree to which litigation funding has become an increasingly standard tool in both New York and other leading jurisdictions.


Recent developments in California also support the continued growth of litigation finance. In October 2020, the State Bar of California Committee on Professional Responsibility and Conduct released a formal opinion on the ethical obligations of counsel representing clients in funded cases. The opinion notes that litigation finance is compatible with California law, but it cautions that counsel must not allow a funding arrangement to interfere with the lawyer’s duty of loyalty to the client claimholder. Counsel are obligated to stay abreast of the relevant law to ensure that they provide competent advice to a claimholder about whether funding could assist in achieving the client’s goals.

The opinion advised: “where the funder has some degree of control of the litigation, the lawyer has an obligation to advise the client about the impact of such limitations on the lawyer’s representation.”   Moreover, counsel must take care not to disclose confidential information to a funder without the client’s informed consent and should guard against inadvertently waiving privilege. This is all sensible guidance, and it reflects the best practices by which experienced funders like Lake Whillans already operate.  For example, Lake Whillans, like many reputable funders, does not generally require or exercise control over the litigation in matters that it has funded.

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We can expect that additional state bars will weigh in on litigation finance in due course and that the discussion of ethics in relation to funding will continue to evolve. There is no sign that professional responsibility constraints will prevent funding from becoming an increasingly common feature of the litigation landscape in every major U.S. forum, but counsel should remain cognizant of their ethical obligations. We invite counsel who wish to ensure that their funding arrangement is structured in accordance with best practice to contact Lake Whillans.   We regularly provide CLE programs to law firms and bar associations on the ethics of litigation funding. 

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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.