Litigation Finance and the ABA — A Mixed Bag of Best Practices (Part I)

In August 2020, the American Bar Association released its Best Practices for Third-Party Litigation Funding.  In this Part I of a two-part post, we highlight some of the key issues the ABA raises and suggest how counsel might best interpret the document.  In the upcoming Part II, I will do a Q&A style article discussing the ABA’s recommendations and how they compare to current standard practices among reputable litigation funders.

The ABA first weighed in on litigation funding in 2012, when the ABA House of Delegates adopted its white paper on litigation finance, which was then still an emerging phenomenon in the United States.  Since 2012, third-party litigation funding has become increasingly widespread.  In light of the growing variety of funding structures and developments in case law regarding disclosure of funding agreements, ethical issues, and the legality of financing arrangements, the ABA Section of Litigation Federal Practice Task Force decided that it was time to revisit the subject.  Notably, the task force drafted its Best Practices without soliciting the participation of the major litigation funders.

Although the title of the document refers to “Best Practices,” the ABA explains: “The phrase ‘Best Practices’ is used as a shorthand for issues that should be considered before entering into a litigation funding arrangement.”  Accordingly, counsel should understand the ABA’s contribution as fundamentally an issue-spotting exercise and not as a set of inflexible recommendations.

The Best Practices can generally be divided into four main categories: (1) disclosure, (2) documentation and structure, (3) professional responsibility, and (4) privilege and work product.  The organization is imperfect.  For example, in the disclosure section, the ABA addresses both the question of whether a funding agreement may have to be disclosed to the court or tribunal and also the question of what disclosures an attorney should make to a client in connection with arranging litigation funding.  The latter question might more logically have been treated as a subset of professional responsibility questions.  Nonetheless, the best practices cover the topics that are consistently the most analyzed by observers and participants in the industry.

Counsel may wish to pay particular attention to the following issues raised in the Best Practices document:

Distinction between claimholder and law firm funding.  The ABA divides funding into two broad classifications, which it refers to as “Lawyer-Funder” arrangements and “Client-Funder” arrangements.  It also discusses portfolio funding agreements, in which the funder invests in several cases pertaining to the same claimholder or litigated by the same law firm.  Counsel should note that there are two dimensions here.  One is the entity receiving funding: claimholder or law firm. The other is the scope of funding: single case or portfolio.  Four combinations are possible: (1) funding the claimholder to pursue a single case, (2) funding the claimholder to pursue a portfolio of cases, (3) funding a law firm to litigate a single case, (4) funding a law firm to litigate a portfolio of cases.  Single-case law firm funding is relatively uncommon—when law firms receive funding, it is more typically tied to a portfolio.

The Best Practices characterize these next three suggestions as “common to all types of funding:”

Documentation of the funding terms.  The ABA emphasizes the importance of committing all material funding terms to writing, including the nonrecourse nature of the funder’s investment and precisely how any recovery will be apportioned between the claimholder, the funder, and (if applicable) the claimholder’s counsel.  The cost of funding will be an important consideration for any claimholder, but other terms also matter greatly.  For example, “[p]rovisions for termination and withdrawal are some of the most important issues to consider in any funding agreement.”  The time to ensure alignment of expectations between claimholder and funder is before any funds have been disbursed.

Claimholder control of case strategy.  The ABA encourages claimholders to speak with potential funders about the anticipated role of the funder during the pendency of the litigation, in order to establish appropriate boundaries.  In particular, it is essential to ensure that the claimholder will retain control of litigation strategy (such as settlement decisions) throughout the case, without any interference from the funder.

Disclosure of the funding agreement.  The ABA advises that “[t]he careful lawyer should assume that the litigation funding arrangement may well be examined by a court or the other party at some point in litigation.”  Although it is possible that such disclosure will be required, it is hardly assured.  Disclosure norms vary by jurisdiction and by type of matter (e.g., disclosure may be warranted in the context of funding for a class representative whereas disclosure in a commercial case between sophisticated parties may not be appropriate).  Counsel should research the disclosure practices of the relevant court or arbitral forum rather than make blanket assumptions about the likelihood of disclosure.

All of the recommendations are underpinned with ethical considerations, and the Best Practices also devote a section to this topic.  The ABA stresses that counsel must be mindful of his or her professional responsibility obligations in the relevant jurisdiction when considering any aspect of the impact of litigation funding on the lawyer’s practice.  The Best Practices document cites various rules that may be relevant, leaving attorneys to assess applicability to their particular situation.  Given that funding has become a mainstream component of modern litigation and arbitration, the intention seems to be to remind counsel to consider professional responsibility—as in any other aspect of an attorney’s practice—rather than to dissuade lawyers from informing clients about funding options.