State Bars Weigh in on Litigation Finance

As the number of jurisdictions embracing litigation funding grows, bar associations are following suit. Lawyers utilizing third-party funding as an option for clients would do well to note guidance offered by the state bar association on funding agreements and professional ethics obligations. While more state bars are expected to lend their opinions on the practice, New York and California have their own approaches to litigation funding.

Above the Law details that litigation funding agreements have been enforced in New York for years—including those between funders and law firms. The Professional Ethics Committee of the New York City Bar made a formal statement regarding Rule 5.4 of the Professional Conduct guidelines with regard to portfolio funding arrangements. Rule 5.4 prohibits sharing fees with non-lawyers, and would therefore preclude the use of portfolio funding agreements.

This 2018 opinion inspired intense dissent and led to the formation of a Litigation Funding Working Group, whose report was released in 2020. In it were suggestions including changing Rule 5.4 to welcome litigation funding and portfolio agreements, as well as recommending no mandatory disclosure of litigation funding.

In California, concern about legal ethics is a major focus of the State Bar of California Committee on Professional Responsibility and Conduct. Their formal opinion states that third-party litigation funding is permissible under California law. However, it reiterates the importance of counsel to respect the duty to the client before any obligation to funders. If a funder has any control over decision-making in the litigation, clients must be informed of that. Of course, reputable litigation funders already know that it is inadvisable to exercise control over the cases they fund.