Litigation Funding * Trial Lawyer Advertising * Class Action Lawsuits * In the News
New York City Bar Makes Right Call on Litigation Funding, Pennsylvania Should Follow Suit
By Curt Schroder, Executive Director of PCCJR
Litigation funding is a rapidly expanding business involving the provision of capital by a third-party “litigation funder” to a plaintiff in a lawsuit. In return, the litigation funder receives a portion of the recovery. Proponents of this practice argue that litigation can be prohibitively expensive, particularly in high-stakes litigation against deep-pocketed defendants.
However, litigation funding has problems and pitfalls as well. Concerns have been expressed that litigation funding increases the volume of litigation and prolongs litigation. Furthermore, some funders might exert control over the litigation in order to ensure a certain level of return on their investment in the case. Ethical issues arise when the financial recovery becomes paramount over the attorney’s duties to the client.
The New York City Bar Association recently issued a formal opinion in which it found that litigation funding agreements between lawyers and funders who finance lawsuits in exchange for a percentage of the recovery violate the fee sharing provisions of the New York Rules of Professional Conduct found in Rule 5.4.
New York’s Rule 5.4 provides that “a lawyer or law firm shall not share legal fees with a nonlawyer.” The Bar Association was careful to distinguish its opinion from those opinions upholding arrangements where a funder enters into agreements directly with a lawyer’s client, finding that client-funder arrangements do not implicate Rule 5.4. Neither do loans to a lawyer at a fixed rate of interest without regard to the outcome of a lawsuit.
According to the New York City opinion, the fee sharing restriction in Rule 5.4 is intended to protect the lawyer’s professional independence of judgment. Non-lawyers must not be allowed to interfere with a lawyer’s professional judgment, use dishonest or illegal methods or pressure lawyers to use improper methods. “Rule 5.4(a) must, therefore, be read to foreclose a financing arrangement whereby payments to the funder are contingent on the lawyer’s receipt of legal fees,” the opinion concluded. Therefore a lawyer may not enter into a financing agreement with a non-lawyer litigation funder when the lawyer’s future payments to the 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.
While the decision of the New York City Bar Association is not binding in Pennsylvania, this well-reasoned formal opinion should be persuasive to bar associations and even the Pennsylvania Supreme Court. The Pennsylvania Rules of Professional Conduct contains language identical to New York’s:
Rule 5.4. Professional Independence of a Lawyer.
(a) A lawyer or law firm shall not share legal fees
with a nonlawyer
In addition, Section C provides:
(c) A lawyer shall not permit a person who
recommends, employs or pays the lawyer to render
legal services for another to direct or regulate the
lawyer’s professional judgment in rendering such
legal services.
Adoption of this position in Pennsylvania would be a good first step in light of the identical Pennsylvania fee sharing language and section C’s proscription on regulating a lawyer’s professional judgment. Investors must be prevented from influencing decision making in cases. The presence of a funding decision maker skews a case and could result in a plaintiff forgoing a reasonable settlement offer due to the demands of a litigation funder.
However, more needs to be done to protect clients and the courts from issues associated with third-party litigation funding. Direct contact between third-party litigation funders and attorneys should be prohibited unless the client is present and part of the conversation. Pennsylvania should also consider prohibiting third-party litigation funding in class action lawsuits.
Wisconsin recently passed a mandatory disclosure requirement to ensure that all parties to an action are informed of the existence of a litigation funder in the case. A similar law in Pennsylvania is also needed.
The Superior Court of Pennsylvania has already declared one type of litigation funding as “champertous and invalid”, in the WFIC, LLC v. LaBarre Et.Al action in September 2016. The court said:
In order to establish a prima facie case of champerty,
the following three elements must exist: (1) the party
involved must be one who has no legitimate interest in
the suit; (2) the party must expend its own money in
prosecuting the suit; and (3) the party must be entitled
by the bargain to share in the proceeds of the suit. 16
Summ. Pa. Jur. 2d Commercial Law § 4:88 (2d ed.). See
also Belfonte v. Miller, 212 Pa.Super. 508, 243 A.2d 150,
152 (1968) (defining a champertous agreement as “one
in which a person having otherwise no interest in the
subject matter of an action undertakes to carry on the
suit at his own expense in consideration of receiving a
share of what is recovered”).
The Superior Court found the requisite elements of champerty had all clearly been met. The Litigation Fund Investors were completely unrelated parties who had no legitimate interest in the litigation. The Litigation Fund Investors loaned their own money simply to aid in the cost of the litigation, and in return, were promised to be paid “principal, interest, and incentive” out of the proceeds of the litigation. “Under Pennsylvania law, if an assignment is champertous, it is invalid.” Frank, 45 A.3d at 438. The Superior Court was constrained to conclude that the 2008 Fee Agreement was invalid and, therefore, the Appellant was not entitled to any fees under said agreement.
Nonetheless, litigation funding arrangements are still in use in Pennsylvania, and the Labarre decision was not appealed to the Supreme Court. Therefor Pennsylvania should look to New York City’s opinion on litigation funding agreements between attorneys and funders for guidance. Other public policy changes should also be considered as noted above.
ATRA Releases New Report on Trial Lawyer Advertising
A new study by the American Tort Reform Association (ATRA) found that trial lawyers spent $186 million on advertising in the Second Quarter of 2018. The study looked at seven media markets and trial lawyer spending on legal services ads. The markets they examined represent nearly 15 percent of local legal services television ad spending and included Los Angeles, San Francisco, Tampa-St. Petersburg, Miami-Ft. Lauderdale, St. Louis, Kansas City and New York City.
“These ads from plaintiffs’ attorneys, while many times irritating, can also have detrimental effects,” Sherman Joyce, President of the American Tort Reform Association said. “The ads will often claim a certain prescription or medical device can cause harm, and without consulting a doctor, consumers will sometimes stop use due to the false alarm created by unfounded advertisements.”
You can read the full report here.
Want to help spread the word? Share ATRA’s social media posts:
Twitter: https://twitter.com/AmTortReform/status/1044195140796067843
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Lawsuit Watch| Special Focus: Class Action Lawsuits
This month’s edition of Lawsuit Watch features Ted Frank, Director of Class Action Fairness at the Competitive Enterprise Institute. Frank is considered a leading critic of abusive class action settlements. The conversation focused on the issue of the merits of class action lawsuits, the benefit of such suits to attorneys vs. those who were wronged, and the impact class action lawsuits have on individuals and businesses.
You can hear the complete podcast here.
Lawsuit Watch airs on the fourth Monday of each month on WFYL. The program broadcasts live on 1180 AM and on the web.
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