Attorney Independence is a Primary Consideration for Ethics Authorities Considering Litigation Funding Agreements

Author: Timothy Duree, Partner, Commercial & Environmental Litigation Practice Group

Introduction

Litigation funding - the practice of an outside entity financing the costs of investigating and litigating a case - has become a fixture of the legal industry. Law firms of every size can now avail themselves of funding options to assist in covering expenses associated with advancing their cases. Despite the prominence of this type of financing, legal regimes governing it vary by jurisdiction and are constantly evolving.

Litigation financing agreements cover many of the elements a party would expect in any type of loan, like financial terms and interest rates. But one factor that differentiates litigation funding agreements from traditional financial transactions is that these agreements sometimes grant to the lender a degree of influence or oversight of the litigation. Of course, this raises an array of questions relating to attorney ethics, many of which remain unclear.

Of the handful of ethics authorities that have issued opinions directly addressing litigation financing, one issue remains paramount: attorney control of litigation and independence in attorney judgment. Although ethics bodies apply varying ethics rules to address the pertinent issues, a common theme between them is an emphasis that funding agreements will be impermissible if they imperil or restrict attorney independence.

Below are highlights from a few of the states that have addressed the issue and prioritize the importance of protecting attorney independence.

New York

In New York City, litigation financing agreements in which a lender obtains a contingent stake in a lawyer’s legal fees are impermissible under Rule of Professional Conduct 5.4(a) because they constitute fee-sharing with a nonlawyer. N.Y.C. Comm. on Pro. Ethics, Formal Op. 2018-5 (2018). “Rightly or wrongly, [Rule 5.4] presupposes that when nonlawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer.” Id. A subsequent New York City ethics opinion emphasizes the necessity of attorney independence, noting that Rule 5.4(a) “is intended to serve two overarching purposes - to protect clients from non-lawyers' interference with their lawyers' independence of professional judgment and to prevent the unauthorized practice of law by non-lawyers.” N.Y.C. Comm. on Pro. Ethics, Formal Op. 2024-2 (2024).

Texas

The Texas Professional Ethics Committee viewed the issue through the same lens as its New York City counterpart, finding that Texas Rule 5.04 prohibits a lawyer from entering into a financing agreement by which the lender would obtain a portion of the attorney’s contingent recovery. Texas Pro. Ethics Comm., Op. No. 576 (2006). 

There, the ethics committee explained that such an agreement constituted fee-sharing with a non-lawyer, which is prohibited in order to “avoid encouraging or assisting non-lawyers in the practice of law.” Id.

Ohio

In Ohio, the state disciplinary body approached the issue of litigation financing by referencing Rule 2.1, which states that “a lawyer shall exercise independent professional judgment.” Supreme Court of Ohio Bd. of Comm’rs on Grievances and Discipline, 2021 WL 2182140, at *3–4. This comports with a prior Ohio opinion noting that in a litigation financing agreement, “a lawyer must guard against undue influence” and must “exercise independent professional judgment.” When obtaining litigation funding, the lawyer must make certain that the funder “does not attempt to dictate the lawyer’s representation of the client.” Supreme Court of Ohio Bd. of Comm'rs on Grievances and Discipline, 2012 WL 6591524, at *6.

California

The California Committee on Professional Responsibility and Conduct avoided an absolute prohibition on litigation control by a financer, stating that “[t]he Committee does not reach a general conclusion that any particular degree of control is per se unethical.” Cal. Eth. Op. 2020-204 (2020). But the Committee advised that if a financing agreement impacts a lawyer’s ability to control the litigation, the lawyer has an obligation to advise the client of this pursuant to Rule 1.4, which governs client communications. Id. The California authority further noted that litigation funding agreements “do not alter the lawyer’s ethical obligation to pursue the client’s best interest.” Id.

Conclusion

The state ethics authorities that have squarely addressed issues relating to litigation funding have approached the pertinent issues from differing angles and have relied on varying ethical touchstones to ground their analysis. But among several of these opinions, there is a consistent theme: attorney independence is sacrosanct, and a litigation funding agreement that bestows decision-making authority on the funder will be viewed with skepticism—and may potentially be unenforceable.