Acting in light of what the proposal calls the “exponential growth” in litigation financing, and taking its first action in the area since 2012, the American Bar Association’s House of Delegates has approved a proposal for the third-party litigation funding “best practices.” The proposal, which stays away from some of the higher-profile litigation funding issues (such as whether or not litigation funding should be disclosed), is built around principles of transparency and client control.
On August 3, 2020, the American Bar Association House of Delegates, meeting virtually due to the pandemic, voted 366-10 to approve the proposed “Best Practices for Third-Party Litigation Funding,” a copy of which can be found here. The Best Practices proposal updates the House of Delegate’s 2012 informational white paper on litigation funding. The ABA’s August 3, 2020 press release describing the House of Delegate’s approval of the litigation funding best practices proposal, as well as a number of other actions taken the same day by the House of Delegates, can be found here. The House of Delegates consists of 597 representatives of state, local, and specialty bar associations.
The proposal itself emphasizes that there are many different types of third-party litigation funding, and that the litigation funding field is evolving very rapidly. Nevertheless, and notwithstanding the differences and changes, there are, the proposal states, “some suggested Best Practices” that are “common to all type of funding.”
First, the proposal states, “any litigation funding arrangement should be in writing.” In particular, the agreement should make the non-recourse nature of the agreement clear and spell out how the funder will be compensated, who will pay them, and when and from what source the compensation will come. The agreements should also be clear with respect to provisions for termination of the agreement, including specifications as to who may terminate the agreement, and if there is a termination what impact that will have on funding already provided and on any returns due to the third-party funder.
Second, the litigation funding arrangement “should address what happens to the funding arrangement if, down the road, the client and the funder disagree on litigation strategy or goals.” The proposal specifically notes that “control of key litigation decisions, including with respect to settlement, should remain with the client in all circumstances.”
Third, because both the propriety and discoverability of litigation funding arrangements are “unsettled questions in many jurisdictions, the proposal advises that “attorneys negotiating funding agreements do so with an eye to the likelihood that the ‘deal documents’ for the funding agreement will be examined by readers whose interests are not fully congruent with those of the lawyer and the client.”
Attorneys must also ensure that the funding agreement has been fully explained to the client in a way to allow the client to make informed decisions about the funding.
The Best Practices proposal adopted by the House of Delegates does come with a number of caveats. First, the proposal is careful to state that the best practices presented “should not be read as recommended standards of professional conduct or as a basis for attorney discipline.” Rather, the phrase “best practices” is used as a shorthand for “issues that should be considered before enter into a litigation funding arrangement.” Various jurisdictions may have standards that differ from the best practices.
The proposal also is careful to note that it does not take a position on a number of litigation funding issues, “for example, whether litigation funding should be permitted, as a matter of law or legal ethics … or whether, when and in how much detail a funding arrangement needs to be disclosed.” The proposal document does note that practitioners should assume that some level of disclosure may be required at some point, whether by court or standing orders or through proceedings extraneous to the “main event” litigation.
The ABA House of Delegate’s adoption of the proposal represents a tacit recognition that third-party litigation funding is an increasingly important part of an increasingly broad range of types of litigation. Indeed, the proposal document itself specifically notes the increasingly important role of litigation funding, “whether to provide legal fees for sophisticated, cross-border arbitration and litigation, to assist an individual plaintiff or claimant in a personal injury lawsuit or worker’s compensation claim, or any other litigation or arbitration context.”
The proposal’s emphasis on the need for clarity in the funding agreement and arrangements involves a number of practical measure calculated to try to avoid disputes between the funder and the ultimate client. The proposal’s emphasis on the need for ultimate client control of decision making underscores the fact that the client’s litigation interests should remain paramount and the litigation funder’s interest should remain subordinate.
The proposal deliberately side-steps one of the most divisive issues surrounding litigation funding, which is whether the involvement of third-party litigation funding must be disclosed to the other litigants or parties to the arbitration. At least one state (Wisconsin) has adopted legislation mandating litigation fund disclosure, as discussed here. By the same token, at least one federal district court has adopted a local rule mandating litigation funding disclosure. By contrast, the federal judge presiding over the multi-districted opioid litigation adopted a standing rule requiring the disclosure of litigation funding to the court (rather than to opposing parties). Courts and legislatures undoubtedly will continue to wrestle with these issues. The proposal document simply says that parties to litigation funding arrangement should just assume that the arrangements are going to have to be disclosed at some point, and that the financing documents should be drafted with the expectation that non-friendly third parties could get access to the documents.
Because contingency fees are permitted in most jurisdictions in the U.S, and because the U.S., unlike many other countries, does not have a “loser pays” litigation model, third-party litigation funding arguably is less integral to the litigation system than in other countries, such as, say, Australia or Canada. Nevertheless, in recent years it has become an increasingly important part of our litigation system. There is an increasing likelihood that attorneys in the U.S. may find themselves called upon to deal with and address, a reality that explains the need for the ABA to issues guidelines of the type set out in the recently adopted best practices. As practices change and as financing itself evolves, it will be increasingly important for many of the principles set out in the best practices proposal to be reinforced, particularly the principles of transparency and client predominance.