By: Bryan Diaz
If a plaintiff is using TPLF, they could be paying their lawyer twice without even knowing it. TPLF has quickly become a 15 billion dollar industry in the United States alone, it has revolutionized how lawsuits are financed, allowing plaintiffs and law firms to pursue cases that may otherwise be financially out of reach. TPLF’s explosive global growth in a largely unregulated environment raises significant ethical questions – especially when lawyers themselves can invest in these funds. Potential conflicts of interests to diminished independence, the intersection of TPLF, and legal ethics present complex challenges to potential plaintiffs, regulators, practitioners, and funders alike.
What is Third-Party Litigation Funding?
TPLF is a means of covering litigation costs where a financing fund or hedge fund provides money upfront to a plaintiff or their counsel in exchange for a portion of the proceeds from the litigation. It comes in two main forms: consumer litigation funding, where individual plaintiffs receive support for expenses during litigation (typically in personal injury cases), and commercial litigation funding, which includes either single case arrangements for large multi-plaintiff cases or portfolio funding for law firms handling multiple cases.
TPLF has its roots in medieval times but was restricted for centuries under laws against maintenance and champerty. It reemerged in the 1990s in Australia and has since become a major player in global legal markets. TPLF’s rapid growth is driven by its potential to improve access to justice, reduce financial risks for plaintiffs and law firms, and level the playing field against well-funded opponents. However, it also raises concerns about promoting frivolous lawsuits, exploitative practices, and a lack of transparency in funding arrangements.
Ethical Challenges Arising from Third-Party Litigation Funding
Rules or regulations surrounding TPLF vary from country to country; however, few countries impose extensive TPLF rules or regulations. The explosive growth of this market in combination with minimal regulation has created an environment poised to generate ethically compromising situations. Most of TPLF ethics discussions are from the financier’s perspective, but the lawyers who are benefiting from TPLF are also faced with a variety of incentives promoting seemingly obvious ethics issues that have gone unaddressed in most jurisdictions.
Many jurisdictions regulate who can own or profit from a law firm’s activities. However there are no regulations on who can own or profit from a TPLF firm. Lawyers investing in litigation funding, regardless of the jurisdiction, can create conflicts of interest, loss of independence, and confidentiality risks presently ignored by most modern ethics systems.
For example, a lawyer invests in a litigation fund that finances multiple cases, including one in which they are representing a plaintiff. The lawyer could prioritize strategies or settlements to maximize the fund’s return rather than the client’s best interest. This could mean convincing a client to take a settlement, as opposed to pursuing trial, that could benefit the client but also increase litigation costs for the fund. Alternatively, a lawyer defending a well-funded defendant against a plaintiff who is funded by the litigation financier with whom the lawyer is invested could also prioritize strategies and settlements that maximize the plaintiff’s return or minimize the plaintiff’s litigation costs.
Examining Ethics Rules Across Key Jurisdictions
The United States has little, if any, federal rules related to TPLF, their regulatory approach has empowered the states to regulate the funders as they see fit. However, no level of government imposes regulations addressing a lawyer’s non-law business ventures, any rules on this topic stem from state bar associations ethics rules or the American Bar Association (ABA) Model Rules of Professional Conduct.
The Model Rules prohibit any non-lawyer from profiting or taking an ownership stake in a law firm, this is imposed in most states, with Arizona and Utah imposing “sandbox” programs experimenting with non-lawyer ownership. These rules are meant to ensure non-lawyers have no ability to direct or control the professional judgment of lawyers. Yet, there are no rules prohibiting a lawyer from profiting or owning a third-party litigation fund.
The model rules that would most likely guard against this type of conduct would be conflict of interest and misconduct rules. The conflict-of-interest rule dictates a lawyer must avoid business ventures that create direct conflicts of interest with their legal practice or impair the ability to represent clients. The misconduct rule states lawyers must avoid business ventures that reflect poorly on their fitness to practice law.
Although these rules provide a good foundation, they do not fully address the unique challenges posed by lawyers investing in TPLF. For example, does a lawyer’s Investment in a litigation financing fund automatically create a conflict with every client whose case is funded? And what would constitute adequate disclosure or informed consent in this context? What would trigger such necessary disclosure? Additionally, lawyers invested in TPLF may also face indirect pressures from the fund that align with the fund’s profitability.
In the United Kingdom, there are also no explicit rules prohibiting lawyers from investing in litigation financing funds. Lawyers, again, are subject to professional rules, here titled Solicitors Regulation Authority (SRA) Standards and Regulations, that address potential conflicts of interests and the independence of legal advice. These rules call for lawyers to act in a way that upholds public trust and integrity while also avoiding conflicts between their own financial interests and duty to their clients.
The European Union has similar rules to the United States and the United Kingdom with regard to misconduct and conflicts of interest. The European Union, recognizing the ethical questions raised by TPLF, in the process of passing a resolution that would address these concerns. The resolution would be the process of creating safeguards and disclosure requirements of all of those involved in the claims and who have an interest in the outcome of the court case. However, as of now, there are no disclosure or transparency requirements.
In Hong Kong, where TPLF is outlawed for litigation, but permitted in arbitration and related court proceedings, there appear to be the most robust rules addressing ethical questions raised by third party litigation funders. The rules require funders to maintain effective procedures to manage conflicts specifically handled by senior management. They also define conflicts of interest to include “situations in which a lawyer acts both for the funder and a funded party or in which there is a pre-existing relationship between any such parties.” Hong Kong also required “disclosure of third-party funding and the identity of the third-party founder.”
Proposed Solutions
There are a few rules which, to varying degrees, could address the novel ethical questions posed by TPLF and investment or ownership by practicing lawyers. One option is to outright ban lawyers from investing in TPLF funds. This would solve most transparency, conflict of interest, and lack of independence problems, though this seems unlikely to be instituted given the hesitant regulatory landscape of most jurisdictions.
A more pragmatic approach might be banning lawyers from investing in TPLF funds which invest in that lawyer’s practice area. This would mean a personal injury attorney could not invest in a TPLF fund investing in personal injury cases but could invest in a TPLF fund investing in commercial litigation. This rule would address most of the ethical issues yet could be difficult to enforce.
A variation of the Hong Kong rules, likely provide the best solution. Funders could be required to maintain effective procedures to manage conflicts of interest and requiring disclosure to plaintiffs or prospective plaintiffs of any relationship, broadly defined, the lawyer may have with any TPLF fund. TPLF funds would also be required to disclose if that fund has any interest which could become adverse to the plaintiff. This would allow the plaintiff to make an informed decision before working with the attorney or the TPLF fund. It would also incentivize lawyers and TPLF funds from having adverse interests to their target clients.
In sum, TPLF funds have an opportunity to democratize access to justice and level the playing field in legal systems worldwide. This unique opportunity also presents novel ethical questions which have gone unaddressed in most jurisdictions. New rules regarding conflicts of interest and disclosures could be the answer to incentivizing both lawyers and TPLF funds to act such that they may seize this lofty opportunity.
