Litigation Funding in the U.S.: Practice and Theory

Litigation funding has become controversial in the United States. That said, some forms of it are relatively well accepted. Law firms have long benefited from lines of credit. There is little dispute that their doing so is ethical. Further, it is generally viewed as permissible for clients to receive contingent loans based on their recovery in particular legal actions—or at least it is not an ethical problem for the lawyers representing those clients. What is less clear is whether attorneys can receive similar non-recourse loans secured by the fees they receive in particular legal actions. A recent formal opinion of the influential New York City Bar Association (NYCBA Formal Opinion 2018-5) concluded that they cannot, casting doubt on a growing practice in the United States. The formal opinion reasoned that those sorts of contingent loans violate the prohibition on lawyers sharing their fees with non-lawyers and expressed concern that the loans would threaten lawyers’ professional independence of judgment. Concerns about this restrictive approach are both practical and theoretical. At a practical level, an issue is whether contingent agreements between lenders and lawyers regarding particular lawsuits really do give rise to risks not present in other loans. At a theoretical level, what one thinks of this sort of litigation funding is likely to depend on a more general normative view. Three likely options are: a libertarian view that favors free markets; a traditional view that worries about lawyers acting less like professionals and more like ordinary businesspeople; and a progressive view that sees restrictions on funding as primarily advantaging those who have access to capital over those who do not. The selection one makes from among these theoretical views is likely to play a significant role in what one thinks about loans made to lawyers contingent on their success in litigation. Finally, there is the interesting possibility that whatever ethical rules apply in other contexts might be adapted in the class context, as has occurred with other ethical rules, including those that apply to conflicts of interest. Reasons that an adjustment to the ordinary ethical rules might be appropriate for loans to class action lawyers include judicial scrutiny that class action settlements receive and the “progressive” and practical commitments built into U.S. class action procedure.

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