Early last year, the federal Northern District of California became the first court to require — by rule — that a party receiving outside litigation funding must disclose the arrangement. As we described, the rule is limited to class actions; it had been favored by the U.S. Chamber of Commerce, which views it as promoting needed transparency.
Now comes the first statute on the subject, Act 235, which passed in a narrow vote by the Wisconsin state legislature, and was signed into law on April 3.
“Forward” for the Badger State?
The U.S. Chamber’s Institute for Legal Reform had lobbied in support of the Wisconsin bill, and said on its website that its passage lived up to the state’s motto — “Forward” — by “bring[ing] litigation funding out of the shadows.”
The statute requires a party to disclose “any agreement under which any person … has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment or otherwise.” It exempts lawyer-client contingency fee agreements, and only applies to actions filed in Wisconsin state courts.
Burford Capital, one of the largest of the U.S. commercial litigation funders, downplayed the significance of the Wisconsin law. As reported by the ABA Journal, Burford’s chief marketing officer said that the statute overreached in applying to commercial litigation finance as well as consumer finance, and predicted a backlash from businesses. Proponents of funding also point to a possible Pandora’s box of discovery disputes that will be opened with increasing regulation.
But you can’t invest in your cake and eat it, too…
Whether the new Wisconsin statute will be the first of many remains to be seen. Another unknown, as we’ve discussed before, is how courts will deal with the doctrines of champerty and maintenance that have historically placed limits on the ability of third parties to fund suits.
But in another litigation-funding development, the New York State Bar Association last month decided that neither a lawyer nor the lawyer’s firm can represent a client in an action funded by a litigation finance company in which the lawyer is an investor.
In Opinion 1145, the NYSBA’s ethics committee said that doing so raised an unwaivable conflict of interest that couldn’t be remedied by the client’s informed consent. New York’s version of Model Rule 1.8(e) bars a lawyer from providing “financial assistance to a client in connection with pending or contemplated litigation,” subject to limited exceptions for advances covering court costs and expenses, and indigent clients. The committee said that even though the lawyer wouldn’t be the only investor in the funding company, the “reality [is] that money from the [lawyer] would be paid as financial assistance to the … client.”
And representing a client funded through the company the lawyer invests in would also violate New York’s version of Model Rule 1.8(i), which prohibits acquiring a “proprietary interest” in a client’s claim, the committee ruled. By providing money to the client in exchange for a percentage of the prospective recovery, the funding company would acquire such an interest, and the lawyer would also do so, as a part owner of the company.
There is no provision for waiving these prohibitions, said the committee, and they are imputed to the investing lawyer’s whole firm.
Third-party funding remains a hot topic, and we predict that there will be further developments, on all fronts — legislative, case-law, and regulatory. (The U.S. Chamber is one of more than two dozen organizations that last summer asked the federal courts’ Rules Committee to consider amending the Rules of Civil Procedure to require disclosure of third-party funding arrangements.) We’ll continue to keep you posted, so check back often.