New York Bar Provides Ethical Guidance for Client Litigation Funding

The New York State Bar Association (NYSBA) issued Formal Opinion 2024-2[1] on April 11, 2024. This opinion addresses critical issues throughout the litigation funding process, including conflicts of interest and client confidentiality, and is the first formal update on this topic since 2011.

The NYSBA’s Opinion officially acknowledges that litigation funding has the potential of increasing a claimant’s access to justice and provides guidance for attorneys whose clients seek litigation funding. USClaims welcomes the guidance of the NYSBA, as we’ve tailored our business practices by the principles of fairness and transparency since 1996.

While Formal Opinion 2024-2 is a step in the right direction, it is simply not enough.

The Need for Clear Ethical Standards in an Unregulated Industry

The current lack of regulation in litigation funding enables unethical practices behind closed doors, hindering responsible funders like USClaims from providing plaintiffs with funding assistance during the lengthy litigation process.

Over the past 13 years, the number of litigation funders grew substantially, as did clients’ need for litigation funding. COVID-19 exacerbated this need, as court closures created a backlog and delayed compensation for injured victims. Yet, despite the rapid increase in litigation funding companies, there is still no industry regulation.

The recent NYSBA Opinion, together with the Code of Conduct[2] mandated for members of the American Legal Finance Association (ALFA), helps ensure funding contracts are fair, ethical, and transparent. In our view, this Opinion is in line with the principles that USClaims and other ALFA members have been advocates of for decades.

Let’s take a closer look at the guidelines covered in the NYSBA Opinion:

Litigation Funding

The Opinion begins by broadly addressing lawyers’ ethical responsibilities regarding advising clients on litigation funding agreements. As a consumer/plaintiff directed funding company that has been in business for almost 30 years and funded more than $1Billion dollars since 2010, we believe ethical funding processes are critical in restoring and maintaining public confidence.

It’s probably no coincidence that Formal Opinion 2024-2 was issued one day before the New York State Unified Court System Administrative Board requested public comment related to proposed amendments to the Uniform Civil Rules, which would require disclosure of information related to litigation financing agreements.[3]

The Board’s request for public comment cited a case in which a funding company provided funding to the mother of a brain-injured infant against the infant’s future settlement proceeds. In that case, the attorney failed to inform the mother that his brother owned the funding company. The attorney also failed to notify the court of this conflict of interest when filing the motion to approve the distribution of the settlement proceeds. This is a classic example of a client’s best interest falling by the wayside.

We can and must do better.

Pre-Contractual Issues

Per the Opinion, Attorneys may advise clients about litigation funding and refer them to one or more litigation funding companies. However, the Opinion highlights that, in doing so, lawyers need to carefully navigate potential conflicts of interest when dealing with litigation funders. Specifically, it notes that attorneys are prohibited from having a direct financial interest in a claim or receiving referral fees for directing clients to funders. Lastly, lawyers may also represent their clients in transactions with litigation finance companies and charge clients a fee for such representation.

It is important to note that USClaims does not require attorneys to represent their clients and charge attorney’s fees as a result of fundings transactions. This is geared more towards commercial litigation. Furthermore, USClaims does not offer or pay attorneys any fees when they refer their clients. In line with the Opinion, we believe lawyers better serve their clients’ best interests when conflicting financial incentives are not at play.

On conflicts of interest issues where attorneys may represent both funder and plaintiff to evaluate a potential lawsuit – USClaims does not ask attorneys to represent us or to underwrite their clients’ cases for USClaims (we have a dedicated in-house team of underwriters).

Contractual Issues

The Opinion reinforces that clients must retain ultimate control over critical litigation decisions, such as settlement offers. Funding contracts should never undermine the lawyer’s obligations to abide by the client’s directives on objectives and strategy, ensuring the client maintains control throughout the case.

USClaims has always prioritized client autonomy by never interfering with an attorney’s professional judgment. To that aim, it structures its funding agreements to ensure clients retain ultimate control over crucial litigation decisions like settlement offers. Our contracts are clear, concise, and transparent with no hidden fees and non-compounded rates. We also typically include a cap on the amount of our lien, which ensures that the attorney and their client know from the outset what would be client’s maximum funding lien exposure, regardless of how long the case takes to resolve. This knowledge gives the attorney and the client the opportunity to maintain control of their case strategy.

These practices enable clients to make informed choices while benefiting from litigation funding, without ceding decision-making authority to the funder.

Post-Contractual Issues

The final section of the Opinion outlines lawyers’ obligations regarding receipt of funding, payment, and negotiating funding on a client’s behalf.

USClaims does not get involved in the litigation process — our practices and our contracts ensure that the client and attorney control all aspects of the litigation. Furthermore, we are always willing to work with the law firm if a case settles for less than expected.

USClaims: A Champion for Ethical Litigation Funding

The NYSBA’s Formal Opinion 2024-2 marks a significant step forward in ethical litigation funding, but it also underscores how much further the industry must go.

There is an urgent need for broader oversight with fair, uniform rules and enforcement mechanisms to foster true transparency and accountability. Until the funding industry is regulated, bad actors will continue to prevail at the expense of clients’ best interests. In the meantime, the guidelines set forth by the NYSBA will allow attorneys to distinguish ethical funders from those engaging in unethical or predatory behavior.

USClaims believes that ethical and transparent litigation funding is vital in ensuring access to justice for all. By providing financial support and upholding the highest ethical standards, litigation funding companies can empower plaintiffs to pursue their claims and achieve a fair resolution.

Learn more about ethical funding services at www.USClaims.com.

Resources

  1. “Formal Opinion 2024-2: Ethical Issues Arising from Advice to Clients on Client-Funder Litigation Funding Agreements.” New York City Bar Association, www.nycbar.org/reports/formal-opinion-2024-2-ethical-issues-arising-from-advice-to-clients-on-client-funder-litigation-funding-agreements/#:~:text=SUMMARY. Accessed 29 Apr. 2024.
  2. Consumers – American Legal Finance Association. 21 Jan. 2023, www.americanlegalfin.com/consumers/. Accessed 6 May 2024.
  3. “Request for Public Comment on proposed amendments to Section 202.67 and Section 207.38 of the Uniform Civil Rules for the Supreme Court and County Court relating to litigation financing agreements.” New York State Unified Court System, https://www.nycourts.gov/LegacyPDFS/rules/comments/pdf/LitigationFinancingAgreements.pdf

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