Alternative Litigation Funding: Ethics on Loan Part Three

Alternative Litigation Funding: Ethics on Loan Part Three

In this short blog series,  we are looking at the structure of Alternative Litigation Financing (ALF) in the United States today, and some of the ethical issues that it raises. In the previous two posts we have discussed the current structure of ALF and some of the problems.

To limit ALF's possible influence, specific clauses could be included in agreements that promise that the ALF supplier "will not attempt to direct or regulate the attorney's professional judgment in the funded case,"[1] but the Chamber of Commerce still contends that because ALF suppliers lack a "privileged, fiduciary relationship with the plaintiff," their interest in maximizing profit-rather than in vindicating plaintiffs' rights-makes their influence too corrupting.[2]

Some say, though, that the incentives created by ALF are no different than contingent fee financing[3]: in both ALF and contingent fee agreements, the funder receives a share of the proceeds and there is a third party with an interest in the outcome of litigation.[4] Contingency fees already often cause mismatched interests regarding when to settle,[5] for example, so "the more appropriate question . . . is whether ALF will exacerbate (rather than create) such conflicts of interest."[6] There are several reasons to believe the answer to that question is yes: while attorneys are bound by legal and ethical requirements, contingent fee arrangements must be knowingly approved by clients and must be objectively fair and reasonable, and attorneys must adhere to rules relating to advertising and client-getting, ALF providers are not similarly bound.[7] For example, one ALF provider "sen[t] $50 bills, along with [ALF] information, to the families who lost loved ones" on September 11, a practice that would be prohibited for attorneys.[8]

In addition to concerns about ALF influencing litigation, it can also place attorneys directly in conflict with their clients. ALF suppliers often require the lawyer to formally agree to pay the ALF supplier after settlement or judgment, and this creates a "Hobson's choice between the duty of loyalty to the client and a contracted duty owed to an ALF supplier."[9] Though clients can waive these conflicts,[10] several state bar associations seem particularly troubled,[11] and clients have often instructed their attorneys after-the-fact not to pay the ALF supplier despite previous consent.[12] One solution could be to prohibit contractual relationships between ALF suppliers and the consumer's attorney.[13]

Despite the potential ethical pitfalls, it does appear possible for ALF suppliers to comply with attorneys' ethical and legal requirements, though regulation-as opposed to trust that ALF suppliers will voluntarily comply with attorneys' ethical requirements-seems prudent. In addition to ethical concerns, ALF also faces criticism regarding its effect on the amount and quality of litigation in the United States[14]; its legality[15]; and whether, as a normative matter, we wish to allow investors to profit from others' misfortune.[16] The ABA has sought comments about how ALF should be regulated,[17] and it seems clear that as ALF continues to grow, more courts and state legislatures will define the boundaries of ALF in the United States.

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Building a Better Legal Profession (BBLP) is an organization based at Stanford Law School.   BBLP is a national grassroots movement that seeks market-based workplace reforms in large private law firms. For more information, visit BBLP's Web site at www.betterlegalprofession.org.


[1] Douglas R. Richmond, Other People's Money: The Ethics of Litigation Funding, 56 Mercer L. Rev. 649, 670 (2005).

[2] Beisner et al., supra note 14, at 2.

[3] Jonathan T. Molot, Litigation Finance: A Market Solution to a Procedural Problem, 99 Geo. L.J. 65, 91 (2010).

[4] McLaughlin, supra note 2, at 647. Though a lawyer "shall not acquire a proprietary interest in the cause of action . . . the lawyer is conducting for a client," contingency fee agreements are specifically excepted from this prohibition. Model Rules of Prof'l Conduct R. 1.8(i). See McGovern et al., supra note 14, at 19; Richmond, supra note 28, at 673.

[5] Richmond, supra note 28, at 673.

[6] Garber, supra note 3, at 18-19.

[7] McLaughlin, supra note 2, at 647.

[8] Id.

[9] ABA Memo, supra note 18, at 5 (Dec. 2, 2010); see McLaughlin, supra note 2, at 623, 647, 650.

[10] Model Rules of Prof'l Conduct R. 1.7(b)(4).

[11] See State Bar of Michigan, Standing Comm. on Prof'l & Judicial Ethics, Op. RI-321 at 1 (2000), available at 2000 WL 33716933; Utah State Bar Ethics Advisory Op. Comm., Op. 00-04 at 3 (2000), available at 2000 WL 815564 ("[A] lawyer ordinarily should not simply hand over the funds or property to the third person against the client's instructions.").

[12] See, e.g., Fausone v. U.S. Claims, Inc., 915 So. 2d 626, 629 (Fla. Dist. Ct. App. 2005) (client borrowed $30,000 and instructed her attorney not to pay the $50,937 she owed the ALF supplier when her claim settled for $200,000).

[13] McLaughlin, supra note 2, at 660.

[14] Garber, supra note 3, at 29.

[15] Id. at 17.

[16] Susan Lorde Martin, The Litigation Financing Industry: The Wild West of Finance Should Be Tamed Not Outlawed, 10 Fordham J. Corp. & Finance L. 55, 63 (2004).

[17] ABA Memo, supra note 18, at 5.