As we say at Westfleet Advisors, an eleven year old litigation finance advisory, the best litigators are not merely talented advocates for their clients in the courtroom. Rather, their clients also rely on their advice for the selection of essentially every third-party service provider that will support the litigation: expert witnesses, e-discovery companies, jury consultants, document service providers, et cetera.
So, why should litigators treat referrals to—or advice in connection with—litigation funders any differently?
After all, litigation financing may be the only viable means by which certain clients can assert their legal claims, and any litigator worth their salt should always strive to provide excellent service to help clients solve complex problems.
The answer is simply that litigation finance is different. There are peculiarities inherent to funding that do not exist with any other litigation procurement decision, resulting in a paradox for litigators who really just want to help their clients.
Litigation finance is a capital market that exists to pay legal fees to law firms. In almost every litigation funding arrangement, the representing law firm is the primary recipient of the funding proceeds. Absent a financial interest (which would need to be disclosed) of the lawyer or law firm, no litigation support provider’s services would directly enrich the law firm other than a litigation funder.
For clients, litigation financing eliminates or reduces the burden of paying legal fees and costs, and the client’s obligation to repay is only triggered by a successful result in the underlying case. Thus, from the client’s perspective, the costs and benefits of litigation funding are nearly identical to those of a contingent fee arrangement with their law firm. Just as a law firm would never advise a client on its own contingent fee arrangement, the law firm should be wary of advising its clients on the selection of a funder, negotiation of deal terms or structural parameters, and the definitive financing agreement. How many law firms would recommend a legal fee credit card (or cards) with a high interest rate and then advise clients on the agreement with the credit card company, the source of payment of the law firm’s fees? Litigation financing is fundamentally the same.
Despite a litigator’s best intentions and good faith, a conflict exists that requires a waiver at a minimum, and preferably a recommendation that the client seek independent advice in connection with the litigation financing transaction. Most major US law firms have recognized this conflict and adopted best practices that include recommending that clients retain independent counsel in connection with the financing agreement. This is a necessary, but insufficient, step. Once the definitive agreement is being negotiated, the deal terms have already been struck with the chosen funder. And if the litigator suggested or presented the funder(s) to her client, she may have left herself and her law firm open to second-guessing a few years down the road once the funder’s investment returns are deducted from the recovery proceeds, regardless of independent counsel’s advice to the client on the fine print of the definitive deal documents.
The conflict issue is not the only peculiarity of litigation financing that sets it apart from other litigation procurement functions. The litigation finance market lacks transparency and does not have standardized pricing or terms. Both the market and the financing process are complex and inefficient. Parties seeking funding without expertise can wind up with a problematic deal structure (which can cause problems for counsel too), an unsuitable funding provider, and/or a mispriced deal that results in the client leaving millions of dollars on the table.
Why would any litigator bear these risks and burdens? The good news is, they don’t need to. As the litigation finance industry has developed and matured, several specialized advisors and brokers have emerged who have both the expertise and independence to alleviate all of these problems for litigators and their clients. Further, as litigators and their law firms have gained more experience with the litigation funding process, they are increasingly adopting best practices that restrict or eliminate referrals of clients to funders and instead recommending that clients consider engaging an experienced broker or advisor to provide conflict-free advice on all aspects of the funding arrangement. Take Westfleet Advisors for example. Leveraging over 60 years of combined industry expertise, we empower claimholders and their legal counsel with unbiased insights and comprehensive resources necessary for successful negotiations with litigation funders. Supporting our clients through every complexity of litigation financing from beginning to end is quite simply what we do as leaders in the field.
So, questions to ask:
- Should a litigator decline providing a list of names of funders to clients?
- Does doing so amount to a recommendation, referral, or endorsement?
- Is it possible for a litigator (or other law firm partner) to accumulate enough expertise in litigation finance to meet the competence requirements of Rule 1.1?
For lawyers who prefer to represent their own clients in connection with litigation financing transactions, look for future insights where we will address the necessary disclaimers and conflict waivers to ensure the clients have been provided informed consent following adequate disclosure required under the ethics rules.
Always happy to take these insights private to engage in a deeper conversation. Please reach out at your convenience.