Litigation Finance And The ABA — A Mixed Bag Of Best Practices (Part II)

Ed. note: Litigation finance is transforming the fields of both law and finance. To help our readers gain a better understanding of what litigation finance entails, we’ve partnered with Lake Whillans to present an ongoing series detailing how litigation funding works, its pros and cons, and its past, present, and future.

In Part I of this double post, we reviewed some of the key issues raised in the American Bar Association Best Practices for Third-Party Litigation Funding document released in August 2020. In Part II, we speak with Marla Decker of Lake Whillans to learn more about the ABA’s recommendations and how they compare to current standard practices among reputable funders.

ATL: Why do you think the ABA decided to publish a list of Best Practices now?

MD: Nearly 10 years ago, the ABA was one of the first organizations to research and analyze litigation finance, at a time when the industry was in its infancy and the ABA Commission on Ethics 20/20 published its white paper on litigation finance, which is still a go-to source of information today. By publishing the Best Practices, the ABA has implicitly recognized the growing importance of litigation funding to the legal industry, which is being driven by the demand from claimholders and lawyers who recognize and desire the myriad benefits litigation funding offers. It makes sense that the ABA would tackle a new comprehensive project to further its earlier work and give updated guidance to lawyers and litigants now that there has been nearly a decade of experiences and case law to draw from. 

ATL: How should counsel use the Best Practices document?

MD: The ABA makes clear in its introduction that “‘Best Practices’ is used as a shorthand for issues that should be considered before entering into a litigation funding arrangement.” In other words, the Best Practices are meant to educate and to guide an issue spotting exercise. The ABA recommendations should be read in that light, rather than as a set of one-size-fits-all practices or recommendations. As the Best Practices make clear, litigation finance has many applications and forms, and there are nuances that exist depending on the type of funding you are doing (i.e., commercial versus consumer; claimholder versus law firm funding) as well as the jurisdiction or forum you are in, and it’s important to pull out the recommendations that are relevant and consider the context.

ATL: Which of the ABA recommendations are already standard practice for Lake Whillans?

MD: The Best Practices include a number of recommendations already practiced by Lake Whillans and embodied in our code of conduct. For example, in a typical financing deal, we contractually commit not to interfere with the independent professional judgment and the duty of undivided loyalty of the attorney(s) representing our investment counterparty, and control of settlement rests with the claimholder. Further, our investment process is designed not to cause any waivers of relevant privileges. We keep abreast of relevant case law, safeguard against waiver of privileges using non-disclosure and other agreements, and avoid receiving any documents or information that poses a high risk of waiver if shared with us. And of course, we follow the Best Practices paramount recommendation that all litigation funding arrangements should be in writing and carefully anticipate and address contractually the various outcomes and situations that may arise once the funding is in place.

ATL: What are some shortcomings of the ABA’s recommendations?

MD: Some of the recommendations seem overly conservative and do not take into account existing case law trends or the commercial reality of litigation finance. For example, with respect to protecting privileges, advising lawyers not to offer an opinion on “the weaknesses in the other side’s case [or] in your case” is unnecessarily cautious given the growing body of law finding no waiver of work product protection when this type of information is shared with a funder. It is also commercially impractical: Discussions with counsel about the strengths and weaknesses of a case are almost always necessary for any reputable funder to make an investment.

In other areas, the report would have benefitted from greater depth of discussion. For example, the report offers the general advice that lawyers should assume that litigation funding agreements will be disclosed. Practitioners considering the risks of disclosure in the cases they are handling would likely have been interested in understanding the different risks, approaches and considerations given to disclosure by courts in different contexts. There are very different considerations given to disclosure of agreements in class action proceedings (where a litigation funding agreement may be relevant to the adequacy of the class representative and counsel) compared to private litigation between two sophisticated commercial parties where the arguments for disclosure are not as strong (nor typically successful). Likewise, cases proceeding in arbitrations may have precise disclosure rules. Further discussion of these contexts would likely have been helpful to lawyers rather than a generalized maxim.

ATL: What did the ABA get right?

MD: As I said before, the ABA was right to recognize the need for updated guidance, as the era of robust litigation funding is upon us and the Best Practices take a comprehensive approach. The Best Practices rightly recognize the distinction between the flavors of litigation funding (for example, what they term “Lawyer-Funder” versus “Client-Funder”). The industry looks different compared to a decade ago, and it’s important to distinguish between various types of financing when thinking through the issues that arise. The Best Practices also delve into a topic that is not as often talked about, but nonetheless important, which is ways to diligence a funder, an important topic as the field of options grows. For example, there are a number of Best Practices that address how to ensure the capital promised will be there when needed (which is one of several ways to distinguish between funders).