NYC Bar Association Working Group Endorses Litigation Finance

The New York City Bar Association, one of the nation’s most influential legal associations with 24,000 members, created a working group in January 2019 to study litigation funding. The forming of this working group was important as the New York City Bar Association had previously issued a controversial non-binding opinion stating that litigation finance could violate New York rules of professional conduct that prohibit lawyers from sharing fees with non-lawyers (e.g. litigation funders). On March 2, 2020 the working group, made up of 25 members including law school ethics professors and a former federal judge, released a 90-page written report that made several conclusions and recommendations.  The report stated that the New York rules of professional conduct should be modified to “accommodate the reality of litigation funding” and rejected the idea of mandatory disclosure of commercial litigation finance agreements in federal and state court litigation.  Moreover, the report concluded that both lawyers and clients will benefit “if lawyers have less restricted access to funding.” The report is relevant only for litigation funding deals directly between law firms and litigation funders and not between claimants and litigation funders. However, it should give support to both attorneys and claimants considering litigation finance.

The working group addressed the following four specific areas in its report: (i) the ethics rules regarding litigation funding of lawyers and law firms and potential amendments to Rule 5.4 of the New York Rules of Professional Conduct, (ii) current practices in litigation funding and guidelines for attorneys on these issues, (iii) disclosure of litigation funding arrangements, and (iv) consumer litigation funding. 

Although the report did not revise the 2018 formal opinion, it did recommend revisions to the ethics rules, which should provide comfort to lawyers and others interested in pursuing litigation funding.  In addition, the working group did an extensive review of federal and state court decisions on disclosure of commercial litigation funding arrangements and recommended that there should not be a mandatory requirement for plaintiffs to disclose such funding arrangements. The working group did state, however, that the details of funding arrangements may be discoverable in certain circumstances.

The working group suggested two alternative proposals to revise New York’s rules of professional conduct. The group offered both alternatives in order to further the discussion and provide “some inspiration” to the relevant Committees of the City Bar and to those in the judiciary or legislature who would be involved in changing the ethics rules or the law.  While the proposals differ in some ways, they both aim to have the legal ethics rules allow litigation funding and make clear that lawyers may obtain financing without contravening the rule prohibiting fee sharing.

The working group concluded that litigation finance “can serve to advance the objectives of clients, facilitate the smooth operations of law firms, and offer an attractive investment option for funders.” The working group’s consensus report should further legitimize the growing legal finance industry and provide more comfort to claimants and law firms interested in litigation funding.