Disclosure Rules, Ethics Hang Over Legal Funding Conference

As it appeared on Law360

By Sam Reisman

Law360, New York (September 17, 2018, 7:29 PM EDT) — A panel of litigation finance experts pushed back Monday against a recent bar opinion that portfolio funding could be unethical and told representatives from the burgeoning industry that they should prepare themselves for some form of enhanced disclosure requirements.

The tone at the first day of the inaugural Litigation Finance Dealmakers Forum in Manhattan was sanguine, despite the recent opinion issued by the New York City bar that there was a possible Rule 5.4 violation of the New York state rules of professional conduct in the growing practice of investing in a portfolio of law firm matters, as well as multiple potential changes to rules regarding the disclosure of funding arrangements, which are pending on various fronts.

Charles Schmerler, a partner at Norton Rose Fulbright and member of the American Bar Association’s working group on alternative litigation finance, told attendees, “The overall reaction to this opinion so far that we’ve been able to discern is really overwhelmingly negative. … I don’t know anybody who says it’s a good opinion other than perhaps on the Chamber side,” a reference to the U.S. Chamber of Commerce, which has pushed for a change to Rule 26 of the federal civil procedure rules, mandating the disclosure of third-party litigation funding arrangements.

“I think there’s an early expectation that this will either be modified or overturned or courts may not pay it that much heed,” he added.

The speakers at the panel, which was dedicated to untangling the ethical and regulatory hurdles to litigation finance, described the opinion as myopic; moreover, they noted, there is no evidence to suggest that third-party financing induces lawyers to behave unethically.

“This opinion gives no reason to believe that the kind of financing that it discusses is at the top of the list of practices that interfere with the professional judgment and independence of lawyers,” said Anthony Sebok, a professor at Cardozo School of Law and consultant for litigation finance behemoth Burford Capital.

Another specter looming over the panel was changing policies regarding mandatory disclosure of funding arrangements, which are advancing along multiple lines.

Sen. Chuck Grassley, R-Iowa, introduced a bill in May requiring the disclosure of any funding agreement in class actions and federal multidistrict litigation to the court and to the opposing party. The bill is pending in committee.

The same month, U.S. District Judge Dan Aaron Polster ordered plaintiffs in a multidistrict litigation over the opioid crisis to disclose their financial arrangements with third-party lenders. However, the order was tailored such that, absent “extraordinary circumstances,” defendants would not learn the details of the agreements, a move that garnered praise from some litigation finance leaders.

“There’s a sense among the panelists that more disclosure, in some form or other, was likely to be coming,” moderator Ross Wallin, managing principal at Curiam Capital, said after the panel. “And opinions among funders about how much disclosure is tolerable probably vary, but you’re going to find more comfort with Judge Polster’s approach than with the Grassley bill” or the effort to amend Rule 26.

Judge Polster’s order, in the Northern District of Ohio, obliged attorneys to provide sworn affirmations that the funding didn’t create a conflict of interest, undermine attorney obligations to clients, affect professional judgment, hand over any control of the litigation to funders or affect control of settlement.

“My observation is that the industry generally thinks that the Polster approach is a sound solution. And that the approach of mandatory disclosure of funding documents to the adverse party … is a bad idea,” Sebok said.

–Additional reporting by Andrew Strickler and Jeff Overley. Editing by Bruce Goldman.