Litigation funding during the age of quarantine

In addition to the devastating human toll resulting from COVID-19, the pandemic has had an impact on the economy now and likely for the foreseeable future. With so much economic insecurity, attorneys and litigants may look to litigation funding as a means to insulate themselves from the risks of litigation. While litigation funding has been a hot button issue in recent years, it has again garnered increased attention in the midst of the pandemic.

Litigation funding can vary in many respects, but it typically refers to an arrangement where a third party (such as a litigation funding company) pays a litigant’s attorney fees and other costs in exchange for an interest in the outcome of the lawsuit. The decision to fund litigation is thus effectively an investment premised on the perceived strength of the claims at issue. Litigation funding can provide access to justice for litigants that otherwise could not afford it, or can help minimize the risks for litigants by sharing the costs and risks with a third party.

The rise in the use of litigation funding has been well-documented in recent years. With the increased economic pressure resulting from the pandemic, more and more litigants may find litigation funding as an attractive option.

Potential Benefits for Firms and Clients

Litigation financing companies more commonly invest in claims brought by plaintiffs, although some funders will also fund defendants as a means for the defendants to mitigate the risk of a large judgment. Some law firms are getting into that business as well. As reported in the legal news recently, there are high-profile large law firms — traditionally engaged in defense work — that are exploring self-funding plaintiff’s side contingency work as a revenue-generating proposition. This has prompted other large and medium sized law firms to start exploring legal finance.

Large law firms typically depend on hourly legal fees from clients to ensure the health and success of their business. However, as financial pressures on firms and clients increase, many firms are exploring the potential business opportunity to work with litigation funders to guarantee fees and to help clients save on their own bottom line.

Experts expect to see a flurry of litigation funding activity in the aftermath of the COVID-19 pandemic. This is because clients and law firms alike may be experiencing cash shortages or layoffs as a result of pandemic-related issues, including the shutdown orders that resulted in the closure of many businesses for a significant period of time. Working with a litigation funder can help ensure that law firms are paid in real-time for their work and can help ease the burdens on cash-poor clients to pay legal fees during financial duress. Even large corporate clients can therefore be freed up to generate cash flow and to let a funder finance their litigation, which litigation itself is an asset and can be a revenue-generating enterprise.

As many high-profile litigation funding companies were borne out of the 2008 financial crisis, it is anticipated that the current economic circumstances may create a similar watershed moment for litigation funding.

Acceptance of Litigation Funding Arrangements

Most observers have come to agree that that there is nothing inherently unethical about litigation financing and that it can serve a positive purpose in ensuring access to the court system.

One prior criticism of litigation funding was that it could increase the amount of frivolous litigation in an already-burdened system. However, before making an investment, funders will typically review the merits of a case, assess the likelihood of success and determine the potential upside. Therefore, there is a presumption that because funders do not want to lose money in bad investments, they have an incentive to support only those cases that have merit. Many litigation funders also will work only with experienced legal counsel. Of course, Rule 11 and other prohibitions against frivolous litigation also serve as a safeguard here.

While there still are ethical parameters that shape the relationship between funder and litigant, the legal community at large is recognizing the positive attributes of litigation funding. For example, a few years ago, the New York City bar issued an opinion that was very critical of litigation funding and suggested that such arrangements could run contrary to the ethical rules against fee-sharing with non-lawyers.

This spring, however, the Litigation Funding Working Group of the New York City Bar Association issued a 91-page report reflecting its study of litigation funding and concluding, among other things, that “lawyers and the clients they serve would benefit if lawyers have less restricted access to funding,” recommending that there should not be mandatory disclosure requirements in courts relating to funding arrangements, and identifying specific rule changes that may be warranted.

Moreover, even where litigants are required to disclose parties with a financial interest in the outcome of litigation (which is required under some local rules), courts have increasingly rejected discovery requests seeking the production of litigation funding agreements. See, e.g., MLC Intellectual Prop., LLC v. Micron Tech., Inc., 14-CV-03657-SI (N.D. Cal. Jan. 7, 2019) (rejecting a request for production of a litigation funding agreement on the basis that it was not relevant).

Maintaining the Privilege

It is helpful for litigants and their attorneys to take steps to protect the confidentiality and privilege surrounding their materials when working with litigation funders. Like other ethical issues surrounding litigation funding (such as disclosure obligations), there are typically solutions.

In order to obtain litigation funding, litigants often need to share work product information with their potential funders that the funders will use to assess the strength of the case. This information could include summaries of witness interviews, outlines of potential case strategies, and counsel’s mental impressions of the case. In an attempt to protect such information from disclosure, it is common for litigants and funders to enact written agreements invoking the work product doctrine before materials are provided (even if the litigant and funder decide not to work together).

Many courts have indeed recognized that materials exchanged between a litigation funder, a litigant, and the litigant’s counsel are protected from disclosure by the work product doctrine. However, privileged materials may not always reflect the mental impressions of counsel, and disclosure of privileged information can subject it to waiver.

Some courts have found that the “agency” exception applies to communications with funders, comparing litigation funders to other non-lawyer professionals like experts, accountants, or consultants. However, to limit risk, many litigants will consider providing their funders with only work product materials. 