Report to the President by Litigation Funding Working Group

The Working Group is comprised of a range of interested professionals, including private practitioners, ethics professors and specialists, litigation funding executives, a former federal judge, in-house counsel, ADR specialists, and representatives from several of the City Bar’s standing committees. The Working Group’s Mission Statement specifies in pertinent part:

The Litigation Funding Working Group is studying the issues and practices surrounding litigation funding. Specifically, the Working Group is addressing the following topics: (a) the ethics rules and framework relating to the City Bar’s Ethics Opinion 2018-5, (b) current practices in litigation funding and best practices for the future, (c) issues of disclosure regarding litigation funding, (d) litigation funding in the consumer and civil rights arenas and (e) recent litigation funding developments in New York and in certain jurisdictions outside New York. The Working Group will not be revisiting Opinion 2018-5, but is open to exploring potential revisions to the ethics rules and/or legislation.[3]

Over the course of the last year, the Working Group met as a whole ten times and convened numerous subcommittee meetings and teleconferences. During these meetings, the Working Group heard from a range of guest speakers, including practitioners, scholars, and experts in the fields of commercial and consumer finance.[4]

In addition, the Working Group for a five-month period sought and received comments from the public on the issues and practices surrounding litigation funding. We received eleven written submissions provided by private practitioners, retired judges, mediators, litigation funders, and lobbying groups. These commentators provided diverse views both supportive and critical of litigation funding and supplied additional resources for study. To obtain further comments, the Working Group released a draft of this Report in December 2019 to multiple City Bar committees and received comments through February 2020.

The Working Group formed four subcommittees to analyze particular issues surrounding litigation funding: (i) Ethics Rules, (ii) Best Practices, (iii) Disclosure, and (iv) Consumer Litigation. The Report that follows contains the findings and recommendations of each of these Subcommittees as reviewed and vetted by the Working Group.

In Section I, we provide a brief overview of the history of litigation funding in the United States and other countries; the current legal landscape with respect to case law on disclosure and discovery-related issues; and current legislative proposals in Congress and New York to regulate litigation funding.

In Section II, we address whether Rule 5.4 of the New York Rules of Professional Conduct, as interpreted in Opinion 2018-5, should be revised to reflect contemporary commercial and professional needs and realities. We conclude that lawyers and the clients they serve would benefit if lawyers have less restricted access to funding and offer two alternative proposals for a revised Rule 5.4.

In Section III, we present guidelines for representing a client seeking litigation funding, which encompass both the specific steps and the process to follow when obtaining and utilizing litigation funding to carry out clients’ objectives. We focus on the necessary steps a lawyer should take to best protect the client’s interest and to comply with his or her professional obligations.

In Section IV, we provide an overview of the policies, statutes, rules, regulations, and case law governing disclosure in federal and state courts; present arguments commonly made in support of and against disclosure in federal and state courts, including a discussion of the special considerations in the class action, multi-district litigation and arbitration contexts; and present the Working Group’s recommendations regarding disclosure. We conclude that there should not be a mandatory disclosure requirement in federal and state courts with respect to the funding of commercial litigation at this time, but that the details of funding arrangements may be discoverable in special circumstances. We recognize that different considerations may apply regarding disclosure in class and derivative actions and in arbitrations.

In Section V, we review the industry that provides to consumers funding secured by recoveries from civil litigation, and focus on the way in which the industry is regulated. In particular, we analyze the bill introduced in New York during the last legislative session and offer our views on changes that could be made to the current bill, including removal of the fee cap and changes in the annual reporting requirement designed to gather sufficient financial information to evaluate the industry.[5]

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