Understanding Litigation Financing
In an earlier article, we took a look at the basics of litigation financing. We explained the basics of the industry, what problems it helps clients solve, and how it operates. In this article, we’re going to take a look at the ethics of this important, yet somewhat controversial industry.
Litigation finance firms provide an important service to both attorneys and litigants. But these firms are not without controversy. The American Bar Association’s Rules of Professional Conduct generally prohibit non-lawyers from taking ownership stakes in law firms. The idea behind this rule is that lawyers are highly trained professionals who owe a fiduciary duty to their clients. In other words, lawyers must always look out for their clients’ interests and everything they do must have the clients’ best interests in mind. The concern, in theory, is allowing non-lawyers to take an ownership stake in a law firm could incentivize attorneys to place certain interests above those of their clients. Although these concerns are often overblown, it’s important to acknowledge them in order to quell any doubt and ensure that even if lawyers receive funding for a lawsuit from a third party, they nonetheless keep their clients’ best interest foremost in their minds when making decisions that affect their cases and their clients.
Of course, litigation finance firms do not take an ownership stake in a law firm in the first place simply by providing a loan. So from that point of view, the ethical question is much simpler to answer. But still, whenever a third party has an interest in a lawsuit, it’s only reasonable to assume that third party is going to look out for their best interests. Because litigation financing firms do not get paid unless the lawsuit they fund settles in their party’s favor or their party wins at trial, some commentators have voiced concern that financing firms may interfere in matters of case strategy or even go over attorneys’ heads to try to convince the client to settle.
But in this respect, it is crucial to remember that litigation finance firms rely just as much on the attorneys that they fund as the attorneys rely on the financing firms. For this reason, litigation financing firms have a very strong incentive to not interfere in cases and instead to sit back and let the attorneys do what they do best: litigate and negotiate. Financing firms realize that, while they may be expert in financial matters, the attorneys are the experts when it comes to legal matters. The financing firms, therefore, know better than to second guess attorneys’ strategic decisions or to otherwise interfere in a lawsuit they are funding. Financing firms, on the other hand, do their research and their due diligence up front when deciding whether to invest in a lawsuit in the first place. As with any other investment, there are potential risks and potential rewards. Reaping the rewards likewise requires collaboration and professional trust.
As professionals in finance, lawsuit funding firms know better than to interfere with attorneys’ case management decisions. Financing firms know their job is only to provide the cash, and that it’s up to the attorneys to do the legal work. Do not allow companies with shady pre-settlement funding scenarios get to you. Understand your rights.
