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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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<img style="max-width: 100%;height: auto;max-width: 100%;height: auto" loading="lazy" class="alignright size-medium wp-image-1287" src="https://www.thelawforlawyerstoday.com/wp-content/uploads/sites/754/2014/12/Money-and-gavel-200x300.jpg" alt="" width="200" height="300">The New York City Bar Association recently found that common forms of third-party litigation funding for law firms violate New York&rsquo;s Rule 5.4(a), which like the analogous <a href="https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_4_professional_independence_of_a_lawyer.html">Model Rule</a>, bars fee-splitting with non-lawyers.
In its <a href="https://s3.amazonaws.com/documents.nycbar.org/files/2018416-Litigation_Funding.pdf">Opinion 2018-5</a>, the NYCBA&rsquo;s Professional Ethics Committee advised that &ldquo;a lawyer may not enter into a financing agreement with a litigation funder, a non-lawyer, under which the lawyer&rsquo;s future payments to the funder are contingent on the lawyer&rsquo;s receipt of legal fees or on the amount of legal fees received in one or more specific matters.&rdquo;&nbsp; (Left untouched by the opinion are agreements between funders and clients, which do not implicate the fee-splitting issue.)
While ethics opinions are advisory, they can be cited by courts as persuasive authority; and an opinion from the influential NYCBA could help shape the conversation in an area that has been marked by controversy.&nbsp; <a href="https://www.thelawforlawyerstoday.com/2018/04/3854/">As we described</a> earlier this year, two jurisdictions now require some disclosure when third-party funding is part of a case (Wisconsin by statute and the Northern District of California by rule), and the U.S. Chamber of Commerce has favored a change to the Rules of Civil Procedure to require such disclosure.&nbsp; And as we have <a href="https://www.thelawforlawyerstoday.com/2017/02/for-the-first-time-a-court-adopts-rule-requiring-litigation-funders-to-be-disclosed-but-only-in-class-actions/">also described</a>, some courts still view third-party funding as impermissible under the old doctrines of champerty and maintenance.&nbsp; Yet, litigation funding is big business, with the U.S. market <a href="https://www.dandodiary.com/2018/01/articles/litigation-financing-2/latest-third-party-litigation-financing/">estimated at $5 billion annually</a>, and growing.
Fee-splitting problem
Against this backdrop, the Committee considered two arrangements, both of which it found forbidden by the fee-splitting rule:&nbsp; (1) where the funding to the firm is not secured other than by the lawyer&rsquo;s fee, &ldquo;so that it is implicit that the lawyer will pay the funder only if the lawyer receives legal fees in the matter;&rdquo; and (2) where instead of a fixed amount or interest rate, the amount of the lawyer&rsquo;s payment to the funder will depend on the amount of the lawyer&rsquo;s fee.
Rule 5.4(a) (&ldquo;Professional Independence of a Lawyer&rdquo;) provides that &ldquo;a lawyer or law firm shall not share legal fees with a non-lawyer.&rdquo;&nbsp; The purpose of the rule, as described in comment 1, is to protect independent legal judgment.&nbsp; See also <a href="https://law.hofstra.edu/directory/faculty/emeritus/simon/">Roy Simon</a> &amp; <a href="http://fkks.com/attorneys/nicole-hyland">Nicole Hyland</a>, Simon&rsquo;s New York Rules of Professional Conduct Annotated at 1420 (noting that the rule&rsquo;s intention is to protect independent legal judgment by removing the incentive for non-lawyers to interfere or pressure lawyers to use improper measures to win cases).
The Committee noted the long-standing nature of the fee-splitting prohibition, and that it has been broadly interpreted to bar many different types of business arrangements in which lawyers agree to make payments to non-lawyers based on the lawyer&rsquo;s receipt of legal fees, or on the amount of those fees.&nbsp; A financing arrangement contingent on the receipt of fees or their amount is no different, and is impermissible, said the Committee, &ldquo;regardless of how the arrangement is worded.&rdquo;
&ldquo;Rightly or wrongly,&rdquo; the Committee said, Rule 5.4(a) &ldquo;presupposes that when non-lawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer.&rdquo;
Lessons from the case law... and a call to the legislature?
The Committee acknowledged that New York courts have enforced litigation funding contracts against attempts to invalidate the agreements based on public policy grounds, but said that would be expected:&nbsp; &ldquo;[L]awyers who violate the Rules cannot ordinarily invoke their own transgressions to avoid contractual obligations.&rdquo;
And as for the argument that the prohibition on fee-sharing is overbroad?&nbsp; The Committee recognized that there is room for question there, including whether there might be adequate contractual or other means of preventing litigation funding arrangements from interfering with independent legal judgment.&nbsp; But &ldquo;that is a matter to be decided by the state judiciary,&rdquo; said the Committee.
Funder reaction:&nbsp; not warm
As described in <a href="https://www.law360.com/articles/1071768/funders-decry-nyc-bar-s-litigation-finance-warning">Law360</a> (subscription required), the chief investment officer at one major funder, Burford Capital, called the NYCBA&rsquo;s opinion &ldquo;flatly wrong.&rdquo;&nbsp; The chief investment officer of another funder, Bentham IMF, said it was &ldquo;going the wrong way.&rdquo;
Perhaps these reactions are predictable; but the NYCBA&rsquo;s opinion is only the most recent of a string of advisory opinions from other jurisdictions, such as <a href="http://www.mebaroverseers.org/attorney_services/opinion.html?id=86896">Maine</a>, <a href="https://www.vsb.org/docs/LEO/1764.pdf">Virginia</a>, <a href="https://www.nvbar.org/wp-content/uploads/opinion_36.pdf">Nevada</a> and <a href="http://www.utahbar.org/wp-content/uploads/2017/12/1997-11.pdf">Utah</a>, that point in the same direction.
Stay tuned.&nbsp; This is a topic with possible ramifications on how new firms are financed, as well as an ongoing debate over the role of the fee-splitting rule in actually protecting clients.

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Ethics

Legal Ethics, Professional Responsibility and the Business of Law

Contingent litigation funding agreements for law firms impermissible, says NYC Bar