Law360 (October 24, 2022, 10:21 PM EDT) — Hausfeld’s global managing partner and a former Latham & Watkins attorney agreed during a conference on complex litigation ethics that third-party litigation funding should “come out of the shadows” and be subject to court disclosure, a move that would help avoid ethical pitfalls and legitimize use of such funding.

The discussion on the growing use of private funding in class action lawsuits and multidistrict litigation took place Saturday between lawyers, scholars, judges and others at a day-long conference at UC Hastings Law School in San Francisco, where participants mulled the ethical challenges confronting lawyers working in complex litigation.

At a panel on ethics in funding, moderator W. Bradley Wendel of Cornell University Law School asked funders and lawyers if they thought plaintiffs should disclose if their cases are backed by private funding.

Maya Steinitz, a University of Iowa law professor and former Latham & Watkins LLP litigator, said some sort of disclosure to the judge is likely appropriate since it affects the cost of the financing and who ultimately pays for it.

“All of that has to do with assessing the settlement, its fairness, its timing and so forth,” she said.

Brent Landau, global managing partner of Hausfeld, agreed, saying the judge and perhaps class members should be told.

“If there’s going to be third-party litigation funding involved in class actions, then it ought to come out of the shadows and into the light of disclosure so it can be seen as a legitimate route for lawyers and class members to obtain the funding that they need to litigate cases,” he said.

That information could also affect whom the judge decides to appoint as class counsel or what sort of fees and expenses are approved, Landau added.

Private funders are a large and growing source of capital for plaintiffs’ lawyers and their clients. Some provide loans linked to individual cases, while other law firms get funding for a portfolio of cases.

Jiamie Chen, director of investor initiatives at Parabellum Capital, told the audience that portfolio funding can extend to all contingency matters of a particular firm.

“So if two cases win and one case loses, the return from that financing comes from the two that win,” she said. “So you can’t really trace and say this dollar that went into this case is going back into the case. That’s now how it works when it’s cross-collateralized.”

In response to the question about disclosure, Chen noted that in recent complex litigation cases, judges have asked to review the agreements outside of the view of the public and the opposing party, with a narrow focus on certain issues, such as whether there’s a conflict of interest.

She claimed no such ethical dilemma comes up with Parabellum’s cases.

“No conflict of interest is created by the financing; the funder is not providing legal advice, the funder does not have any authority in any litigation decisions,” she said.

While funders aren’t concerned about shining a light on their role in a case, they’re cautious about opening the door to “fishing expeditions into irrelevant matters,” Chen said. Generally courts have held that third-party funding is not relevant to the claims or defenses of a case, she added.

Steinitz said the cross-collateralization of cases poses some ethical concerns.

“What we have here economically are some clients subsidizing other clients, and then lawyers arguably needing to make complicated decisions as a manager of a portfolio,” she said. “Obviously the fiduciary duty is to the individual clients and the individual cases.”

Landau added that paying back a bank loan is different from giving a percentage of any litigation recovery to a funder.

“If the funder is going to get a percentage of the fee or a percentage of the recovery, then it starts to look like they’re sharing in the fees of the case as opposed to the revenues of a business,” he said.

Chen told the audience that each funding deal is customized to the particular needs of a law firm and its lawyers, but generally the expected return is some multiple of what was invested, not a percentage of what the law firm gets.

Further, Chen added that if lawyers can accept a line of credit, they should be able to receive litigation funding.

“It’s commonplace or regular for plaintiffs’ attorneys to pledge their house, their car, their kids’ college tuition fund … to get a line of credit,” she said. “Why aren’t we concerned about whether or not a lawyer is being swayed to settle a case for a certain amount because they might lose their car or house?”

Private litigation funding could also be considered when judges are determining the adequacy of class counsel, Wendel said.

Retired U.S. District Court Judge Vaughn R. Walker spoke up from the audience about how he didn’t think that a trial judge handling the merits of a case should have to deal with fee agreements or funding arrangements. He suggested that that’s a task better suited for a magistrate judge.

“I think as a judge you’re tempted to try to come up with a fee decision that’s going to affect how the case comes out. It creates the wrong incentive,” Judge Walker said. “The judge really should just look at the merits of the case … and not worry about whether the plaintiffs’ lawyers are making money or not making money, or what their financial arrangements are.”

Such funding agreements are common and disclosed in the U.K., said Steve Weisbrot, CEO of claims administrator Angeion Group. It’s also a way to increase access for parties that could not otherwise afford to pursue their claims in court.

The idea that lawyers who use third-party funding are less adequate “perpetuates the old boy system that we’re seeing in the MDL structure — not enough women, not enough people of color, not enough minorities — and a lot of times that has to do with the fact that they don’t have access to the same funding that some of the more established firms do,” he said.

Wendel noted that much of the concerns about third-party funding stems from court restrictions, such as California’s Rule 5.4, which prohibits a lawyer or law firm under most circumstances from sharing their legal fees with someone not authorized to practice law. He questioned, however, how litigation funding differs from a loan or line of credit a lawyer or law firm might take out to support their operations.

He also noted that Arizona’s supreme court ditched its version of that ethics rule in 2020.

“Arizona didn’t just eliminate 5.4 … it replaced it with about 100 pages of regulations, the essence of which is to extend ethical obligations to the funders,” she said. “It’s a pretty breathtaking extension if you’re a passive investor in Singapore investing in an Arizona law firm.”

One commenter at the conference on Saturday told the panelists that “scary allegations” about litigation funding, which he said were oft perpetuated by the U.S. Chamber of Commerce, hurt plaintiffs.

“Not that there aren’t legitimate concerns,” they said. “But this more or less cuts in one direction … the more roadblocks there are to litigation funding, it predominantly helps the defense-side.”

It would be helpful to have someone study litigation funding and not just rely on anecdotal evidence about its successes and failures, Wendel said.

Steinitz agreed. “We are discussing regulation, or issues generally in the dark without data,” she said.

Contributing to the lack of evidence is that when third-party-funded cases go to arbitration, there aren’t even any anecdotes, Steinitz said.

Another ethical concern is whether and how much control the private litigation funders might have over cases, she said.

“Are funders largely passive? Are they largely active? Are they seeking to influence?” Steinitz said. “What’s going on there?”

Chen said it’s not in the interest of funders to control the litigation.

“We’re invested in hundreds of litigations. … There’s no possible efficient way that we could control what goes on in each of them, nor would we want to,” she said.