NEW YORK, June 20 (Reuters) - An opinion by the New YorkCity Bar Association has blessed the practice of third-party
funding for litigation, but cautioned that the practice can
pose thorny ethical issues.
The practice of seeking funding for cases from outside
investors has been on the rise in the past 20 years, the
association said. It has moved from a cottage industry of
personal-injury cases to a $1 billion business involving a wide
swath of commercial litigation.
The New York City Bar is not the first to approve
third-party funding, but its opinion is significant because it
says "there is nothing bad about this, it has enough redeeming
virtues to let the clients decide," said Louis Solomon, a
litigation partner at Cadwalader Wickersham & Taft.
While the opinion does not have the force of law, it could
be followed by other bar associations or used in ethics cases,
"The city bar association is a very renowned bar; it has
all the lawyers in New York City in it, and it has a real
lineage of taking important opinions on important topics,"
The city bar association's opinion comes as the American
Bar Association is also considering the topic. The ABA's
project on the ethics of alternative-financing generated dozens
of letters earlier this year, from plaintiffs' lawyers
embracing the practice to the U.S. Chamber of Commerce's legal
reform group, which opposes it.
In its June 15 opinion, the city bar association raised
issues surrounding a lawyer's obligation to protect
confidential information, conflicts of interest with a lawyer
and funder, and the role of the outside funder in controlling a
"From the legal ethics perspective, perhaps the greatest
concern stems from a financing company's involvement in the
details of a case," the opinion said.
A lawyer shouldn't allow the outside funder to control the
case without a client's consent, the opinion stated. A
financing company could, for example, steer a plaintiff away
from settling a case if it thinks it could recoup more,
possibly contradicting the plaintiff's best interests.
Lawyers also shouldn't disclose privileged information
without the consent of their clients. Third-party financing may
demand privileged information in order to assess the case and
determine how much to invest.
The opinion is primarily aimed at companies that provide
funding to individual plaintiffs, rather than ones funding
corporate entities, said Christopher Bogart, chief executive
officer of Burford Capital, a publicly-traded lender which
typically provides between $3 to $15 million per transaction to
"It's obviously useful for an organization like the New
York City Bar Association to say there is value in the
emergence of litigation funding, and there are ways to do it
without raising ethical issues," Bogart said.
(Reporting by Carlyn Kolker)