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Ethics 20/20 Commission Issues White Paper About Alternative Litigation Financing


As any insomniac watching a lot of late night television can attest, companies that help individuals meet basic financial needs while they pursue lawsuits are part of a growth industry.

Alternative litigation financing also has caught the attention of the ABA Commission on Ethics 20/20, which is studying the impact of technology and globalization on lawyer ethics and regulation.

The commission held a public hearing on the issue in February during the ABA Midyear Meeting in Atlanta. At the hearing, Harvey Hirschfeld, chairman of the American Legal Finance Association, said companies that provide financial support to consumers, businesses and occasionally even law firms work on the premise that “banks only lend you money when you don’t need it. Our business is providing money to consumers where they’ve reached the point of asking, ‘Do I lose my house to proceed with my case?’ ”

RULES REMAIN THE SAME

In October, the commission issued a draft white paper (PDF) concluding that the growing use of alternative litigation financing does not require any adjustment in professional conduct rules for lawyers. The commission will submit a final version of the white paper as an informational report to the ABA House of Delegates before the 2012 midyear meeting in February. Informational reports do not require House action.

“ALF is relatively new in the United States but appears to be evolving as a method of providing financial support to litigants,” states the draft white paper, which notes that at least 29 of 51 state jurisdictions (including the District of Columbia) permit some form of champerty, in which a third party maintains a lawsuit in return for a financial interest in the outcome.

Nevertheless, lawyers should be aware of potential ethics red flags in the use of alternative litigation financing. Despite the growth of ALF, “many lawyers are unfamiliar with the ethical issues presented by these transactions,” states the report. “The general conclusion of this white paper is that attorneys must approach transactions involving alternative litigation finance with care, mindful of several core professional obligations.”

In particular, the white paper discusses in detail how lawyers should exercise independent professional judgment on behalf of clients, protect against disclosure of confidential client information and waivers of the attorney-client privilege, and make sure that clients understand the terms and ramifications of agreements with ALF suppliers.

Ethics issues can vary greatly depending on the circumstances of the ALF arrangement. “It is difficult to generalize about the ethical issues for lawyers associated with alternative litigation finance across the many differences in transaction terms, market conditions, relative bargaining power of the parties to the transactions, and type of legal services being financed,” states the white paper.

The report was drafted by a working group co-chaired by Jeffrey B. Golden, a visiting professor at the London School of Economics and Political Science, and Philip H. Schaeffer, a partner at White & Case in New York City. The working group was supported by reporters Anthony Sebok, a professor at the Benjamin N. Cardozo School of Law at Yeshiva University in New York City, and W. Bradley Wendel, a professor at Cornell University Law School in Ithaca, N.Y.

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