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California State Bar opinion on litigation funding could have sway

October 26, 2020
Andrew Cohen

The State Bar of California Committee on Professional Responsibility and Conduct’s recent opinion on legal finance and the ethical obligations of lawyers who represent clients in cases funded by third-party litigation funders could hold significant sway, especially because its conclusions were based on a rigorous process involving several rounds of public comment.

As a state, California is home to the second largest community of lawyers in the country, according to the 2019 ABA National Lawyer Population Survey. The California opinion (Formal Opinion No. 2020-204) strongly supports legal finance and confirms that its use presents no significant hurdles to the ethical practice of law, while cautioning that attorneys must be aware of their ethical obligations.

Importantly—and in distinction to demonstrably insufficient opinions and guidelines developed by the New York City Bar and the American Bar Association—California’s advisory opinion was issued after several rounds of public comment. Legal finance providers, including Burford, were invited to weigh in. The advisory opinion is all the stronger for this transparency and rigor.

Funders Can’t Interfere With Duty to Clients

The State Bar of California acknowledges several important points. First, the California opinion stresses that a lawyer’s duty of loyalty is to the client first and foremost, and that a funder cannot interfere with that duty.

In the commercial legal finance context in which Burford operates, funders do not control litigation. We neither control nor will we seek to control strategy, settlement or other litigation-related decision-making, nor direct a counterparty to settle a case at all, or for a particular amount.

The protection of the client-lawyer relationship is a gating question for every user of legal finance, but one that is quickly put to rest as soon as lawyers learn more about how legal finance works. Indeed, the opinion reminds lawyers that they must provide competent advice and encourages them to seek education on legal finance and how it may impact litigation. This education can be sought from legal finance providers themselves, as many (including Burford) offer educational materials and continuing legal education to lawyers.

Research by Burford confirms that the vast majority (78%) of in-house lawyers expect the law firms they work with to educate them about litigation finance—by recommending its use and collaborating with them to make the decision to use it.

Second, California’s opinion notes that lawyers must obtain the client’s informed consent before sharing confidential information, and that is, of course, standard practice for legal finance providers. A confidentiality agreement is always the first step of our process and occurs before any diligence review.

The Champerty Question

Third, the opinion correctly observes that litigation funding in California is legal and that the doctrine of champerty does not apply. Champerty is the practice of maintaining a suit in return for a financial interest in its outcome. An archaic doctrine established in medieval times, champerty has been abolished in many jurisdictions and become mostly obsolete in those where they still exist.

There is much confusion about champerty in some quarters, and it is worth noting that even the California opinion makes a minor error when it references an outdated Minnesota Court of Appeals decision. As of June 3, Minnesota joined the majority of jurisdictions and abolished the doctrine of champerty.

Legal finance arose in the U.S. from the ashes of the last recession, and in the current downturn, this relatively young industry is quickly becoming a widely accepted business tool among not only leading law firms but also Fortune 500 companies.

This opinion further supports that sentiment, and we are pleased that the State Bar of California has conducted thorough research, engaged legal finance providers, and issued a well-informed opinion of the legal finance industry, recognizing the benefits of commercial legal finance to businesses, lawyers, and the legal system.

This article was originally published in Bloomberg Law and can be found here.