What ethical duties does a California lawyer owe when a third-party litigation funder is involved in the case?
State Bar of California COPRAC Formal Opinion 2020-204: Third-Party Litigation Funding
Short answer: The opinion concludes that a California lawyer representing a client in a case funded by a third-party litigation funder must preserve independent professional judgment, comply with the duty of confidentiality, obtain the client's informed written consent before disclosing confidential information to the funder, and (if the funder pays the lawyer directly) comply with Rule 1.8.6.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.
Plain-English summary
The opinion identifies two forms of third-party litigation funding the committee considered: consumer funding, in which a funder advances money to a plaintiff (typically in a personal-injury case) for personal expenses on a non-recourse basis, and commercial funding, in which a funder advances money to pay litigation expenses (and sometimes lawyer fees) on a non-recourse basis. The opinion identifies the principal ethical issues as the maintenance of independent professional judgment and compliance with the duty of confidentiality. It declines to enter the policy debate about whether litigation funding is desirable and addresses only the operative ethical questions under the California Rules of Professional Conduct in effect as of November 1, 2018.
On the legality threshold, the opinion observes that California has never recognized prohibitions against champerty or its variants, citing In re Cohen's Estate (1944) 66 Cal.App.2d 450, and concludes that such doctrines should not bar enforcement of a litigation-funding contract in California. The committee notes that the opinion does not opine on the enforceability of any particular contract.
On the operative duties, the opinion applies Rule 1.1 (competence), Rule 1.4 (communication), Rule 1.6 (confidentiality), Rule 1.7(b) (conflicts), Rule 1.8.1 (business transactions with a client), Rule 1.8.6 (compensation from a non-client), Rule 2.1 (independent professional judgment), and Rule 5.4(c) (third-party direction of professional judgment). The committee holds that where a funding contract gives a funder some degree of control over the litigation, the lawyer must advise the client about the impact of such limitations on the representation. Per the opinion, a lawyer's duties are not dictated by the funding contract; they are dictated by the lawyer's ethical duties to the client.
On confidentiality, the opinion holds that sharing the lawyer's case analysis or other confidential information with a funder requires the client's informed consent under Rule 1.6, that the consent must include the relevant circumstances and material risks (including the risk that a court may find a waiver of work-product or attorney-client privilege), and that taking steps such as obtaining a non-disclosure agreement and appropriately marking shared materials will reduce but not eliminate that risk. The committee notes that the case law on whether disclosure to a funder waives work product or privilege is still developing.
The opinion applies its analysis to three hypotheticals. In Scenario 1 (consumer funding for living expenses), the lawyer may refer the client to a funder and may review the agreement if the lawyer has the requisite competence under Rule 1.1; if not, the lawyer must obtain the necessary understanding, consult another lawyer, or decline. In Scenario 2 (commercial funding with the lawyer negotiating the funding contract), the lawyer must analyze whether the lawyer's preexisting relationship with the funder or the deal's beneficial terms to the firm create a Rule 1.7(b) conflict requiring informed written consent. Rule 1.8.1 does not apply merely because the lawyer is paid for legal services, but would apply if the lawyer owned an interest in the funder. In Scenario 3 (the funder pays the lawyer directly), Rule 1.8.6 requires the client's informed written consent, no interference with the lawyer's independent professional judgment, and compliance with the duty of confidentiality; Rule 5.4(c) bars the funder from directing or regulating the lawyer's professional judgment.
In practice
Under this opinion, conduct that establishes a third-party litigation funding arrangement in California is consistent with the Rules of Professional Conduct as they stood at the time of the opinion provided the lawyer (i) preserves independent professional judgment under Rules 1.7, 1.8.6, 2.1, and 5.4(c); (ii) obtains the client's informed written consent before disclosing confidential information to the funder under Rule 1.6 and before any third-party compensation arrangement under Rule 1.8.6; (iii) ensures Rule 1.1 competence to advise on the funding contract or, failing that, declines or consults; and (iv) advises the client of any control rights the funder holds over the litigation under Rule 1.4. Per the opinion, the lawyer must remain cognizant throughout that the client, not the funder, is the client.
The opinion declines to reach a general conclusion that any particular degree of funder control is per se unethical and notes that the relevant law on privilege and work-product waiver is still developing.
Common questions
Q: Can a California lawyer recommend that a client use a litigation funder?
A: Per the opinion, yes. The committee holds there is nothing unethical about a lawyer recommending litigation funding as long as there is no legal bar to the client entering such a transaction, citing Cal. State Bar Formal Op. 2002-159 (lawyer may refer client to a real-estate broker for a loan to pay legal fees) for analogy. The lawyer who reviews or negotiates the funding contract must have or obtain the necessary competence under Rule 1.1.
Q: Must the lawyer obtain the client's written consent before sharing case information with a funder?
A: Yes. Per the opinion, Rule 1.6 prohibits a lawyer from sharing confidential information without the client's informed consent. The lawyer must inform the client of the relevant circumstances and material risks, including the risk that a court may find the disclosure to be a waiver of attorney-client privilege or work-product protection. The opinion notes that an NDA with the funder and appropriate confidentiality markings reduce, but do not eliminate, the risk of waiver.
Q: What rule applies when the funder pays the lawyer directly?
A: Rule 1.8.6. Per the opinion, the lawyer must ensure (1) no interference with the lawyer's independent professional judgment or the lawyer-client relationship, (2) protection of confidential information as required by Business and Professions Code section 6068(e)(1) and Rule 1.6, and (3) the client's informed written consent that includes the relevant circumstances and material risks. Rule 5.4(c) separately bars the funder from directing or regulating the lawyer's professional judgment.
Q: Does the opinion say a funder can never have any control over the litigation?
A: No. The committee declines to reach a general conclusion that any particular degree of funder control is per se unethical. Per the opinion, where the funder has some degree of control of the litigation, the lawyer has an obligation under Rule 1.4 to advise the client about the impact of those limitations on the representation. The lawyer must also reasonably believe under Rule 1.7(d) that the representation can be provided competently and diligently notwithstanding the funder relationship.
Q: Does California treat litigation-funding contracts as champertous?
A: No. The committee states that California has never recognized prohibitions against champerty or its variants, citing In re Cohen's Estate (1944) 66 Cal.App.2d 450. Per the opinion, champerty doctrines should not be a barrier to a litigation funder enforcing a litigation-funding contract in California.
Background and rules framework
The opinion interprets California Rules 1.1 (competence), 1.4 (communication), 1.6 (confidentiality), 1.7(b) and 1.7(d) (conflicts with material limitation by third parties or the lawyer's own interest), 1.8.1 (business transactions with a client), 1.8.6 (compensation from a non-client), 2.1 (independent professional judgment), and 5.4(c) (third-party direction of professional judgment), in each case in the version in effect as of November 1, 2018. The committee draws operative analogies from insurance-defense ethics: ABA Formal Op. 96-403 (lawyer cannot accept insurer's settlement absent client wishes) and ABA Formal Op. 01-421 (insurer's representation guidelines that materially impair professional judgment). The opinion also references Ohio Sup. Ct. Op. 2012-3 and NYC Bar Op. 2011-02 as committee opinions reaching contrasting positions on the permissible scope of funder control.
Citations and references
Rules of Professional Conduct:
- California Rules 1.1, 1.4, 1.6, 1.7(b), 1.7(d), 1.8.1, 1.8.6, 2.1, 5.4(c)
- California Rule 1.0.1(e) (definition of informed consent)
Statutes:
- California Business and Professions Code section 6068(e)(1)
Cases:
- In re Cohen's Estate, 66 Cal.App.2d 450 [152 P.2d 485] (Cal. Ct. App. 1944), California rejection of champerty
- Pollack v. Lytle, 120 Cal.App.3d 931, 946 [175 Cal. Rptr. 81] (Cal. Ct. App. 1981), duty of loyalty and independent professional judgment
- Santa Clara County Counsel Attys. Assn. v. Woodside, 7 Cal.4th 525, 546-47 [28 Cal.Rptr.2d 617] (Cal. 1994), test for compromising representation
- Laguna Beach County Water Dist. v. Superior Court, 124 Cal.App.4th 1453, 1459 [22 Cal.Rptr.3d 387] (Cal. Ct. App. 2004), waiver-by-disclosure standard
- Charge Injection Technologies, Inc. v. E.I. DuPont De Nemours & Co., 2016 WL 937400 (Del. Super. Ct. 2016), funding contract did not violate Delaware champerty doctrine
- Maslowski v. Prospect Funding Partners LLC, 890 N.W.2d 756 (Minn. Ct. App. 2017), Minnesota champerty
- Miller UK Ltd. v. Caterpillar, Inc., 17 F.Supp.3d 711, 738 (N.D. Ill. 2014), no work-product waiver where confidentiality agreement existed
- Leader Technologies, Inc. v. Facebook, Inc., 719 F.Supp.2d 373, 376-77 (D. Del. 2010), work-product waiver by sharing with funder
- In re International Oil Trading Co., LLC, 548 B.R. 825 [62 Bankr.Ct.Dec. 145] (Bankr. S.D. Fla. 2016), common-interest privilege preserved
Other opinions cited:
- ABA Formal Op. 96-403: lawyer-insurer-insured settlement obligations
- ABA Formal Op. 01-421: insurer guidelines that impair professional judgment
- ABA Commission on Ethics 20/20, Informational Report to the House of Delegates 23 (2012)
- NYC Bar Formal Op. 2011-02: permissible scope of funder direction with client consent
- Ohio Sup. Ct. Op. 2012-3: lawyer's duty when funder seeks to dictate representation
- Md. State Bar Op. 00-45: client's right to discharge counsel notwithstanding funder
- LACBA Formal Op. 500 (1999): California treatment of champerty
- Cal. State Bar Formal Op. 2002-159: lawyer referring client to a loan source
See also
- CA COPRAC Op. 2020-203: Data Breaches and Client Notice
- CA COPRAC Op. 2021-207: Diminished-Capacity Client
- NYSBA Op. 1295: Conflicts, Advertising, Trust Account
Source
- Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
- Original PDF: https://www.calbar.ca.gov/sites/default/files/portals/0/documents/ethics/Opinions/Formal-Opinion-No-2020-204-Litigation-Funding.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2020-204
ISSUE: What ethical obligations arise when a lawyer represents a client whose
case is being funded by a third-party litigation funder?
DIGEST: Two types of third-party litigation funding have emerged over the last
several years: consumer litigation funding, which provides funds to a
plaintiff with personal injury claims, typically for personal use rather than
to fund their case, and commercial litigation funding, which typically
involves advancing funds to pay a plaintiff's litigation expenses or
otherwise. Both types of funding are non-recourse. This opinion
addresses the ethical issues that arise from such funding arrangements.
The principal ethical issues are maintaining independent professional
judgment and complying with the lawyer's duty of confidentiality. In
commercial litigation funding arrangements, the funding agreement will
likely be negotiated. If the client asks the lawyer to represent him or her
in such negotiations, the lawyer should consider whether the lawyer has
the experience or learning required as well as whether the lawyer has
any personal interest that creates a conflict. If so, the lawyer must
address those by a written disclosure that describes the relevant
circumstances and material risks and then obtain the client's written
consent. If the funder seeks client confidential information, the lawyer
must advise the client of the risks of disclosure and obtain the client's
informed consent to disclose confidential information to the funder. The
lawyer should also take appropriate steps to limit the risks to the client
that the disclosure of such information will effect a waiver of attorney-
client privilege or work product protection which may include having the
funder sign a non-disclosure agreement, appropriate labeling of shared
materials as confidential or taking other steps to maintain the
confidentiality of the shared materials.
AUTHORITIES
INTERPRETED: Rules 1.1, 1.4, 1.6, 1.7(b), and 1.8.6 of the Rules of Professional Conduct
of the State Bar of California.
STATEMENT OF FACTS
Scenario 1: Lawyer represents Client with personal injury claim who is in need of money for
living expenses. Lawyer advises Client that Client may qualify for litigation funding and provides
Client with a list of funders that Lawyer's clients have used. At Client's request, Lawyer reviews
the agreement and explains its terms carefully, emphasizing that the interest rate on the loan is
high, there is also a large administrative fee, and Client might be able to get a bank loan at a
lower rate. Despite this advice, Client enters into the funding agreement.
Scenario 2: Client, a company asserting a patent claim, is interested in litigation funding to
avoid tying up its cash in legal fees. Lawyer has extensive experience with third-party funding
and recommends a funder with which the firm has worked previously. Prior to agreeing to fund
the case, Funder asks for a memo assessing the strengths of Client's case. Lawyer tells Funder
that Lawyer will seek Client's consent to share this information. Lawyer advises Client there is
some risk that sharing the memo could waive applicable privileges, that the risk is lessened if
the information is communicated under a non-disclosure agreement ("NDA"), and that Client
must also consider that Funder will probably not fund the case without receiving Lawyer's
assessment of the strength of the claims. Client authorizes Lawyer to share the memo. Because
of prior good experience with Lawyer, Funder agrees to fund Client's case (the Client, in turn, is
responsible for paying Lawyer's legal fees). Lawyer is able to negotiate a better than standard
deal for Client because of Lawyer's relationship with Funder. Under the terms of the deal,
Funder funds a portion of Lawyer's fees (the Lawyer is on a partial contingency) and pays
litigation expenses. Such funds are provided to Client, who in turn pays Lawyer. Funder has the
right to cease funding if it disagrees with the direction of the litigation. The funding agreement
also gives Funder the right to review and approve any change in counsel, which approval will
not be unreasonably withheld. Over the course of the litigation, Funder's employees
communicate regularly with Lawyer.
Scenario 3: Same facts as Scenario 2, except under the funding agreement, Funder pays
Lawyer's legal fees directly for the representation of Client.
INTRODUCTION: LITIGATION FUNDING AND ITS ANTECEDANTS
Litigation funding is the practice where a third-party unrelated to the lawsuit provides funds for
litigation in return for a portion of any financial recovery. In this opinion, we consider the
ethical issues an attorney may face in representing a client where litigation funding is involved.
The type of third-party litigation funding addressed by this opinion is a relatively recent
development in the United States, although more common and accepted elsewhere. The
ethics and social utility of this type of litigation funding are the subject of debate. Some have
raised concerns that litigation funding will lead to frivolous lawsuits or that vulnerable clients
may be forced to accept unfair deals. Others argue litigation funding in the United States
promotes access to justice and/or diversifies thinking about litigation.
The purpose of this opinion is not to enter the normative debate about litigation funding but
rather to provide guidance to attorneys as to the ethical issues that arise when dealing with a
case that involves third-party funding.
DISCUSSION
A. Legality
In some states, agreements between a litigant and a stranger to the litigation by which the
stranger pursues or assists in pursuing the litigant's claim and in return receives part of any
recovery are prohibited under laws against champerty and maintenance. These are legal
doctrines dating from the Medieval England that developed to prevent feudal lords from
financing other individuals' legal claims against the financer's political or personal enemies.
Courts in states with laws against champerty and maintenance have considered whether
litigation funding arrangements violate those laws. See Charge Injection Technologies, Inc. v. E.I.
DuPont De Nemours & Company (2016) 2016 WL 937400 (finding that litigation funding
contract did not violate Delaware's common law prohibition on champerty and maintenance
because the funder did not exercise control over litigation); Maslowski v. Prospect Funding
Partners LLC (2017) 890 N.W.2d 756 (finding that litigation funding agreement was
unenforceable by Minnesota law against champerty).
California has never recognized prohibitions against champerty or its variants. See In re Cohen's
Estate (1944) 66 Cal.App.2d 450 [152 P.2d 485]. Such laws should not be a barrier to a litigation
funder enforcing a litigation funding contract in California.
B. Duty of Competence and Duty to Communicate
A lawyer has a duty to provide competent representation, which includes applying the learning
and skill reasonably necessary to perform legal services. Rule 1.1(b). A lawyer also has a duty to
communicate with the client about the means by which to accomplish the client's objectives in
the representation. Rule 1.4(a). To the extent the client's ability to accomplish its objectives
depends on the client's ability to fund the litigation or fund the client's personal expenses while
proceeding with the litigation, the lawyer's representation of the client may involve advising
the client as to whether litigation funding would assist in accomplishing the client's goals. Such
advice would likely need to include a discussion of the pros and cons of obtaining litigation
funding and alternatives, if any.
Furthermore, a lawyer representing a client in a matter funded by a litigation funder has an
obligation to understand how the funding agreement impacts the litigation. If the client asks
the lawyer to advise on or negotiate a litigation funding contract, the lawyer must either have
the expertise to do so, obtain such experience, or decline to provide the requested advice
regarding litigation funding. See rule 1.1(c). But regardless of whether the attorney is advising a
client on the funding contract, the lawyer must understand how the terms of the funding
agreement impact decisions in the litigation.
C. Candid Advice and Independent Professional Judgment
Rule 2.1 provides that "[i]n representing a client, a lawyer shall exercise independent
professional judgment and render candid advice." This rule dovetails with a lawyer's duty of
loyalty to a client, which generally prohibits a lawyer from allowing obligations owed or
potentially owed to a third-party to compromise the quality and soundness of advice offered to
a client. See, e.g., Pollack v. Lytle (1981) 120 Cal.App.3d 931, 946 [175 Cal. Rptr. 81] (explaining
how the duty of loyalty to clients should not be diluted by obligations owed to third parties, as
that would be inconsistent with an attorney's duty to exercise independent professional
judgment for the client). The lawyer must reasonably believe that the lawyer's independent
professional judgment will not be undermined, and that the lawyer can thus provide candid
advice to the client regarding the subject matter of the representation.
Rule 1.7 prohibits a lawyer from representing a client if there is a significant risk that the
representation will be materially limited by the lawyer's relationships with a third person or the
lawyer's own interest without the lawyer's informed written consent. Rule 1.7(b). The lawyer
must also reasonably believe that the lawyer can provide competent and diligent
representation notwithstanding the potential conflict or relationship with a third person. Rule
1.7(d).
Rule 1.8.6 prohibits a lawyer from entering into an agreement for or accepting compensation
for representing a client from one other than the client unless the client gives informed written
consent, the lawyer complies with the lawyer's duty of confidentiality, and the payment
arrangement will not interfere with the lawyer's independent professional judgment or with
the lawyer-client relationship. The rule would apply in an arrangement where the funder pays
the lawyer directly. The rule reflects the recognition that the source of the lawyer's payment is
likely to have influence over the lawyer. Litigation funding, like a third-party payor, introduces a
third-party with its own interests into the lawyer-client relationship, posing risks to the lawyer's
independent professional judgment and the relationship of confidence between the lawyer and
client. The duty of loyalty and independent professional judgment require the lawyer to act in
the client's interest at all times and particularly where the client's interest might depart from
the funder's.
The lawyer's independent professional judgment may also be impaired if the funding
arrangement imposes limitations on the how the case is litigated. Some ethics committees have
suggested that there could be circumstances in which a funding agreement imposes such
limitations on the attorney's judgment that the lawyer might not be able to competently
represent the client. ABA Commission on Ethics 20/20, Informational Report to the House of
Delegates 23 (2012); Ohio Sup. Ct. Ethics Opn. No. 2012-3 (lawyer must ensure the alternative
litigation funding company providing nonrecourse loan to client "does not attempt to dictate
the lawyer's representation of the client"). Others have suggested that such arrangements are
permissible with client consent. Assn. of the Bar of the City of N.Y. Com. on Prof. and Jud.
Ethics, Formal Opn. No. 2011-02 (client may "agree to permit a financing company to direct
strategy or other aspects of a lawsuit" and the lawyer is not prohibited from acceding to the
funder's direction as long as the client consents); cf. ABA Formal Opn. No. 01-421 (lawyer hired
by insurer to represent insureds may not comply with insurer's guidelines or directives relating
to representation if these would "impair materially the lawyer's independent professional
judgment").
The Committee does not reach a general conclusion that any particular degree of control is per
se unethical. However, it is clear that where the funder has some degree of control of the
litigation, the lawyer has an obligation to advise the client about the impact of such limitations
on the lawyer's representation. Rule 1.4; see also ABA Formal Opn. No. 01-421 (where lawyer
represents insured and the insurer imposes limitations on the representation, lawyer must
communicate limitations to the client early in the representation).
A lawyer's duties are not dictated by the funding contract but by the lawyer's ethical duties.
ABA Formal Opn. No. 96-403 illustrates this principle in the context of an insurance agreement.
The opinion considers the ethical obligations of an attorney retained by an insurer to represent
the insured pursuant to a contract that gave the insured control over settlement within policy
limits where the client objects to the proposed settlement. The ABA opined that the lawyer
could not settle against his client's wishes. Instead, the lawyer was obligated to discuss with the
client, the client's legal rights, explain the consequences of rejecting the settlement and let the
client decide.
This opinion stands for the proposition that a litigation funding agreement may be a fact that
impacts the advice the lawyer gives a client, but it does not alter the lawyer's ethical obligation
to pursue the client's best interest. Id. ("Whatever the rights and duties of the insurer and
insured under the insurance contract, that contract does not define the ethical responsibilities
of the lawyer to his client.") See also, Md. State Bar Ass'n, Comm. on Ethics Opn. No. 00-45
(opining that where the client wishes to terminate a lawyer, the lawyer must abide by the
client's wishes regardless of whether the client's terminating the lawyer is a breach of the
funding agreement).
D. Protecting Confidential Information
In order to determine whether to invest in a case, funders will likely require information about
the case at the outset. A prospective funder may ask for the attorney's analysis of the merits of
the case or other privileged materials. Once a funder has agreed to fund the case, that
agreement will likely be memorialized in a contract which may reflect how the funder values
the case which is likely to be based on the attorney's analysis. As the case proceeds, there may
continue to be communications between the funder and client or between the funder and the
client's counsel.
Rule 1.6 prohibits a lawyer from sharing confidential information without the client's informed
consent. In order for the client's consent to be informed, the lawyer must inform the client
about "the relevant circumstances and the material risks, including any actual and reasonably
foreseeable adverse consequences." Such risks include the client's adversary may seek to
compel communications between the funder and the client or lawyer and a court may hold that
the sharing effected a waiver of otherwise available evidentiary privileges.
E. Application to Hypothetical Scenarios
Scenario 1
In Scenario 1, Client with a personal injury claim entered into a funding agreement to pay his
living expenses while his lawsuit is ongoing. Lawyer recommended that Client explore litigation
funding, but also after reviewing the terms of the funding agreement, advises Client accurately
about the downsides of the funding including that Client might be able to get a bank loan at a
lower rate. Did Lawyer meet his ethical duties in each of these steps?
First, there is nothing unethical about a lawyer recommending a client consider litigation
funding as long as there is no legal bar to the client entering into such a transaction. This
Committee has previously opined that a lawyer may refer a client to a real estate broker to
obtain a loan to be used for legal fees. Cal. State Bar Formal Opn. No. 2002-159. Similarly, a
lawyer may ethically provide information and introductions to a litigation funder.
In Scenario 1, the Client asked the Lawyer to review the terms of the funding agreement and
the Lawyer gave Client an independent and objective assessment. The fact pattern is silent on
the Lawyer's experience reviewing litigation funding agreements. The Lawyer must consider
whether Lawyer has the skills necessary to advise the client and, if not, either tell Client it is
outside the Lawyer's expertise, obtain the necessary understanding of litigation financing in
order to adequately advise Client regarding the agreement proposed, or consult with another
lawyer he reasonably believe has the requisite expertise. Rule 1.1.
Scenario 2
In Scenario 2, Lawyer advises Client on choice of funder and negotiates the funding contract on
behalf of Client. Does Lawyer have a conflict in providing these services? The facts state that
the Lawyer has a preexisting relationship with Funder, that Funder will be partially paying the
law firm's fees and that certain terms of the funding agreement are advantageous to the law
firm.
Under rule 1.7, if any of those circumstances or their combination creates a significant risk that
Lawyer's advice on the choice of funder or funding contract terms is materially limited by
Lawyer's own interests, Lawyer is required to advise Client of the facts and seek Client's
informed written consent. Rule 1.7(b). See also, Santa Clara County Counsel Attys. Assn. v.
Woodside (1994) 7 Cal.4th 525, 546-47 [28 Cal.Rptr.2d 617] (lawyer must evaluate whether the
relationship creates a "situation in which [he or she] might compromise his or her
representation in order to advance the attorney's own financial or personal interests"). Indeed,
Lawyer owes Client a duty to communicate material facts concerning the representation. Rule
1.4. Lawyer's existing relationship with Funder is a material fact. In addition to obtaining
informed written consent, rule 1.7(d) requires that Lawyer reasonably believe that Lawyer can
provide Client with diligent and competent representation notwithstanding the rule 1.7(b)
conflict.
Rule 1.8.1 applies where a lawyer obtains a pecuniary (financial) interest adverse to the client.
There is nothing adverse to a client about a lawyer getting paid for legal services. See Cal. State
Bar Formal Opn. No. 2002-159, n.3 ("Although the lawyer does receive some benefit from the
escrow arrangement [she is assured that there are funds available to pay her fees and costs] this
is no different from the benefit the lawyer receives by requiring an advance fee and placing
it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within
rule 3-300."). Thus, the rule does not apply merely because the arrangement permits a lawyer
to get paid its fees. On the other hand, if a lawyer owns a share in the litigation funding
company, the funding arrangement would constitute a business transaction with the client and
the lawyer would be obliged to comply with rule 1.8.1.
Scenario 3
This is the same as the prior scenario, except that Funder pays Lawyer's legal fees directly for
the representation of Client.
Lawyer must not enter into an agreement, charge, or accept compensation for representing
Client in this scenario, unless Lawyer ensures that: (1) there is no interference with Lawyer's
independent professional judgment or relationship with Client, (2) the information is protected
as required by Business and Professions Code section 6068(e)(1) and rule 1.6, and (3) Lawyer
obtains Client's informed written consent as set forth in rule 1.8.6(c). Rule 1.8.6(a)-(c).
Lawyer must also ensure that such a payment arrangement does not interfere with Lawyer's
obligation to render candid advice and exercise of independent professional judgment under
rule 2.1. As for the informed written consent required in this scenario, Lawyer must
communicate and explain (i) the relevant circumstances; and (ii) the material risks, including
any actual and reasonably foreseeable adverse consequences of the proposed course of
conduct. See rule 1.0.1(e) (defining informed consent).
Moreover, rule 1.8.6 does not alter or diminish a lawyer's obligations under rule 5.4(c), which
addresses financial arrangements with third parties. Rule 1.8.6, Comment [5]. In other words, in
such a payment arrangement it remains paramount that Lawyer not permit the third-party
payor to direct or regulate Lawyer's independent professional judgment or interfere with the
attorney-client relationship.
F. Impact on Attorney's Duty of Confidentiality
According to the facts of Scenario 2, Lawyer shares a legal analysis memo with Funder after
Funder signed an NDA. Lawyer also engages in communications with Funder about the progress
of the case. These activities implicate Lawyer's ethical obligation to maintain the confidentiality
of information learned in the course of the representation and to apply diligence, learning and
skill to avoid adverse consequences, such as a waiver of privileges and protections to which the
clients is entitled.
Case law concerning whether funding agreements and communications with funders are
privileged is still developing. Most but not all courts that have considered the question have
held that work product does not lose its work product status because an attorney or client
shares that work product with a funder either orally or in writing. That is because work-
product protection is only subject to waiver based on disclosure to a third-party where the
disclosure "substantially increase[es] the possibility that an opposing party will obtain the
information." 2 Mueller & Kirkpatrick, Federal Evidence (4th ed. 2016) § 5:38; see also Laguna
Beach County Water Dist. v. Superior Court (2004) 124 Cal.App.4th 1453, 1459 [22 Cal.Rptr.3d
387] (disclosure operates as a waiver only where the otherwise protected information is
divulged to someone with no interest in maintaining confidentiality). Taking steps to ensure
that the funder will keep all information it receives confidential such as by entering into a
confidentiality agreement and/or marking documents appropriately will decrease the risk that a
court will find that work product is waived. Such steps are therefore consistent with Lawyer's
ethical duty to safeguard confidential information. However, particularly because case law is
still developing, Lawyer should also inform Client of the risks of waiver and obtain the Client's
consent. See rule 1.6(a) (lawyer may not reveal client confidences without informed written
consent in this context).
Under Scenario 2, Lawyer communicates frequently with the Funder about the case. Lawyer has
an obligation to consider whether such communications may be discoverable, advise Client as
to any risk of discoverability, take steps necessary to minimize the risk and ensure that the
Client consents to disclosure. The few courts that have considered whether involving a funder
in attorney-client privileged communications waives the privilege have split on the issue. Some
courts, for example, have accepted the argument that such communications are protected from
waiver by the common interest exception because the funder and client share a common legal
goal.
Finally, throughout the litigation, Lawyer must not allow the relationship with Funder to impair
Lawyer's objectivity and loyalty to Client. Lawyer must remain cognizant that the company is
the Client, not the Funder.
CONCLUSION
Opportunities exist to contract with litigation funders. Attorneys who represent clients that
consider or take these opportunities must be cognizant of ethical considerations that are
implicated. The lawyer is obliged to provide independent professional judgment not shaded by
a third-party with an interest in the outcome of the litigation. The lawyer must ensure
competence in advising on litigation funding including staying abreast of relevant law, such as
whether disclosures to funders waive any evidentiary protections. The lawyer must obtain the
client's informed consent before providing any client confidential information.