Can a New York lawyer review or sign a client's litigation funding agreement, and what are the lawyer's duties on fee sharing, conflicts, confidentiality, and control of the case?

Plain-English summary

The opinion addresses a lawyer's duties when a client asks the lawyer to review, sign, or acknowledge a third-party litigation funding agreement. It distinguishes "lawyer-directed" funding (the funder contracts directly with the lawyer) from "client-directed" funding (the funder contracts with the claimholder, who uses the money to pay legal fees and repays the funder only out of the claim's proceeds). The opinion addresses only client-directed funding and updates the Bar's 2011 review of the subject.

On fee sharing, the opinion concludes that client-directed funding does not implicate Rule 5.4(a), because the funder is repaid from the client's recovery rather than the lawyer's fee. It reaffirms Opinion 2018-5's reading that Rule 5.4(a) forbids only arrangements in which the lawyer's payments to a funder are contingent on the lawyer's receipt of fees, and notes that result holds even if the lawyer signs the agreement between client and funder.

On conflicts and confidentiality, the opinion applies Rules 1.7 and 1.9 to lawyers who also work for funders, and applies Rule 1.6 to disclosures made during a funder's diligence. A lawyer may not disclose a client's confidential information to a funder without the client's express consent; obtaining funding may be impliedly authorized, but disclosure to a funder is not "reasonable under the circumstances or customary in the professional community" so as to dispense with consent. The opinion recommends a non-disclosure agreement and attention to whether privilege or work-product protection will be waived.

On control of the litigation, the opinion holds that Rules 1.2(a) and 5.4(c) bar a lawyer from agreeing to follow the funder's instructions instead of the client's. A client may contract to take a funder's direction, but that does not alter the lawyer's duty to abide by the client's own settlement and objective decisions, so a lawyer may not sign a funding agreement requiring the lawyer to follow the funder rather than the client.

In practice

Under this opinion, a New York lawyer reviewing a client-directed funding agreement should treat the engagement's scope, the conflicts analysis, and the confidentiality terms as the operative ethical issues, not the fee-sharing bar, which client-directed funding does not trigger. The opinion states that disclosure of client confidences to a funder requires express client consent and should be paired with a non-disclosure agreement, and that the lawyer should evaluate privilege-waiver risk before sharing case evaluations, evidence, or drafts.

The opinion is firm that a lawyer cannot cede professional judgment or the client's decision rights to the funder: per Rule 5.4(c), which the opinion notes cannot be cured by client consent, and Rule 1.2(a), the lawyer must follow the client's settlement instruction even if doing so would breach the client's contract with the funder. A lawyer asked to sign or acknowledge terms that give the funder control over litigation or settlement decisions should decline those terms.

Common questions

Q: Does litigation funding violate the rule against sharing fees with non-lawyers?

A: Not in the client-directed form addressed here. The opinion concludes Rule 5.4(a) is not implicated because the funder is repaid from the client's recovery, not from the lawyer's legal fees, and reaffirms Opinion 2018-5 on that point, even where the lawyer signs the client-funder agreement.

Q: Can I share my case evaluation or work product with the funder?

A: Only with the client's express consent. The opinion holds that disclosure of client confidential information to a funder is not customary or reasonable enough to be impliedly authorized, and recommends a non-disclosure agreement plus an analysis of whether privilege or work-product protection will be waived.

Q: Can the funding agreement give the funder a say over settlement?

A: The lawyer cannot agree to follow the funder over the client. Under Rules 1.2(a) and 5.4(c), the lawyer must abide by the client's settlement decision regardless of what the client agreed to give the funder, and may not sign terms requiring the lawyer to take the funder's instructions instead.

Q: Is client-directed funding the same as champerty in New York?

A: The opinion states it is not. It explains that the typical New York funding transaction assigns only the proceeds of a claim, not the chose-in-action itself, so it is not the champerty prohibited by N.Y. Judiciary Law sections 488 and 489.

Background and rules framework

The opinion interprets the New York Rules of Professional Conduct, which parallel the ABA Model Rules. The central provisions are Rule 5.4(a) and (c) (fee sharing with non-lawyers and protection of professional independence), Rule 1.2(a) (allocation of authority, including settlement decisions), Rule 1.6 (confidentiality and the implied-authorization exception), Rules 1.7 and 1.9 (current- and former-client conflicts), Rule 1.8 (business transactions and aggregate settlements), and Rule 1.16 (declining or terminating representation). The opinion builds on Opinion 2011-2 (third-party litigation financing) and Opinion 2018-5 (lawyer-directed funding and Rule 5.4).

Citations and references

Rules of Professional Conduct:

• MR / NY RPC 5.4(a), (c) (fee sharing; professional independence)
• MR / NY RPC 1.2(a) (client's settlement and objective decisions)
• MR / NY RPC 1.6 (confidentiality; implied authorization)
• MR / NY RPC 1.7, 1.9 (conflicts of interest)
• MR / NY RPC 1.8 (business transactions with clients)
• MR / NY RPC 1.16 (declining or terminating representation)

Statutes:

• N.Y. Judiciary Law sections 488 & 489 (champerty)

Other opinions cited:

• New York City Op. 2018-5: lawyer-directed funding and Rule 5.4
• New York City Op. 2011-2: third-party litigation financing
• New York State Op. 666 (1994) and Op. 769 (2003): related funding/fee questions
• Michigan Op. RI-321 (2000): financing terms that interfere with professional judgment

See also

• NYC Bar Ethics Op. 2018-5: Litigation funders' contingent interest
• NYC Bar Ethics Op. 2011-2: Third-party litigation financing
• NYC Bar Ethics Op. 2006-1: Multiple representations and conflict waivers

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-2024-2-ethical-issues-arising-from-advice-to-clients-on-client-funder-litigation-funding-agreements/
• Original PDF: https://www.nycbar.org/wp-content/uploads/2024/04/20221252_EthicsOpinionLitigationFunding-1.pdf