This article originally appeared in the American Bar Association's Consumer Financial Services Committee Newsletter, November 2020.
In August of 2020, the American Bar Association (ABA) House of Delegates issued "Best Practices for Third-Party Litigation Funding" (the "Report").[1] Litigation funding, in any of its various forms, is largely unregulated by statute in most states. Accordingly, litigation funding companies with a national presence must navigate a shifting mosaic of common law, regulator guidance, and bar association opinions in order to operate. Amidst this legal uncertainty, self-policing is necessary to avoid regulatory scrutiny and to dissuade legislators from enacting overly onerous statutory limitations. The Report provides a valuable resource for self-policing of the industry.
Recommendations in the Report, such as those pertaining to documentation and structure of funding agreements, largely adhere to requirements codified in the type of state statutes governing litigation funding that are generally favored by the industry. Such laws typically do not impose fee limitations but focus on clear disclosure of terms, require the agreements to be non-recourse, and prohibit funding companies from influencing decisions relating to the underlying litigation.[2]
The ABA advises that its Report should not be read as "recommended standards of professional conduct" but instead "as a shorthand for issues that should be considered before entering into a litigation funding arrangement."[3] Considering the variety of forms of both litigation funding and state regulation, rigid best practices standards would be untenable. The Report acknowledges the breadth of transactions that may be considered "litigation funding." Litigation funding commonly involves a litigant obtaining financial assistance from a third-party funder (a "litigation funding company") in exchange for an interest, usually non-recourse, in the potential recovery from the litigation claim. Litigation funding companies may also provide funds directly to a litigant's attorney to cover litigation costs in exchange for a portion of the attorney's share of the recovery. While many companies fund individual litigants, others fund large, complex commercial litigation.[4] As discussed below, the Report recommends certain precautions that may not be warranted in many transactions, depending on the jurisdiction and form of litigation funding.
Among the Report's more controversial...
