A recent ethics opinion from the New York State Bar Association (“NYSBA”) found that a lawyer and his or her law firm is forbidden from representing a client in litigation funded by a company in which the lawyer invests.
The opinion came in response to an inquiry from a lawyer of a law firm that represents plaintiffs in commercial litigation. At times, the lawyer has referred clients to a litigation finance company so the clients could receive funds in exchange for a share of the potentially forthcoming recovery. The question addressed by the NYSBA arises because, despite the lawyer never representing the client in negotiations with the litigation finance company and the lawyer’s lack of control in the company’s investment decisions, the lawyer is a major qualified investor to the litigation finance company. Such conflict begs the question: “[m]ay a lawyer or the lawyer’s firm represent a client in litigation funded by a litigation finance company in which the lawyer is an investor?” The NYSBA said the lawyer and the law firm cannot engage in such representation.
The NYSBA analyzed four ethical rules. The NYSBA first addressed Rule 1.8(a) and Rules 1.7(a)(2). The NYSBA found that Rule 1.8(a), which prohibits a lawyer from engaging in a business transaction with a client, and Rule 1.7(a)(2), which prohibits a lawyer from representing a client when there is a concurrent conflict of interest, can be waived, so long as the relevant waiver provisions of each rule are complied with.
Nonetheless, the NYSBA found that the representation at issue is impermissible under Rule 1.8(e), which prohibits a lawyer from advancing or guaranteeing financial assistance to a client, and Rule 1.8(i), which prohibits a lawyer from gaining a proprietary interest in the litigation he or she represents a client in. With respect to the former rule, the NYSBA expressed two concerns: “first, that such financial assistance ‘would encourage clients to pursue lawsuits that might not otherwise be brought’”; “second, that ‘such assistance gives lawyers too great a financial stake in the litigation.’ Rule 1.8, Cmt. [10].” The NYSBA further found that none of the exceptions or waiver provisions applicable to Rules 1.8(e) and 1.8(i) would apply. And, with respect to the lawyer’s firm, given that none of the exceptions or waiver provisions apply, the ethical violations would be imputed to the lawyer’s law firm.
Read the full opinion here.
