Two by Sebok on Litigation Financing

Tony Sebok (Cardozo) has posted two pieces to SSRN on litigation financing.  First up is Litigation Investment and Legal Ethics:  What Are the Real Issues?.  The abstract provides:

One of the foundational principles of legal ethics is that the lawyer owes an obligation of undivided loyalty to the client, and no other interests or relationships can be permitted to interfere with the lawyer’s exercise of independent professional judgment on behalf of the client. The strongest objections to litigation investment by third parties is that it may compromise a lawyer’s independence. This article examines this objection in the context of a recent report from the Ethics Committee of the Commercial and Federal Litigation Section of the New York State Bar Association and argues that it misses the real legal ethics risks posed by litigation investment, which include the risk of self-dealing. The article compares the risk of self-dealing in commercial and consumer litigation investment in the United States with the risk of self-dealing in class action litigation investment in Ontario. It concludes by noting that courts in Ontario have properly identified the self-dealing risk in litigation funding for class actions and suggests that American courts and others concerned with the ethical risks for lawyers created by litigation investment can learn from the Canadian experience.

Next is What Do We Talk About When We Talk About Control?.  The abstract provides:

Despite the recent rejection by the ABA of attempts to weaken the limitations on the sharing of fees with non-lawyers, pressure to allow laypersons to invest in lawsuits remains.  This article looks at one argument against lay investment in litigation, which is that laypersons should not be able to control how litigation is conducted.

The intertwined questions of control and investment have two dimensions.  The first is whether and to what extent non-lawyers may invest in a stranger’s lawsuit; this is know as litigation investment and is limited by statute or the common law doctrine of champerty.  The second is whether and to what extent non-lawyers may invest in a lawyer’s anticipated legal fees; is the known as fee-splitting and is limited by the rules of professional responsibility.  This paper focuses on the second question, but it will be illuminated by work I have done on the first question.

I approach the question of investment and control of lawyers by asking two subsidiary questions.  First, what do we mean by “loss” of control when we say that investment in a lawyer’s anticipated fees risks allowing the investor to control the lawyer’s legal advice and judgment?  Are there any investment structures under which the risk of control could be eliminated or minimized?  Second, what do we mean by the “control” which is the subject of the forbidden transfer from the lawyer to the investor?  Lawyers, after all do not actually control the litigation they conduct. Clients ultimately have control; lawyers are agents of the client. Therefore, the autonomy which opponents of fee-splitting wish to protect possesses a paradoxical quality.  On the one hand, it can’t be ‘full’ control, equal to that of the client, since that would violate the fundamental agent/principal relationship that exists between lawyer and client.  On the other hand, it must reflect aspects of discretion and judgment which are lacking in the investor qua non-lawyer.  The paper concludes by asking whether clients are helped or hurt by insisting, as we do now, of one-size-fits-all answers to these questions regardless of the sophistication of the client and the nature of the legal representation at issue.

--CJR