Proposed Amendment to the Federal Rules Would Require Disclosure of Third-Party Litigation Funding

On November 7, 2017, the Advisory Committee on Civil Rules established a new subcommittee that will study whether the potential ethical and judicial concerns surrounding third-party litigation funding merit the enactment of amendments to the federal rules that would require disclosure of outside investment in any action filed in federal court. The issue is scheduled for discussion during the committee’s April 10, 2018 meeting in Philadelphia.

The U.S. Chamber Institute for Legal Reform has led the charge for an amendment to the rules of civil procedure that might counteract the potential ethical issues raised by the use of third-party funding arrangements in civil actions. Last summer, Lisa Rickard, president of the Chamber’s Institute for Legal Reform, sent a letter to the Administrative Office of the U.S. Courts to the Federal Rules of Civil Procedure requesting that the rules be amended to require disclosure of all compensation agreements that are “contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”  Rickard’s letter includes a discussion of the following legal ethics concerns:

 (1) Impermissible sharing of legal fees: Model Rule 5.4(a), which bars almost all forms of sharing legal fees with non-lawyers, conflicts with some models of third-party litigation funding which involve plaintiffs’ counsel repaying the funder’s investment out of attorney’s fees;

(2) client confidentiality: the extent that funding arrangements require disclosure of client information to the funder raises confidentiality issues; and

(3) conflicts of interest: attorneys who have contracted directly with a funding company may have duties to that company that are inconsistent with the duties of loyalty to the client, including conflicts that arise when attorney’s are incentivized to recommend clients to work with favored funders.

The Institute proposed a similar amendment to the rules committee in 2014, but it did not receive much attention. The rise in third-party litigation funding in recent years has apparently enlivened opposition, as evidenced by the fact that 29 organizations joined  Rickard’s  letter that  proposes a disclosure requirement be included in Federal Rule of Civil Procedure 26.

“The industry has grown tremendously,” said Page Faulk, vice president of legal reform initiatives at the Chamber’s institute. “There have been a lot of developments since we originally submitted the petition, and we’re also hearing from other business groups about their concerns.” She added that more judges are also sharing the outlined concerns.

In fact, some courts have begun to address third-party litigation funding issues on their own, with the U.S. District Court for the Northern District of California recently adopting a policy that permits class action defendants to discover whether their opponents are receiving funding from outside investors. And in March, the U.S. House of Representatives passed a bill that would mandate the disclosure of third-party funding in class actions.

Commercial litigation funders, including industry giants Burford Capital and Bentham IMF, have opposed the proposal, arguing the rule would be invasive and unnecessary.

To read more click here.

Colorado Goes Live with Lawyer Self-Assessment Program

On October 24, 2017, the Colorado Supreme Court launched an online platform aimed at helping Colorado lawyers to practice ethically, avoid disciplinary actions, and reduce stress when dealing with rules of professional conduct. The new Colorado Lawyer Self-Assessment Program is the first online self-assessment program launched by a state for its lawyers, but Illinois will soon follow with its own similar same initiative.

A subcommittee of the Colorado Supreme Court’s Advisory Committee initiated the self-assessment tool, and a group of Colorado lawyers, professionals, and professors assisted in its development. The self-assessment program addresses 10 important areas-including conflicts, confidentiality, and fees-in which lawyers encounter common ethical obstacles when practicing law. Every area contains a list of objectives, requirements, and the best practices to follow. Then, the program asks the lawyer performing the assessment if he or she is following those guidelines and, if the answer is negative, the program provides ethics opinions and articles that explain the risks involved. Lawyers who complete the entire program also receive CLE credit.

Colorado lawyers are responding positively to the self-assessment program and the Colorado Supreme Court’s Advisory Committee expects to improve it considerably based on the assessment reports submitted.

View the Colorado Lawyer Self-Assessment Program here.

Insurance Counsel Can’t Advise Client on Misrepresentation

The New York County Bar Association’s Ethics Committee published an opinion advising that an insurance defense lawyer cannot advise the insured whether to inform the insurance carrier about false information or a misrepresentation on the insured’s application. Instead, the Ethics Committee suggests that a lawyer advise the client to seek independent counsel as to whether the client needs to disclose the information to the insurance carrier.

This issue arises because insurance carriers often retain firms as “panel counsel” from which they select counsel to defend insured in lawsuits. The opinion deals with the conundrum that may confront a lawyer, who has been retained as “panel counsel,” and then learns that the insured lied on his application. The opinion describes a lawyer who is confronted with the dilemma of whether to report the client’s lie to the insurance company, who may then deny coverage for the client, or to fail to disclose the misrepresentation at the risk of losing a highly coveted panel counsel position.

The Committee concludes that, in this situation, the lawyer’s client is the insured and therefore the duty to the client is paramount. The lawyer owes a duty of confidentiality to his client under the Rules of Professional Conduct Rule 1.6 (Confidentiality), which restrains the lawyer from revealing an insured’s misrepresentation to the insurance carrier.

However, beyond the duty of confidentiality, the committee notes that the lawyer has a conflict under Rule 1.7 (Current-Client Conflicts), because of his personal, financial interest in his business relationship with the insurance carrier. Thus, the lawyer is not likely to be in a position to advise the client even after full disclosure of the conflict to the client.  Ultimately, the opinion concludes that if the client fails to correct the misrepresentation and thereby insists on pursuing a fraudulent course of action, the lawyer may withdraw.

Find the opinion here.

Bloomberg Law Trains Machine to Highlight Legal Points

On September 26, 2017, Bloomberg Law unveiled an AI program called “Points of Law,” a service that allows users to quickly identify and analyze language in a judicial opinion. The program uses a machine learning algorithm that indexes its opinions, making it easier for users to find legal points and precedents that strengthen their own legal arguments. When the feature is turned on, language is highlighted in the text, and citations are linked from the margin. The program is one of a wave of automated legal research and analysis engines that are raising significant ethical questions regarding attorney competence and confidentiality.

As reported by the ABA, attorneys are increasingly turning to AI-generated work product to increase their legal research and drafting efficiency. In fact, attorneys participate in training these machine learning algorithms, as each query entered into the system helps to expand and refine the legal analysis the algorithm returns. But, when delegating work to AI programs, attorneys should be wary of their ethical obligations under the competence rules. Significantly, lawyers must understand how AI programs function in order to fulfill their duty of technological competence.

This means that a lawyer using Bloomberg’s Points of Law service must understand how the program’s indexing works and how it selects which language to highlight. For example, though AI programs continuously “learn,” they may not find every supporting precedent for a client’s case. As such, a lawyer entering a query into programs like Points of Law must ensure the accuracy of the research returned in order to satisfy their duty under the ethical rules. AI programs likely pose concerns regarding lawyers ethical duties of confidentiality. Therefore, lawyers must take the appropriate steps to prevent inadvertent disclosure of confidential information by completely understanding the terms of service of the AI programs they are using, and ensuring there is a confidentiality agreement with the AI vendor.

Find the article discussing the unveiling of Bloomberg’s Points of Law here.

No Implied Authorization: Consent is Key to Discuss Intentions of Deceased Client’s Will in Colorado

The Colorado Bar Association Ethics Committee recently published an opinion finding that will-drafting attorneys cannot volunteer information about a deceased client’s intentions to their beneficiaries without the previous consent of the client or their agent. The opinion was published in response to the frequency with which will drafters receive questions about their client’s intentions from relatives who are disappointed in their bequest.

The opinion noted that a lawyer’s duty of confidentiality extends after a client’s death, as specifically reflected in Colorado Rule of Professional Conduct Rule 1.6(b) which does not  include a client’s death among the listed confidentiality. This notion of confidentiality is also upheld in The American College of Trust and Estate Counsel Commentaries on the Model Rules of Professional Conduct.

The opinion also highlights that an attorney may reveal this information without violating Rule 1.6 if a court orders the disclosure. However, an attorney may not reveal information based upon the rationale that the client impliedly authorized the disclosure.

The committee also noted that there is currently a split of authority concerning whether a will-drafting attorney may ethically disclose information without authorization from the client or personal representative. The ultimate position adopted by the committee states that “simply retaining a lawyer to draft estate documents, without more, is not sufficient to constitute implied consent for the lawyer to voluntarily provide information protected by Rule 1.6.”

Learn about the Colorado Bar’s Ethic Opinion here and here.

Read the American College of Trust and Estate Counsel Commentaries on the Model Rules of Professional Conduct here.