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.

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Florida Amends Bar Rules to Make Pro Bono Work More Accessible for Lawyers

On November 20, 2017, the Florida Supreme Court amended Florida Rule 4-1.2 and adopted Rule 4-6.6 to make it easier for lawyers to volunteer their services to legal aid organizations and pro bono clients.

In its order, the Florida Supreme Court noted that it is not always feasible for a lawyer providing short-term limited legal services through an organization to “systematically screen for conflicts of interest as is generally required before undertaking a representation.” Newly adopted Rule 4-6.6 directly addresses that issue, and states that a lawyer who provides short-term limited legal services to a client “under the auspices of a program sponsored by a nonprofit organization, court, government agency, bar association or an American Bar Association-accredited law school” will not be held to the standard conflicts of interest rules, barring two exceptions.

Specifically, the new rule states that a lawyer providing “short-term limited legal services to a client without expectation by either the lawyer or the client that the lawyer will provide continuing representation in the matter: (1) is subject to Rules 4-1.7 and 4-1.9 (a) only if the lawyer knows that the representation of the client involves a conflict of interest; and (2) is subject to Rule 4-1.10 only if the lawyer knows that another lawyer associated with the lawyer in a law firm is disqualified by Rule 4-1.7 or Rule 4-1.9(a) with respect to the matter.”

Among the amendments to Rule 4-1.2 are additions to the language of the rule that the Supreme Court wrote will “[exempt] a lawyer who gives advice in a short-term limited legal services program under new Bar Rule 4-6.6 from the requirement that a client’s informed consent to representation limited in objectives or scope must be in writing.” The Court also wrote that the new rules are intended to encourage lawyers to volunteer their services; thereby increasing access to justice “at a time when legal aid funding and staff cannot accommodate all individuals who need legal representation.”

The Florida Supreme Court’s order on the changes went into effect on November 20, 2017. Read the full order 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.

Multiple Attorneys Removed from Cases Due to Conflicts of Interest with Guardian Oversight and Attorney-Hospital Relationships

In two recent opinions, Michigan and South Carolina courts have removed attorneys from multiple cases where investigations revealed that they were abusing their powers as clients’ guardians and conservators. Investigations revealed several ethical violations, including an undisclosed agreement in which a hospital would pay the attorney to petition for guardianship of patients. Both attorneys also abused their power by allowing family members to move into the homes of hospitalized clients without their knowledge or consent. In both opinions, the court noted that the attorney’s actions were clear violations of, among other rules, the conflicts of interest rules under 1.7.

These two cases are among hundreds around the country that prompted a recent report in The New Yorker. The article focused on a rash of cases in Clark County, Nevada, in which several elderly individuals were removed from their homes without notice or legal representation. Rather than representing clients who truly needed their help, attorneys were following a routine of temporary guardianship in pursuit of easy payouts. The ethically violative behavior of these attorneys included requests that courts grant them authority to intervene immediately based on vague descriptions of their ward’s medical conditions, minimal physician reports, and reports that wards were too incapacitated to attend a court hearing.

Nevada has begun to address this problem by enacting legislation that entitles all wards of the state to legal representation. For the time being, while these measures are not a cure all for the growing misconduct of certain attorneys, this legislation may provide relief for the people who need it most.

Read more on this issue here.