Disclosing Conflicts of Interest

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Funders and plaintiffs can have multiple conflicts of interest as detailed in this essay. Beyond imposing a fiduciary duty between funder and plaintiff, one of the most direct ways to address these conflicts is through disclosure so that plaintiffs can make informed decisions about whether to waive conflicts or look for a different funder, decisions we believe should be based on the advice of independent counsel.

To assist plaintiffs (and their counsel) in making the decisions, the model requires the funder to make specific representations disclaiming certain conflicts and to disclose potential conflicts on schedules that the plaintiff reviews before executing the contract. The model contemplates three schedules. Schedule A is for contracts between the funder and any other party or potential party to the claim. Contracts not related to the litigation might not be problematic, however, if another party or potential party did substantial business with a funder it might lead a plaintiff to question the funder’s loyalty. Schedule B is for negotiations with a party or potential party. Schedule C is for relationships between the funder and litigation counsel and, if used, independent counsel. As drafted, these schedules are very comprehensive; depending on the nature of the claim, the parties to it, and the funder, the parties may wish to narrow them.

Finally, a type of conflict of interest that may be more subtle than the rest involves pressures the funder feels to resolve the claim quickly because its own contracts (e.g. its limited partnership agreement with its investors) require it to return capital to its investors at a specific time. This type of conflict is also disclaimed or disclosed in the model.

Here is the model language regarding the funder’s disclosure of potential conflicts:

2.2.4 No Conflicts of Interest:

2.2.4.1 Funder has not, as of the date of this Agreement:

(a) paid a referral fee to Litigation Counsel in connection with the Claim, the Plaintiff or this Agreement;

(b) entered any transaction with Litigation Counsel that has or would make Litigation Counsel a part owner of Funder;

(c) contracted with any other party or potential party to the Claim other than has been disclosed on Schedule A;

(d) engaged in negotiations with any other party or potential party to the Claim other than has been disclosed on Schedule B; or

(e) entered any relationship with Plaintiff’s Litigation Counsel [or Independent Counsel] that potentially conflicts with Plaintiff’s interests regarding the Claim other than has been disclosed on Schedule C. For the avoidance of doubt, Schedule C at a minimum details Funder’s history of engaging such counsel or paying such counsel referral fees, including approximate dates, total fees paid, and the nature of the engagement; and, whether such counsel has an ongoing financial connection to the Funder other than those created by this Agreement or the retainer agreement.

2.2.4.2 Funder will not, prior to the Conclusion of the Claim, pay a referral fee to Litigation Counsel in connection with the Claim, Plaintiff, or this Agreement; transfer or agree to transfer any ownership in Funder to Litigation Counsel; or engage in any activity that would have been disclosed on Schedules A, B or C if it had occurred as of the date of this Agreement. This provision shall survive the termination of this Agreement if the Agreement is terminated prior to the Conclusion of the Claim.

2.2.4.3 Funder does not have a duty, contractual obligation or other requirement to monetize its interest in the Claim within any particular time frame or which would require the Funder to cease funding the Claim. For the avoidance of doubt, the preceding sentence does not include a fiduciary duty that would require Funder to cease funding the Claim because of Funder’s assessment of the merits of the Claim.

[Alternate:

2.2.4.3 According to its partnership agreement, the Funder must liquidate the investments and return capital to investors [X] years from the effective date of this Agreement.]

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