As Victoria Shannon notes, one of the options we propose parties consider in order to solve some of the conflicts of interest among the plaintiff, litigation counsel and the funder is to make the funder a fiduciary of the client via a contractually-imposed fiduciary duty. While funders, such as Selvyn Seidel, do not favor imposing one through contract at this point, we believe that the behavior of funders who are actively participating in the case gives rise to the question of why such a duty should not be imposed by law on a co-counsel theory.
More specifically, it seems that we have stumbled upon a conceptual conundrum. The Model Rules of Professional Responsibility set up a dichotomy: either one is engaged in the practice of law—in which case a host of duties and obligations come to bear including fiduciary duties (as well as duties to zealously represent and more)—or the relevant person/entity is engaged in the unauthorized practice of law. There is no third option under the Rules.
As Shannon notes, current rules on law firm ownership mean funders are unlikely to engage in funding transactions if they are held to be co-counsel (thus attorneys as attorneys) along with litigation counsel. That practical consideration does not change the fact that it is hard to characterize the actions of the lawyers at litigation finance firms whose business model includes active investing rather than passive investing in a claim as anything other than the practice of law. Now, we support litigation finance generally, and believe the litigation expertise that participating funders offer is a very valuable kind of non-cash contribution, akin to the expertise VCF can bring to startups. That said, the wisdom they contribute to the conduct of the claim does not seem different in kind to the professional practice they engaged in at their old firms. Consider the kinds of activity the New York City bar believes funders can engage in, with client consent:
“While a client may agree to permit a financing company to direct the strategy or other aspects of a lawsuit, absent client consent, a lawyer may not permit the company to influence his or her professional judgment in determining the course or strategy of the litigation, including the decisions of whether to settle or the amount to accept in any settlement.”
Certainly not all funders attempt be involved in claim conduct; and those that do attempt varying degrees of involvement. But it is appropriate to ask, if an attorney-client relationship is not created between the funder and the plaintiff and the resulting fiduciary duty imposed, at what point do the funder’s activities constitute the illegal practice of law?
By raising the idea of treating funders as co-counsel and imposing the resultant fiduciary duty we are trying to set in sharp relief this issue. The technical challenge of imposing a fiduciary duty through this mechanism due to law firm ownership rules, however, simply highlights the appropriateness (as well as importance) of contractually negotiating a fiduciary duty not anchored to an attorney-client relationship.