The Funder as Co-Counsel: A Glimpse into the Future of Law Firm Ownership

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The authors’ raise an interesting conceptual possibility:  that funders should perhaps serve as plaintiff’s co-counsel, since most litigation funders are run by attorneys anyway. The authors then assert that funders would be unlikely to accept this arrangement and do not make use of co-counseling in their actual model.  I believe that funders may be more willing to do so if law firm ownership rules were changed.  Law firm ownership may also offer a better way to regulate the funder’s role in the litigation than the current hodgepodge of state-by-state rules.  According to our current Model Rules of Professional Responsibility, in nearly all US jurisdictions including New York, law firms cannot be owned by non-attorneys.  Thus, in order to be co-counsel, the funder would have to be structured as a law firm, and all non-attorney businesspersons (e.g. the finance/business people) would have to be cut out of the ownership scheme.  This is unattractive for obvious reasons.

However, in one jurisdiction – the District of Columbia – the rule is more permissive.  Under D.C. Rule of Professional Responsibility 5.4(b), non-attorneys are allowed to have part ownership of a law firm as long as very specific rules are followed.  Why is DC so unique?  I believe that this is largely because there is a revolving door used by the political elite between the public and private sectors in D.C., since whichever party is out of power at a particular time leaves many politicians looking for private consulting positions.  This modified rule allows those non-attorney politicians to join a law firm as a partner/consultant and share in the ownership and profitability of the law firm.  This rule has also been used by non-attorney business people to run D.C. law firms and share in the profits using some very sophisticated corporate structures.  Here’s an example that has gotten quite a bit of publicity: Clearspire (described further here, here, here and here).  Similarly, I believe that litigation funding companies might be able to use this rule in D.C. to be able to conduct business as usual (on the business side) and serve as co-counsel (on the law firm side), if structured properly.  However, other DC laws are not as funder-friendly, so it is unlikely that funding companies will be flocking to Washington to take ownership of law firms any time soon.  Instead, perhaps one or more of the other fifty states that have more funder-friendly laws may decide to experiment with a similar rule.

The authors’ also note that the attorney work-product doctrine is more protective than the attorney-client privilege such that disclosure to funders would not waive the attorney work-product privilege.  Thus, theoretically, the ultimate protection would be a litigation funder that is part owner of a law firm (in a jurisdiction where such ownership is allowed) that is co-counsel to the funded party’s primary legal counsel, where that litigation funder receives its information about the case solely through its co-counsel law firm’s attorney work product.  In this scenario, the funding firm would be a part legal owner of the relevant attorney work product, so (theoretically) no third-party disclosure issues would arise.  This would provide all of the protection without the litigation funder having to take ownership of the claim and become a co-party to the dispute (thus, avoiding champerty restrictions under New York law) and without directly subjecting the litigation funder to attorney-client fiduciary duties (i.e., because it would be only a partial owner of the co-counsel law firm and would be sufficiently separate from the law firm’s day-to-day operations).

Of course, this sort of structure would have to be legalized in more jurisdictions before it would be viable for offering litigation funding across state lines.  In addition, it raises a whole host of conflicts of interest that would require a rewording of the model’s Section 2.26 No Conflicts of Interest, particularly, and/or Schedule D, and 3.2.2 Fiduciary Duty would likely also need to be modified if the funder remains structurally separate from the law firm co-counsel that it partially owns.

By contrast, the United Kingdom’s recent Legal Services Act allows non-attorney partial ownership of law firms through “Alternative Business Structures.”  The American Bar Association (ABA) Commission on Ethics 20/20 recently examined this issue, but decided not to modify the Model Rules of Professional Responsibility to allow non-lawyer ownership of law firms.  Perhaps, after cautiously observing the effects of the UK legislation across the pond, the ABA will eventually change its position.


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