The landscape of legal practice has significantly changed due to the proliferation of third-party litigation funding, a financial mechanism that provides capital to plaintiffs, including patent owners, in exchange for an interest related to any recovery. This funding source can be a vital tool for expanding access to justice, particularly for patent owners who would otherwise be unable to afford the high costs of patent litigation, but it introduces several dynamics that require careful ethical consideration from attorneys. After assessing an attorney's ethical duties of loyalty to the client and client control, attorneys can examine how they are applied and safeguarded in the context of litigation funding, and analyze how state bar ethics opinions and judicial interpretations are guiding attorneys in this evolving field.
I. Ethical Rules Governing Attorney Conduct in Funded
Litigation
At its heart, litigation funding creates a triangular
relationship between the attorney, the client, and the funder,
which potentially complicates two fundamental ethical principles
governing the attorney-client relationship: an attorney's duty
of loyalty to the client and the client's right to control the
litigation.
A. Duty of Loyalty and Professional Independence
First, a lawyer's duty of loyalty compels acting in
the best interests of their client without being compromised by
conflicting interests. Model Rule of Professional Conduct 1.7
addresses conflicts of interest, stating that a conflict of
interest exists if "there is a significant risk that the
representation of one or more clients will be materially limited by
the lawyer's responsibilities to . . . a third person or by a
personal interest of the lawyer."1 This rule is
particularly relevant when a lawyer advises a client on a funding
proposal.
An attorney who affirmatively advises a client to accept a third-party funding arrangement must consider the risk of a future claim that their representation will be "materially limited by . . . a personal interest."2 This personal interest could stem from the attorney's or their law firm's own financial position, including the need to ensure payment of their fees. However, issues associated with Model Rule 1.7(a) can be dealt with by the exceptions to the rule listed under Model Rule 1.7(b). Under Model Rule 1.7(b), a client may waive a conflict by providing the lawyer with informed written consent after full disclosure of the existence and nature of the possible conflict, as long as "the lawyer reasonably believes that they will be able to provide competent and diligent representation to each affected client."3
Further emphasizing the importance of professional independence, Model Rule 5.4(a) generally bars lawyers from sharing legal fees with non-lawyers.4 As the comment to this rule flags, the prohibition on fee-splitting is "to protect the lawyer's professional independence of judgment" that the lawyer owes to the client.5
B. Client Control Over Litigation and Settlement
Second, the principle of client autonomy is a cornerstone
of Model Rule 1.2(a), which grants the client the exclusive right
to make fundamental decisions regarding the objectives of their
representation. This right includes the non-delegable authority to
decide whether to settle a matter. The introduction of a
third-party funder can, however, introduce complexities in
safeguarding this right. For example, while some funders do not
receive any control, certain funding agreements may grant funders
express or implied control over a lawsuit, thereby interfering with
the client's autonomy. Examples of such control mechanisms may
include a funder's veto power over settlement, conditions for
continued funding, or requirements for specific strategic
moves.6
II. State Bar Ethics Opinions
The ethical challenges presented by litigation funding
have prompted various state bar associations to issue opinions that
guide attorneys on navigating these arrangements while upholding
core professional duties. While the common-law doctrines of
champerty and maintenance—which historically prohibited
third-party involvement in litigation—have largely been
relaxed, their underlying concerns about outside interference and
control persist in modern ethical frameworks.7
Many of these opinions permit litigation funding but impose conditions, some stringent, to safeguard loyalty and client control. For example, the Illinois State Bar Association has issued an advisory opinion concluding that, although an attorney may assist a client in obtaining third-party litigation funding, the attorney must ensure that the funding agreement does not grant the funder any rights to control settlement, strategy, or other aspects of the litigation.8 Moreover, the attorney must "render independent professional judgment and candid advice to the client" to comply with Illinois' ethical rule requiring the attorney to "exercise independent professional judgment and render candid advice," similar to Model Rule 5.4.9
Similarly, the New York City Bar Association issued formal opinions emphasizing that while an attorney may advise a client on litigation-funding agreements, they must ensure the client maintains ultimate control over the litigation, including settlement. The opinions prohibit a lawyer from entering into a funding agreement that would improperly limit the lawyer's ability to exercise independent professional judgment or assist a client in doing so.10 The California Bar Association also prohibits an attorney from entering into an agreement that cedes control of litigation decisions to a third-party funder, reinforcing the principle that a funder can be provided with information, but not the contractual right to direct a lawyer's professional judgment or the client's strategic choices.11
III. Judicial Scrutiny: Nimitz and Its
Implications
Judicial decisions also offer crucial insights into the
ethical boundaries of litigation funding, particularly when
arrangements appear to compromise attorney loyalty or client
control. The Nimitz opinion from the District of Delaware
offers a striking example.12 In Nimitz, the
court examined patent-infringement cases where plaintiff LLCs were
allegedly controlled by litigation funder IP Edge and its affiliate
Mavexar. The court found that attorneys representing the plaintiff
LLCs filed, settled, and dismissed cases without any direct
communication with their named clients, and, in doing so, concluded
that the attorneys violated the ethical rules on client control and
communication.13
The court also addressed concerns about loyalty and conflicts of interest, concluding that "counsel violated Rule 1.7 and, to the extent their fees were paid or advanced by Mavexar or IP Edge, Rule 1.8(f)."14 Mavexar's agreements created "potential conflicts of interest between Mavexar and the clients," and the attorneys' "blind adherence to Mavexar's directions to file and settle cases in the clients' name created a significant risk that counsel's actions materially limited their representation of their clients."15
Central to Nimitz was the absence of informed client consent to the funder's directions. This lack of informed consent, especially regarding conflicts and funder influence, constituted a critical ethical lapse in which the attorneys "failed to satisfy their 'ethical obligations of giving [their] clients full and meaningful disclosure of conflicts of interest.'"16 In other words, the attorneys' "de facto clients were IP Edge and Mavexar" and their "loyalty was not to their clients, but rather to IP Edge."17 These findings led the court to refer the attorneys to disciplinary counsel for their state bars.
The Nimitz opinion spotlights a judicial perspective on the importance of maintaining attorney loyalty and genuine client control in the context of funded litigation, emphasizing that an attorney's obligations to their client remain paramount, regardless of external financial arrangements.
IV. Takeaways: Safeguarding Loyalty and Control
To navigate the complex environment of litigation funding
and uphold ethical obligations, attorneys must prioritize loyalty
and client control. Best practices begin with comprehensive
informed consent: attorneys have a duty to thoroughly explain all
funding agreement terms, especially those that could impact,
depending on the circumstances, independence, strategy control, or
settlement. This explanation, including risks and benefits, should
be documented in writing to ensure the client's full
understanding. Furthermore, attorneys should conduct due diligence
on funders and their agreements, scrutinizing clauses that would
cause any undue influence that could compromise loyalty or client
control.
Ultimately, maintaining unwavering professional independence is paramount. Attorneys must prioritize the client's interests above all else and resist any funder pressure that could undermine loyalty or client autonomy. The principles of loyalty and client control are fundamental to the attorney-client relationship. By remaining vigilant, performing diligent due diligence, and prioritizing informed consent, attorneys can responsibly engage with litigation funding, thereby upholding the integrity of the profession and ensuring their clients' interests remain supreme.
Footnotes
1. Model Rules of Pro. Conduct r. 1.7(a)(2).
2. Id.
3. Model Rules of Pro. Conduct r. 1.7(b).
4. Model Rules of Pro. Conduct r. 5.4.
5. Model Rules of Pro. Conduct r. 5.4 cmt.
6. See, e.g., U.S, District Court for the District of Delaware, Standing Order Regarding: Disclosure Statements Required by Federal Rule of Civil Procedure 7.1 (Apr. 18, 2022), available at https://www.ded.uscourts.gov/sites/ded/files/Standing%20Order%20Regarding%20Disclosure%20Statements.pdf.
7. Indeed, in some states, litigation funding agreements may still be deemed unenforceable as a form of champerty or maintenance, as illustrated by cases such as Maslowski v. Prospect Funding Partners LLC, 890 N.W.2d 756 (Minn. Ct. App. 2017).
8. Illinois State Bar Association Professional Conduct Advisory Opinion No. 19-02, available at https://www.isba.org/sites/default/files/ethicsopinions/19-02.pdf
9. Id.
10. New York City Bar Association Formal Opinion 2024-2: Ethical Issues Arising from Advice to Clients on Client-Funder Litigation Funding Agreements, available at https://www.nycbar.org/reports/formal-opinion-2024-2-ethical-issues-arising-from-advice-to-clients-on-client-funder-litigation-funding-agreements/; New York City Bar Association Formal Opinion 2011-2: Third Party Litigation Financing, available at https://www.nycbar.org/reports/formal-opinion-2011-2-third-party-litigation-financing/.
11. The State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 2020-204, available at https://www.calbar.ca.gov/Portals/0/documents/ethics/Opinions/Formal-Opinion-No-2020-204-Litigation-Funding.pdf.
12. Nimitz Techs. LLC v. CNET Media, Inc., No. 21-1247-CFC, 2023 WL 8187441 (D. Del. Nov. 27, 2023).
13. Id. at *30 ("It appears that counsel violated both Rule 1.2(a) and Rule 1.4 by failing to have any communication with their clients before filing, settling, and dismissing the clients' cases.")
14. Id. at *31
15. Id.
16. Id. at *33 (alteration in original) (citing Huber v. Taylor, 469 F.3d 81, 82 (3d Cir. 2006)).
17. Id. at *36
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