The State Bar of California found that third-party litigation funding presents no significant obstacles to the ethical practice of law and issued guidelines in its formal opinion.
“Some have raised concerns that litigation funding will lead to frivolous lawsuits or that vulnerable clients may be forced to accept unfair deals,” the opinion of the Committee on Professional Responsibility and Conduct stated online. “Others argue litigation funding in the United States promotes access to justice and/or diversifies thinking about litigation.”
The guidelines define the practice as lawyers being paid by a third-party who is unconnected to the lawsuit in exchange for a percentage of the award or damages recovered through litigation.
“The judicial system is fact-based,” said Jim Gray, a retired Orange County Judge who now works as a mediator and authored the musical Convention: The Birth of America. “So, there's a protection or buttress against the undue influence of money in the court, which is why third-party litigation funding is not as concerning compared to the political process because you have that buffer.”
According to the committee’s rules, one of the issues is for lawyers to maintain independent professional judgment however Gray said if a lawsuit is funded, an attorney is more likely to accept the case.
“Lawyers are just responding to the system, which is logical,” he said. “So, if you want a better response, improve the system. It's also important for people that do not have access to that much money to be represented and third-party litigation is one way to ensure that.”
Another guideline addresses whether a client’s confidentiality is breached when a third party funds litigation.
“If the funder seeks client confidential information, the lawyer must advise the client of the risks of disclosure and obtain the client’s informed consent to disclose confidential information to the funder,” the opinion states.
Gray said the guideline is important because it is a breach of confidentiality for an attorney to share any confidential information regardless of the source of funding.
One way to mitigate a breach is by having the third-party funder sign a nondisclosure agreement.
“Nothing fixes the problem but a nondisclosure can resolve it or make it less harmful,” he said.
Regarding claims that third-party litigation can lead to frivolous lawsuits, Gray said the solution is to change laws, such as Private Attorney General Act (PAGA) and the Americans with Disabilities Act (ADA), so that abuses are not allowed or are restricted.
“You're going to have corporations or labor unions, for example, that want to keep the state from being able to reduce the salary of a state employee that will fund a state employee action against the state because if one member prevails, all 10,000 members will benefit,” Gray said. “So, public employee unions are a predominant player in this both politically as well as legally.
“They're much too powerful.”