The Paper Chase: Fee-Splitting vs. Independent Judgment in Portfolio Litigation Financing of Commercial Litigation

• Author: Zeqing Zheng
• Position: J.D., Georgetown University Law Center (expected May 2022); B.A., University of Rochester (2018)
• Pages: 1383-1402

The Paper Chase: Fee-Splitting vs. Independent

Judgment in Portfolio Litigation Financing of

Commercial Litigation

ZEQING ZHENG*

INTRODUCTION

Lawyers serve justice and clients. The seemingly complicated legal practice is

comprised of a simple relationship between lawyers—the zealous advocates—

and clients—the people who seek out legal advice.

1

However, a new and poten-

tially disruptive player has emerged in the legal field: the investor, and in particu-

lar, litigation finance firms. Litigation finance is a business transaction where a

third-party investor provides capital to fund a lawsuit in exchange for a certain

preset percentage of final judgment or settlement.

2

The invisible hand of the capi-

tal market is guiding an increasing number of venturers to the legal market. Some

lawyers and their clients—both in need of capital—have rolled out the red carpet

for the investor, while other practitioners are questioning the legality and ethics

behind this burgeoning practice.

3

There has been rapid growth in litigation finance in the last twenty years.

4

As

most major law firms started to collaborate with litigation finance firms,

5

and as

* J.D., Georgetown University Law Center (expected May 2022); B.A., University of Rochester (2018). ©

2021, Zeqing Zheng.

1. See MODEL RULES OF PROF’L CONDUCT pmbl. (1980) [hereinafter MODEL RULES] (“A lawyer’s responsi-

bilities as a representative of clients, an officer of the legal system and a public citizen are usually harmonious.

Thus, when an opposing party is well represented, a lawyer can be a zealous advocate on behalf of a client and

at the same time assume that justice is being done.”).

2. See AM. BAR ASS’N, AM. BAR ASS’N BEST PRACTICES FOR THIRD-PARTY LITIGATION FUNDING 2 (2020), https://

www.americanbar.org/content/dam/aba/directories/policy/annual-2020/111a-annual-2020.pdf [https://perma.cc/9SBY-

BUBC] [hereinafter BEST PRACTICES REPORT].

3. Annie Pavia, ANALYSIS: Firm Lawyers Wary of Portfolio Litigation Financing, BLOOMBERG LAW (Mar.

5, 2020), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-firm-lawyers-wary-of-portfolio-

litigation-financing [https://perma.cc/4Z6Y-W5SV].

4. See CHARLES AGEE & GRETCHEN LOWE, WESTFLEET ADVISORS LITIGATION FINANCE BUYER’S GUIDE 5

(2020); N.Y.C. Bar Ass’n. Comm. on Prof’l Responsibility, Formal Op. 2018-5: Litigation Funders’

Contingent Interest in Legal Fees 1 (2018) (“The number of lawyers and clients benefitting from litigation fund-

ing has increased substantially over the last several years. It is now common for litigants and their lawyers to

contemplate or obtain litigation funding.”) [hereinafter NYCBA Formal Op. 2018-5].

5. See CHARLES AGEE & GRETCHEN LOWE, supra note 5, at 7; BURFORD CAPITAL, BURFORD INTERIM REPOR-

T 2020 8 (2020), https://www.burfordcapital.com/media/1810/hy-2020-report.pdf [https://perma.cc/EL4D-

BEA] (“93 AmLaw 100 and 89 of the 100 largest global law firms have sought our capital and services.”).

Burford Capital is one of the leading litigation finance firms. Id.

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the economic uncertainty caused by COVID-19 has persisted,

6

litigation finance

firms have become more creative, shifting from their traditional case-by-case

investment with clients to portfolio financing with law firms.

7

Portfolio financing involves funding arrangements between third-party litiga-

tion funders and lawyers where funders invest in a portfolio of cases managed by

one law firm.

8

Under portfolio financing, there is a separation between the funder

and the client.

9

This direct funding from a third party to law firms creates a new

ethical dilemma about whether attorneys can actually use independent judgment

when they engage in fee-splitting of their lawsuits.

10

The question here is how the

legal field should resolve the ethical dilemma between fee-splitting and lawyers’

independent judgment obligation in portfolio financing of commercial litiga-

tion,

11

which the present Note explores.

As litigation finance industry becomes more creative and plays an increasingly

important role in the legal industry, this Note addresses a new ethical concern

arises of portfolio financing.

12

This Note focuses on portfolio financing as a sub-

set of litigation finance and attempt to resolve the conflict between fee-splitting

arrangements in portfolio financing and the Model Rules of Professional Conduct

(“Model Rules”), specifically Rule 5.4’s requirement on lawyers’ independent

judgment.

13

Previous researches focus on evaluating benefits and costs of

6. See Eva Shang & Robert Li, INSIGHT: Litigation Finance Could Be a Lifeline During Pandemic,

BLOOMBERG LAW (May 26, 2020), https://news.bloomberglaw.com/us-law-week/insights-litigation-finance-

could-be-a-lifeline-during-pandemic [https://perma.cc/TMY2-N9GG] (As a result of COVID-19, “[m]any

legal professionals are finding themselves furloughed or laid-off. Even more are waking up to pay cuts and

hiring freezes. The industry-wide cost-reducing efforts suggest that law firms are wary of the economic

outlook, and some are already scrambling for cash”).

7. BLOOMBERG LAW, LITIGATION FINANCE SURVEY 2020 (2020), https://aboutblaw.com/T7l [https://perma.

cc/2PX7-F2AM]. In case-by-case investment, litigation finance firms directly contracted with clients. See

NYCBA Formal Op. 2018-5, supra note 4, at 2 (“Client-funder arrangements . . . do not implicate Rule 5.4, . . .

because the lawyer is not a party to the arrangement and payments . . . do not affect the amount of the lawyer’s

fee.”).

8. AM. BAR ASS’N, supra note 2, at 4.

9. See id. Katherine Tommey states as follows:

[O]rdinary litigation funding . . . is usually a contract that is executed on a single-case basis

between a client and a funder[.] . . . [I]n a portfolio funding arrangement with a law firm, the funder

provides financing to the firm, secured by a portion of the law firm’s own right to contingency fees

obtained in specified portfolio of cases agreed upon by the law firm and the funder.

Katherine Toomey, Law Firms Must Beware Risks in Nontraditional Financing, LAW360 (June 5, 2020),

https://www.law360.com/articles/1280209/law-firms-must-beware-risks-in-nontraditional-financing [https://

perma.cc/N8YG-B3CX]).

10. Fee-splitting refers to situations where attorneys share their fees with other parties. See Katherine

Toomey, supra note 9.

11. See Annie Pavia, supra note 3.

12. See supra notes 4–7 and all accompanying text.

13. MODEL RULES R. 5.4 cmt. 2 (“[L]awyer may accept compensation from a third party as long as there is

no interference with the lawyer’s independent professional judgment and the client gives informed consent”)

(citing to R. 1.8(f)).

1384 THE GEORGETOWN JOURNAL OF LEGAL ETHICS [Vol. 34:1383