Photo: Michael J. Fox in The Good Wife. Credit: CBS.

In the “Raw Deal” episode of The Good Wife, Louis Canning (played by fan favorite Michael J. Fox) shared privileged information with a litigation funding source about what his corporate client would likely pay to settle a class action. Canning then switched sides and used the proceeds of the loan to prosecute a class action against his now former corporate client. Setting aside the obvious ethical red flags on using a former client’s confidences, this episode presents an opportunity to discuss the ethics of third-party litigation funding.

The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2020-204 (the Opinion) addressed the “ethical obligations that arise when a lawyer represents a client whose case is being funded by a third-party litigation funder.”

According to the Opinion, “Litigation funding is the practice where a third-party unrelated to the lawsuit provides funds for litigation in return for a portion of any financial recovery.” After a brief discussion about such funding’s legality, the Opinion highlighted the applicable California Rules of Professional Conduct (CRPC).

First, under the duty of competence in CRPC 1.1, the lawyer must understand how the funding agreement impacts the litigation. The lawyer must have or obtain the expertise to negotiate the litigation funding contract, or decline to provide advice about litigation financing.

Second, CRPC 1.4 requires a lawyer to communicate to the client “whether litigation funding would assist in accomplishing the client’s goals,” which include a risks and benefits discussion about litigation funding and alternatives.

Third, CRPC 1.6 requires a lawyer to protect confidential client information. A litigation funder might try to seek privileged information about a lawyer’s evaluation of the case. The lawyer must obtain the client’s informed consent before disclosing client confidences. A court may find the client waived the attorney-client privilege if information is shared with a third-party funder. The Opinion cautions that case law on this topic is still developing.

Fourth, under the conflicts rules of CRPC 1.7, the lawyer must obtain the client’s written informed consent and still “reasonably believe” the lawyer can provide competent and diligent representation.

Fifth, the Opinion stated: “Rule 1.8.6 prohibits a lawyer from entering into an agreement for or accepting compensation for representing a client from one other than the client unless the client gives informed written consent, the lawyer complies with the lawyer’s duty of confidentiality, and the payment arrangement will not interfere with the lawyer’s independent professional judgment or with the lawyer-client relationship.” The takeaway is that the lawyer must explain to the client the risk that the client’s interests may depart from the funder’s interests, and that the lawyer’s actions must be dictated by ethical duties (i.e., the interest of the client) and not the funding contract (or third-party funding source).

Finally, CRPC 2.1 requires a lawyer to “exercise independent professional judgment” when advising the client. Citing to Pollack v. Lytle (1981) 120 Cal.App.3d 931, 946, the Opinion noted CRPC 2.1 “dovetails with a lawyer’s duty of loyalty to a client.” This means a lawyer cannot allow obligations to a third-party “to compromise the quality and soundness of advice offered to a client.”

About the Author:

Joanna L. Storey is an attorney with Hinshaw & Culbertson LLP where she focuses her practice on professional liability and risk management for lawyers. She is a Certified Information Privacy Professional/United States (CIPP/US) and advises clients on compliance with privacy-related laws, rules, and regulations.