A New York City bar committee is suggesting amendments to the state rules to enable law firms to allocate or pledge fees for external financing. The New York City Bar Association’s Professional Responsibility Committee put forward the suggested alterations to Rule 5.4(a) last week. The rule currently prohibits law firms and lawyers from distribution of fees with non-lawyers.
The proposed amendments would help clarify the ambiguity surrounding the thriving litigation funding deals in New York. Litigation finance has bloomed into a $13.5 billion industry where investors provide funds for lawsuits and receive a chunk of any successful awards.
The amendments have been proposed with the intention that lawyers’ judgement must not be impaired due to their bond with a financial provider. Should the amendments pass, law firms would also need to inform their clients of financial agreements that could influence client representation and offer responses to questions about it.
The Professional Responsibility Committee, which consists of 19 legal practitioners and deals with legal ethics issues in New York, has refuted the notion that one type of financing is capable of corrupting a lawyer’s professional ethics more than other methods of financing involving a non-lawyer.
Dai Wai Chin Feman, managing director at the litigation funder Parabellum Capital and a member of the litigation funding working group formulated by the New York City Bar Association, stated that the recommendation is rational and logical. He further added it challenges the belief that non-recourse funding will lead to more conflict of interest than loans.
These amendments, originally designed to stop a lawyer’s judgement from being swayed by non-lawyers, could potentially allow law firms to go public, or bring in private equity and additional investors. Previously, the rule has been altered in certain states to expand access to legal services for lower and middle-income populations. This rule relaxation has also favored litigation funders.
Modifications to the rule have been enacted in places like Washington D.C., that carried out a similar alteration in 1991 allowing partial nonlawyer ownership of law firms, and Utah and Arizona, which did so in 2020. Both Utah and Arizona have created new frameworks that allow businesses partially owned by non-lawyers to offer legal services.
A 2018 response from the City Bar Committee on Professional Ethics brought to a halt the litigation funding intended for law firms by declaring that any such arrangements would violate Rule 5.4. This move sparked a debate within the litigation funding community and led to the formation of the Litigation Funding Working Group in the same year. The Working Group presented two amendments to Rule 5.4 in their 90-page report released in March 2020.
The suggested changes will now be forwarded to the State Bar Association of New York for approval. If they agree, the amendments will then be submitted for final approval to the four appellate divisions of the New York State Supreme Court to be added to the rules of professional conduct.
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