A New York City Bar Association group's report on litigation finance offers further evidence of two distinct camps emerging on the question of how to regulate the profession. Everything is connected, friends. Want to weigh in? Email me here. Want this dispatch in your inbox every Thursday? Sign up here.

Everything Is Connected

Reading a new report from the New York City Bar Association's working group on litigation finance, I knew I'd want to return to the topic in this week's briefing. Then, in the footnotes, I saw a reference to a story I wrote several months ago on proposals to encourage outside ownership of law firms.

From reporting on the prospect of regulatory reform, I knew that the litigation funding industry was paying attention to the question. But seeing the nod to my earlier work and reading the group's conclusions added a new layer to my understanding of how these two threads are woven together.

The NYC bar group—which included members of the litigation funding industry, legal ethics experts, members of the plaintiffs and defense bars, a former federal judge, and figures from the insurance industry—endorsed potential changes to Rule 5.4 of New York state's rules of professional conduct. That's the same rule—part of the American Bar Association's model rules—that stands in the way of outside ownership of law firms in jurisdictions across the country by prohibiting fee sharing with non-lawyers.

The backstory here is that a non-binding 2018 ethics opinion from the NYC Bar's ethics committee said that lawyers might violate Rule 5.4 if they enter agreements with non-lawyer litigation funders where the return would come out of their contingency fees.

Charles Agee, the founder and CEO of litigation funding broker Westfleet Advisors, told me that he didn't observe any chilling effect on lawyers considering outside funding from that opinion. And I heard something similar from Burford Capital co-COO David Perla.

"In the near term, it caused some friction in the discussion cycle," he said. "By the new year, in 2019, that had really cooled off and it was business as usual."

Nonetheless, the opinion did serve as the spark behind the creation of the working group.

The body was explicitly barred from revisiting the opinion. Instead, the key takeaway is the two proposals to modify Rule 5.4, both of which endorsed new language indicating a law firm "may share legal fees with an entity in exchange for the entity's providing" money.

The ultimate impact of these proposals is uncertain, as it's an open question how regulators will respond. But there's still clear value in the 90-page document that emerged from the exercise, which gathers much of the law on pressing questions like disclosures and privilege.

"Because it's such a rapidly evolving industry, it's helpful to have something that's this comprehensive and wide ranging," said Zachary Krug, a senior investment officer at Woodsford Litigation Funding.

Beyond that, it's another sign of growing attention to an increasingly contentious issue. While this group of New York City lawyers say there's nothing sacrosanct about Rule 5.4, their counterparts in the New York State Bar Association recently raised a fuss about a proposal from the ABA's Center for Innovation that would have encouraged states to reexamine the same rule.

The state opposition to even studying the prospect of changing the rule wound up forcing the ABA group to dilute the language in order to secure approval from the wider organization.

The New York City effort complicates the picture of a geographic divide on the question of regulation, where bar groups on the West Coast are supposedly at the vanguard of change and those on the East Coast are intent on maintaining the status quo.

But Perla did acknowledge that the New York City lawyers involved had different considerations than lawyers elsewhere in the state or in different states. As public comments in California's regulatory reform process reveal, some of the most protectionist sentiments come from attorneys in small firms and from solo practitioners.

"There was no one in the room whose starting point was, 'I want to protect my business,'" he said. "I'm not arguing that everything in the report is the way the world needs to go, only that the argument that 'This is all in the interest of the client,' that's usually standing for something else, often an economic argument."

This is a briefing about the legal industry as a business. Everyone has an economic interest here, but there's value in making this explicit.

In the News

➤➤I didn't see the news that Florida was looking into regulatory reform until after I'd finished writing everything you've just read. Bob Ambrogi at LawSites has the story—one more data point striking at the oversimplified geographic narrative.

➤➤Last week's $32 million legal malpractice verdict in Ohio state court against Dentons has been fueling discussions about what it means to organize one's law firm as a Swiss verein. Dentons global chief legal officer John Koski jumped into the conversation Wednesday with a defense of the model: "I am not aware of any firm organized as a verein—least of all my firm—that takes the view that its structure somehow insulates it from compliance with professional responsibility obligations."

➤➤Finally, you might have noticed that I can't resist including stories about literal "disruption." So I have to acknowledge the widening impact of the coronavirus as the number of cases in the U.S. continues to rise. My colleague Brenda Jefferies has a report here on the expanding list of cancellations and rescheduled events.

You'll hear from me again next Thursday! Thanks again for reading, and please feel free to reach out to me at [email protected]. Sign up here to receive The Law Firm Disrupted as a weekly email.