Financing Law Firms

A fair amount of commentary has been published recently about the opinion issued by the New York City Bar Association’s Professional Ethics Committee (the Opinion) concluding that a popular form of financing for law firms conflicts with Rule of Professional Conduct 5.4(a).[1] The Opinion states that financing a law firm through non-recourse loans or investments where the return to the funder is contingent upon the outcome of a case or portfolio of cases constitutes a type of sharing of legal fees (“fee-splitting”) that is prohibited by Rule 5.4. Not surprisingly, the reaction from the litigation finance industry, supported by many legal ethics experts, has been overwhelmingly negative, and rightly so given the strict formalistic approach of the ethics committee and the consequent shackles the interpretation would place on the availability of modern financing techniques to fund law firms’ capital needs and long-term growth. However, even the committee that published the Opinion recognised that it is based on a strict reading of the rule and that the rule itself is possibly over broad and might need to be revisited. This is a call that needs to be answered and the professional bodies in all US jurisdictions should consider appropriate revisions to, or functional interpretations of, their rules to allow law firms to utilise the same financing techniques that are available to the rest of the business community in the US.