The central ethical constraint on litigation finance in the United States is Rule 5.4(c) of the Model Rules of Professional Conduct, which prohibits a lawyer from allowing anyone who pays for legal services on a client's behalf, including a litigation funder, to direct or regulate the lawyer's independent professional judgment. This rule cannot be waived by the client under any circumstances, regardless of what a funding agreement says.
In 2018, the New York City Bar Association issued a non-binding but influential ethics opinion holding that it violates Rule 5.4(a) for a lawyer to enter a litigation finance arrangement in which a portion of the funder's fee is contingent on the lawyer's own receipt of fees, on the theory that this compromises the attorney's independence from a non-lawyer with a financial stake in the matter. Well-drafted funding agreements now typically include express provisions confirming the funder has no right to control litigation strategy or settlement decisions.
Rule 1.2 reinforces this on the client side: if a client agrees in a funding contract to accept the funder's instructions about accepting or rejecting a settlement, the lawyer's ethical obligation is unchanged, Rule 1.2 still requires the lawyer to follow the client's own instructions about settlement, even if doing so would put the client in breach of its contract with the funder. Attorneys are also expected to conduct due diligence on funders and flag any contractual language that could create undue influence over loyalty or client control.