You can pay for the dinner, but you cannot pick when, where or what we’re eating. At least that’s what a Magistrate Judge in the District of New Jersey decided last week in Harish v. Arbit, No. CV 21-11088-EP-AME, 2025 WL 354434 (D.N.J. Jan. 31, 2025), a patent dispute that resulted in the disqualification of two law firms from representing two defendants because the defense was funded, at least in part, by a non-party with an interest in the patent.
Adversarial Standing
Plaintiff maintained that defense counsel violated N. J. Rule of Professional Conduct 1.8(f) when they represented defendants and a non-party payer. The Court held that the plaintiff, as an adversary, had standing to raise a potential conflict of interest and bring a motion to disqualify. While the Court noted that the Third Circuit had not ruled on the issue directly, “this District has held that ‘[a]dversaries, as well as former clients, may raise conflict of interest concerns.’”
The Grand Jury’s Six-Part Test
The Court found that the issues were governed by the New Jersey Supreme Court’s opinion in In re State Grand Jury Investigation, 200 N.J. 481 (2009) because a non-party was paying for the defense. The Court rejected defendants’ argument that Grand Jury only applied when evaluating whether an attorney may accept payment from a nonclient and not when an attorney is jointly representing multiple clients with a common interest.
Under the Grand Jury test, an attorney may represent a client, accepting payment directly or indirectly from a non-party, only if each of the following six factors is satisfied:
- There is informed consent by the client.
- Non-party payer may not direct, regulate or interfere with the attorney’s professional judgment in representing the client.
- There may not be any current attorney-client relationship between the attorney and non-party payer.
- The attorney may not communicate with the non-party payer regarding the substance of his representation of his client.
- The non-party payer shall process and pay such invoices within the regular course of its business, consistent with manner, speed and frequency it pays its own counsel.
- Once a non-party payer commits to pay for the representation of another, they shall not be relieved of that obligation without leave of court brought on prior written notice to the attorney and the client.
Applying these factors to the facts, the Court here found that there was objective evidence from email communications between the parties that the non-party payer’s interests have “commandeered, or at least directed with primacy, Defense Counsel’s approach to its defense of Defendants.” The Court further stated that “[t]he record makes clear that [the non-party] is directing, regulating, and interfering with Defense Counsel’s professional judgment in its representation of Defendants.” The Court found that there was clearly an attorney-client relationship between the attorneys and non-party payer because defense counsel stated they represented the non-party and were advising both the defendants and the non-party payer. The Court further noted that defense counsel continuously and regularly informed the non-party about the substance of defendants’ representation and a representative from the non-party was present and participated in a settlement conference. Finally, the Court found that Grand Jury’s sixth condition was not met because there was an indemnity clause that would release the non-party payer from its obligation to pay if legal fees surpassed a certain threshold.
Notably, the Court defined “informed consent” as requiring the attorney to provide meaningful consultation to the client about potential conflicts, including the disclosure of the full significance of the representation of conflicting interests so that the client may make an intelligent and knowledgeable decision before giving consent. Under this decision, a conflicts waiver cannot be based on generic or boilerplate waiver provisions. Rather, a legally sufficient waiver must explain the kinds of cases that may give rise to potential conflicts, the risks of any conflicts of interest, and reasonably available alternatives to the concurrent representation as well as explicit provisions that make it clear that the non-party payer is directing and controlling the litigation.
This case is an important decision on the impact and contours of what litigation funders can and cannot do. It serves as a roadmap for representation letters, waivers and communications with non-parties whenever a separate entity is involved in paying for litigation, and a cautionary tale for joint representation.
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