iJonathan Friedland and Jeremy Waitzman provide this article as part of a series from their guide for plaintiffs and commercial litigators seeking funding in the United States: Litigation Funding Series: Introduction and History, Litigation Funding Series: CLF vs. Secured Lending and CLF vs. Consumer Litigation Finance, Litigation Funding Series: Types of Commercial Litigation Funding and Role of Insurance in CLF, and Litigation Funding Series: Transactional Q&A.
Is There a Concern That Information Shared by a Fundee with a Funder Will Be Used by the Defense in the Funded Litigation?
Yes, it is an issue that should concern any litigation, but certain legal doctrines may protect information shared between a fundee and a funder from discovery. Understanding the issues and circumstances will enable a fundee to avoid problems.
The Attorney-Client Privilege and The Common Interest Doctrine
A funder should generally not ask a prospective fundee for copies or even summaries of attorney-client communications. That said, sharing may be acceptable once the formal relationship is consummated, depending on where the litigation is taking place.
The attorney-client privilege is a fundamental legal principle ensuring confidentiality in communications between an attorney and their client. It protects confidential communications between the attorney and the client made for the purpose of obtaining or providing legal assistance from being used as evidence by the opposing party. It prevents the compulsion of testimony and the production of evidence about the privileged communication.
A litigant (or the litigant’s attorney) can waive the privilege, either intentionally or unintentionally, by disclosing the contents of the communication to third parties or in situations where the confidentiality of the communication is not maintained (e.g., Grochocinski v. Mayer Brown Rowe & Maw LLP, 251 F.R.D. 316, 326 (N.D. III. 2008).
The common interest privilege (as described below) is an exception to the rule that no privilege attaches to communications between a client and an attorney in the presence of a third person (e.g., United States v. BDO Seidman, LLP, 492 F.3d 806, 815 (7th Cir. 2007). In effect, the privilege extends the attorney-client privilege to otherwise non-confidential communications in limited circumstances. Id. at 815.
According to some courts, the common interest privilege is applicable when (1) parties undertake a joint effort (2) with respect to an identical legal interest, as opposed to a business or rooting interest, and (3) the withheld communications are made to further said ongoing legal enterprise (e.g., Grochocinski v. Mayer Brown Rowe & Maw LLP, 251 F.R.D. at 327).
So, when a funder and fundee enter into a funding arrangement, they certainly have common interest in the prosecution and outcome of a litigation. The question is whether that common interest is enough for the doctrine to protect the attorney-client privilege from detaching as to confidential communications and disclosure of certain documentation between them and/or with respective counsel.
The answer, at least in front of courts that require that the identical interest be a “legal interest, as opposed to a business or rooting interest,” is no (e.g., Miller v. Caterpillar, 17 F.Supp.3d 711,732 (N.D. Ill. 2014) (“A shared rooting interest in the ‘successful outcome of a case’ – and that is what Miller explicitly alleges here – is not a common legal interest”). But the analysis does not end there. Not even close.
The privilege is subject to a wide array of interpretations among state and federal courts. For example, in the Third Circuit, while the degree to which parties’ interests must converge is more relaxed, the communication must be shared with the attorney of the party with the common interest rather than the party itself (in re Teleglobe Communications Corp., 493 F.3d 345,364-366 (3d Cir. 2007).
A complete explanation of this topic is beyond the scope of this article. Suffice it to say that not only is the case law varied, but it is also confused.
Work Product Protection
In contrast to the attorney-client privilege, most courts facing the issue should hold that the work product protection will not be lost when work product is shared with a funder.
The work product protection, embodied in FRCP 26(b)(3)(A) at the federal level, protects materials prepared by or for an attorney in anticipation of litigation from being discovered by opposing counsel. This includes notes, memos, research, reports, interviews, and other documents or tangible things prepared by or for the attorney. While distinct from the attorney-client privilege, the work product protection often overlaps with it. However, the work product protection is broader in some respects, as it covers materials prepared by individuals who are not attorneys, as long as the preparation is for litigation purposes.
Funders, to do their due diligence on the litigation they are considering funding, always require prospective fundees (or their attorneys) to provide work product. This is the primary reason that an NDA is the first document a funder and prospective fundee should execute, as it protects the fundee in the event the funder somehow permits work product to fall into the hands of another party (and this, in turn, is why prospective fundees must take care to work with funders they either completely trust not to make such a mistake or, at the least, is capitalized well enough to pay damages in the event of a breach of the NDA).
The paragraph immediately above begs the question of whether the work product protection may be lost by sharing work product with a funder. While we already answer that question three paragraphs above, we appreciate you may want a little color. For that, we start by redirecting your attention back to Miller UK Ltd. V. Caterpillar, Inc.
While Miller is not helpful for a fundee who wants to rely on the common interest privilege to protect the attorney-client privilege, it's helpful on the question of the work product protection. The Miller court examined the issue this way:
The attorney work product privilege establishes a zone of privacy in which lawyers can analyze and prepare their client's case free from scrutiny or interference by an adversary. It protects documents prepared by attorneys in anticipation of litigation for the purpose of analyzing and preparing a client's case … Hobley v. Burge, 433 F.3d 946, 949 (7th Cir. 2006). The core of attorney work product consists of “the mental impressions, conclusions, opinions, or legal theories of a party's attorney or other representative concerning the litigation” Fed. R. Civ.P. 26(b)(3)(B). Material containing this information “are out of bounds ... ” Mattenson v. Baxter Healthcare Corp., 438 F.3d 763, 768 (7th Cir. 2006) …
Underlying the privilege is the deeply felt notion that the opposing party “shouldn’t be allowed to take a free ride on the other party’s research, or get the inside dope on that party’s strategy, or … invite the [trier of fact] to treat candid internal assessments of a party’s legal vulnerabilities as admissions of guilt” Menasha Corp. v. U.S. Dept. of Justice, 707 F.3d 846, 847 (7th Cir.2013). Justice Jackson has perhaps said it best: opposing counsel should not be permitted “to perform [their] functions … on wits borrowed from their adversary” Hickman v. Taylor, 329 U.S. 495, 516, 67 S.Ct. 385, 91 L.Ed. 451, (1947) (Jackson, J., concurring) …
… The majority in United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), on which Miller relies, rejected the “primarily to assist in litigation test,” in favor of the “because of” test, explaining that “[i]n addition to the plain language of the Rule, the policies underlying the work-product doctrine suggest strongly that work-product protection should not be denied to a document that analyzes expected litigation merely because it is prepared to assist in a business decision.”…
While disclosure of a document to a third party waives attorney-client privilege unless the disclosure is necessary to further the goal of enabling the client to seek informed legal assistance, the same is not necessarily true of documents protected by the work product doctrine. This disparity in treatment flows from the very different goals the privileges are designed to effectuate. The attorney-client privilege promotes the attorney-client relationship, and, indirectly, the functioning of our legal system, by protecting the confidentiality of communications between clients and their attorneys (Upjohn Co. v. United States, 449 U.S. 383, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981)). In contrast, the work-product doctrine promotes the adversary system directly by protecting the confidentiality of papers prepared by or on behalf of attorneys in anticipation of litigation (Appleton Papers, Inc. v. E.P.A., 702 F.3d 1018, 1022 (7th Cir. 2012)); Westinghouse Elec. Corp. v. Republic of Philippines, 951 F.2d 1414, 1428 (3rd Cir. 1991); E.E.O.C. v. FAPS, Inc., 2012 WL 1656738, 28 (D.N.J. 2012).
Miller v. Caterpillar, 17 F.Supp.3d at 734-737. See also Hardin & Andrew Hill v. Samsung Electronics Co., Ltd., et al, Civ. No. 2:21-cv-00290-JRG, Dkt. No. 119, 2022 WL 14976096 (E.D. Tex. Oct. 25, 2022).
Is There a Concern That the Terms of the CLF Will Be Discoverable in the Funded Litigation?
The short answer is yes. The longer answer is that the law on this question is not uniform.
Rules Requiring Mandatory Disclosure?
One thing is clear: there is no mandatory disclosure of CLF terms under the Federal Rules of Civil Procedure. Federal Rule of Civil Procedure (FRCP) 26 is titled “Duty to Disclose; General Provisions Governing Discovery.” Section (a)(1)(A) of Rule 26 requires parties in a litigation to make certain initial disclosures. These initial disclosures include (a) contact information for people likely to have discoverable information, (b) a list of documents that each party has that may be used to support its position, (c) a computation of damages, and (d) any insurance that may be available to satisfy a judgment. Various lobbyists have advocated for FRCP 26(a)(1)(A) to be amended to add the existence of CLF as an initial disclosure. And others have pushed in the other direction. For now, FRCP 26(a)(1)(A) remains unchanged.
The fact that FRCP 26 does not require automatic initial disclosure does not prevent a court issuing local rules that nonetheless require disclosure.
Arguably, the most famous of which is Judge Colm Connolly, the U.S. Chief District Judge in Wilmington, Delaware, who issued a standing order requiring the disclosure of third-party litigation funding arrangements. It requires disclosure of the existence of such funding, identification of the funder, whether funder approval is necessary for litigation or settlement decisions (and if yes, the nature and terms of such approval rights), and a brief description of the financing interest of the funder. It also provides that a party may seek additional discovery of the funding upon certain showings.
In stark contrast to Judge Connolly’s action are those of Chief Judge Rodney Gilstrap, who issued a standing order precluding parties from introducing evidence, testimony, or argument regarding legal finance.
Among the 50 states, we are aware of only one state that legislatively requires disclosure of CLF agreements: Wisconsin. However, just as the lack of a requirement in the FRCP does not prevent federal courts from making their own rules and rulings, so too can state courts act as they see fit.
One of the most comprehensive guides we know of addressing what courts have issued what rules on the subject is a memorandum authored by Patrick A. Tighe, Rules Law Clerk dated 2/7/2018, titled “Survey of Federal and State Disclosure Rules Regarding Litigation Funding” (Tighe Memo). According to the Tighe Memo, at least as of its publication:
- Only the Third, Fourth, Fifth, Sixth, Tenth, and Eleventh Federal Circuit Courts of Appeals have local rules mandating disclosure of the existence of CLF, but none of them require disclosure of the CLF agreement itself.
- About 25% of all U.S. District Courts have local rules or forms mandating the disclosure of CLF in civil cases.
A court, of course, can require disclosure in the absence of a local rule that speaks to the issue. And defendants commonly demand such information (and plaintiffs commonly object). A comprehensive discussion of case law is beyond the scope of this article but to assist you in your own further research and analysis, we have some thoughts to share.
First, as of the date of this article’s publication, the most comprehensive survey of case law on this issue that we have located is an article titled Third-Party Litigation Funding - State and Federal Rules & Case Law.
Second, while one might easily read that the trend is one of courts requiring greater disclosure, much of that case law has been made in the consumer context rather than the CLF context. The fact of the matter is that in the CLF context, the trend is in the other direction.
With that as backdrop, we discuss just two recent cases.
Lower48 IP LLC v. Shopify, Inc.
Ever hear the expression “trying to try a case in the court of public opinion?” Here’s an example of that in the form of a LinkedIn post posted by Jess Hertz, General Counsel of Shopify in June, 2023:
“Today, Shopify filed a motion in the United States District Court for the Western District of Texas requesting that the Court compel the disclosure of third-party interests in an ongoing patent troll case against us. Shopify entrepreneurs are builders and innovators. Patent trolls stifle that innovation, burying hard-working entrepreneurs in piles of legal paperwork. They quietly orchestrate hundreds of patent litigation cases every year, with no accountability. In many cases, we don’t know who’s funding these lawsuits. We are no longer willing to accept this as the status quo. Litigants and judges need – and deserve – to know who they’re litigating against.”
The court of law in which the motion was filed disagreed with Ms. Hertz and denied Shopify’s motion to compel the plaintiff (Lower48 IP LLC) to identify any funders backing the plaintiff’s case. More precisely, the magistrate judge denied the motion in June and the District Court affirmed that ruling in November.
The decision represents a resounding victory for funders and fundees. First, the court specifically rejected the rational of Judge Connolly’s standing order. Second, it rejected an attempt to equate funders with patent trolls.
Shopify, however, is by no means groundbreaking; it is merely representative of the dominant trend (e.g., Kaplan v. S.A.C. Capital Advisors, L.P., No. 12CV-9350 VM KNF, 2015 WL 5730101, at *5 (S.D.N.Y. Sept. 10, 2015) (“Court finds that the defendants did not show that the requested documents are relevant to any party's claim or defense. Therefore, the defendants' motion to compel production of the plaintiffs' Litigation Funding Documents is denied.”).
Nunes v. Lizza
The Plaintiffs in Nunes, who operated an Iowa dairy farm, were close family members of U.S. Congressman David Nunes. At the time the Defendants (who wrote and published an article accusing them of knowingly employing undocumented laborers) filed their motion to compel documents related to the funding of the prosecution of the case, the only remaining allegation against them was that they defamed the plaintiffs. The plaintiffs objected on relevance grounds (2021 WL 7186264 at *1).
After noting that “Congressman Nunes is closely related to the individual plaintiffs and has a history of litigation against media defendants, including a lawsuit in this court about this same story” (id. at *2), the court went on to analyze the issue, relying heavily on Fulton v. Foley, 17-CV-8696, 2019 WL 6609298, at *1 (N.D. Ill. Dec. 5, 2019), a case addressing the relevancy of litigation funding in the context of a claim for wrongful arrest and conviction and the cases that court cited (2021 WL 7186264 at *3).
The Nunes court noted that Fulton’s compilation of cases (including Kaplan v. S.A.C. Capital Advisors, L.P.) in support of their contention that “[a]s a general matter, courts across the country that have addressed the issue have held that litigation funding information is generally irrelevant to proving the claims and defenses in a case” was helpful. Id. at *2-3.
The court then went on to state that “[u]nsurprisingly, none of the cited cases (including Kaplan v. S.A.C. Capital Advisors, L.P.) involves a dispute between a prominent U.S. Congressman and a media conglomerate (Hearst) engaged in a highly-publicized and contentious defamation case.” Id. at *4.
The court then quoted V5 Techs. v. Switch, Ltd., 334 F.R.D., 306, 311–12 (D. Nev. 2019) (internal citations omitted), aff'd sub nom. V5 Techs., LLC v. Switch, LTD., 2:17-CV-2349-KJD-NJK, 2:17-CV-2349-KJD-NJK, 2020 WL 1042515 (D. Nev. Mar. 3, 2020):
“Nonetheless, there is no bright-line prohibition on such discovery. Discovery into litigation funding is appropriate when there is a sufficient factual showing of ‘something untoward’ occurring in the case; “[f]or example, discovery will be [o]rdered where there is a sufficient showing that a non-party is making ultimate litigation or settlement decisions, the interests of plaintiffs or the class are sacrificed or not being protected, or conflicts of interest exist.” Mere speculation by the party seeking this discovery will not suffice. Courts will compel discovery into funding sources only upon the presentation of “some objective evidence” that the discovering party's “theories of relevance are more than just theories.”
2021 WL 7186264 at *4. Using V5 Tech as the framework for its analysis, the court concluded “there is more than speculation or mere theory regarding the relevance of third-party funding” and granted the motion to compel.
Like Shopify, we did not choose to discuss it here because it is groundbreaking. Rather, it, too, is merely exemplary of the old adage, “facts matter.”
Special Considerations When Fundee is Financially Distressed
The fundee that is financially distressed but not in bankruptcy or another insolvency proceeding: We previously discussed the profile of fundees and we noted that many (if not most) fundees do not necessarily need the money provided by funders; companies with the healthiest of balance sheets choose CLF for a host of reasons. However, the case of a fundee that is not financially capable of funding a lawsuit is not rare. And, in fact, financially distressed companies (and their successors) represent a growing percentage of all fundees.
This is not surprising when one thinks for just a moment of the context. First, to state the obvious, a financially distressed company is indeed unlikely to be able to fund litigation on its own. A secured lender of the would-be fundee may be willing to fund, but they generally drive a hard bargain on the terms of that funding, including the extraction of releases, the appointment of an independent director, and others that take autonomy away from the company and that can harm its other creditors. Moreover, the secured creditor itself is often a target of potential litigation. These realities can serve as powerful reasons for a financially distressed company to look elsewhere to fund litigation.
Second, a financially troubled company is likely to be insolvent or at least potentially so. The causes of such a company’s trouble often include actions by third parties that can form the basis of litigation claims against those third parties. As noted earlier, these include claims based on allegations against directors and officers for breaching their fiduciary duties. They may also include claims for fraud, deepening insolvency, and lender liability.
The fundee in bankruptcy or another insolvency proceeding: The potential litigation claims owned by a financially distressed company are not limited to actions that might have precipitated the distress. In most bankruptcy cases, for example, any creditor who received a payment within 90 days of the filing of the bankruptcy may be subject to attack as the recipient of a voidable preference. And other transfers of a company’s assets may be subject to attack as fraudulent transfers.
Bankruptcy is not the only destination for a financially distressed company. That company may recover, or it may become the subject of an alternative to bankruptcy, such as an assignment for the benefit of creditors or a receivership. Regardless, the company (or its assignee, receiver, or bankruptcy trustee) may have valuable assets in the form of causes of action but may lack the liquidity necessary to monetize them.
The fundee that is a post-confirmation litigation trust: Chapter 11 cases commonly conclude with a confirmed Chapter 11 plan that, in turn, creates a “post-confirmation liquidating trust.” That trust is typically empowered to liquidate the remaining assets of the debtor’s estate which are not otherwise administered under the plan. The proceeds of such liquidating are then distributed to creditors of the debtor’s estate pursuant to provisions of the plan.
The assets at issue in this context usually include any or all the causes of action touched on above, and CLF is being used with increasing frequency by post-confirmation estates to fund litigation of such causes of action.
An important bottom line: In any of these situations, the fundee needs to be aware of the ethical issues that are unique to bankruptcy and its strategic alternatives. The good news is that these issues are navigable. In fact, the party that bears far more risk in ‘getting it right’ is the funder, not the fundee.
With this in mind, we next touch on the funder’s perspective in these contexts.
Fraudulent Transfer Risks
Potential funders will likely be concerned that a CLF transaction itself may later be challenged as a constructive fraudulent transfer. If the CLF transaction is entered into before the fundee’s bankruptcy, such risk can be ameliorated, but not eliminated.
Entering into a CLF agreement during the pendency of a fundee’s bankruptcy will require court approval under Bankruptcy Code §363. This requirement adds some time and expense to the transaction but will also obviate any concern about fraudulent transfer risk. It also has the distinct potential to open the transaction up to competitive bidding.
Control Risks
Potential funders will also likely have some concern that a financially distressed company that has not filed bankruptcy may do so or may become subject to another insolvency regime. In such event, there is some risk that the people in control of the fundee at that the time of the transaction will not remain in control.
Fundees in Bankruptcy
The theoretical legal risk is that another party in control (e.g., a bankruptcy trustee) will reject the CLF agreement. This, however, is not likely to be a real-world risk since the debtor’s estate only stands to benefit from the CLF. The more practical risk, which always exists but may be more pronounced in a fundee’s bankruptcy, is that necessary witnesses (i.e., the fundee’s employees) become less accessible (i.e., they become former employees).
Fundees That Are Post-Confirmation Estates/Litigation Trusts In this specific context, a funder needs to take particular care to ensure that the party with whom it is dealing has the authority to enter into the transaction and the standing to bring the underlying litigation. To be clear, the fundee in this context will not be the company but, rather, will be the post-confirmation vehicle created in bankruptcy (or otherwise). To that end, a funder would be well advised to do a very close review of the terms of the Chapter 11 plan and the confirmation order related to the establishment of the litigation trust or other entity seeking the financing.
