The Problem of Discovery about Litigation Funding Arrangements

As litigation funding becomes more prevalent, it is subject to increasing scrutiny, including in discovery in cases where one of the litigants receives funding from a third party. When a litigant does obtain litigation funding, that party’s attorney must take care to assure that any discovery about the funding agreement does not become an instrument with which the opposing litigant can seek privileged or confidential materials.  This means that attorneys must be careful about what kinds of information they share with litigation funders and they should strongly consider the execution of an agreement that would protect confidentiality and define a common interest for the funder and the litigant.

When a litigant seeks funding from a third party, the funder will, of course, seek information about the strength of the claim as part of its due diligence process.  In addition, once funding is provided, the funder will need information about the on-going developments in the case.  Sharing information about the case with someone other than the client creates a risk of breaking the attorney-client privilege.  If the opposing litigant learns about the existence of a litigation funding agreement, it may seek discovery about the agreement and about what information has been shared with the funder.  If the attorney and litigant have not been careful about such shared information, the opponent may be able to argue that the attorney-client privilege has been waived through the sharing of information with the funder.

There are ways to be careful and avoid the risk of privilege breaks, however.  The most obvious way is to restrict the kind of information shared with litigation funders.  In many situations, a funder’s due diligence requirements can be met with information that would be subject to discovery in any event.  The attorney for a litigant seeking funding may be able to inform a funder about the prospects of a case without sharing any of her own work product or any confidential information obtained from the client.

In other situations, the funder may want or need more sensitive information.  In such situations, the common interest doctrine may provide a way to respond to the funder without risking a privilege break.  The common interest doctrine is an exception to the general rule that disclosure of privileged material to a third party constitutes a waiver of the attorney-client privilege. For a communication to be privileged under the common interest doctrine, the interests between the parties must be identical and legal in nature, not purely commercial.

It is possible for the funder and litigant to enter an agreement that permits them to take advantage of the common interest privilege if and when potentially privileged information is shared with the funder.  Under this kind of agreement, the client and funder would stipulate the shared information was confidential and was provided for the purpose of helping the client obtain legal services and advice.  Most importantly, the agreement would have strict non-disclosure provisions that could provide assurance that the shared information would not be disclosed to anyone else.  In some recent case law, courts have concluded that sharing information with a funder will not waive the privilege if such agreements are in place.  To be sure, making such an agreement will not necessarily guarantee preservation of the privilege, but it can go a long way towards reducing the risk that sharing information with a funder will have adverse consequences in discovery.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, discovery, attorney-client privilege, common-interest privilege

 Works Cited:

Lisa Thomas, Beware Discovery in 3rd-Pary Litigation Funding, Law360 (Dec. 20, 2012) available at https://www.law360.com/articles/400599/beware-discovery-in-3rd-party-litigation-funding

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