Protecting Privileged Communications in Litigation Financing
When litigants are communicating with litigation funders, they must provide information about their case. This communication creates a possibility of disclosing confidential communications to the funder, which is a third party. Obviously, the disclosure of information to anyone outside of the attorney-client relationship can waive the privilege. Effectively managing the relationship between a funder and a litigant requires sensitivity to the risk of privilege waiver.
Disclosures to third parties do not always waive the privilege, as long as the outsider shares a common interest with the client. To some degree, courts differ on what constitutes a common interest, and there is no way to be sure that any particular shared interest will be enough to protect the privilege. But most courts agree that a common interest exists when the outsider and the client have a potential or existing common interest in a legal matter. This general rule is known as the common-interest doctrine.
A recent federal district court decision from Texas, Mondis Technology, Ltd. v. LG Electronics, Inc., sheds some light on how the common-interest doctrine would apply to communications relating to litigation funding transactions. In that case, the plaintiff was a limited liability company that owned certain patents and planned to bring some patent infringement claims. The plaintiff’s principal member was an intellectual property holding company that solicited investment in itself and the plaintiff by touting the financial prospects of those potential infringement claims. Some of the materials used in these solicitations were prepared in consultation with the plaintiff’s patent lawyers. The patent infringement action was filed after the solicitations.
In the patent infringement action, the defendant sought discovery of the materials presented to potential investors, and the plaintiff argued that those materials were protected by the attorney-client privilege through the common-interest doctrine. The court rejected the plaintiff’s argument, however, because it concluded that the plaintiff and the potential investors did not have a common interest in connection with the investment solicitation. In the court’s view, that solicitation was for an arms-length transaction in which the potential investors had different economic interests than the plaintiff. This difference was enough to preclude the application of the common-interest doctrine.
Although Mondis Technology did not involve an ordinary litigation financing transaction, its holding is nevertheless instructive. Before a funder actually invests in a claim, it has differing economic interests than the claim holder, and it does not yet have an actual interest in the claim itself. If the claim holder shares any attorney-client confidences with the prospective funder, there is a substantial likelihood that the privilege protecting those confidences will be waived. By the same token, there is a greatly reduced risk of waiver after a funder completes the investment in the claim. At that point, the funder will have a perfected security interest in the proceeds of the claim and will share both an economic and a legal interest with the claim holder. Sharing confidential communications at this point is far less risky.
Topics: litigation finance, legal reform, third-party funding, attorney-client privilege
Works Cited: Mondis Tech., Ltd. v. LG Elecs., Inc., No. 2:07-CV-565-TJW-CE, 2011 U.S. Dist. LEXIS 47807 (E.D. Tex. May 4, 2011)
