Acceleration Bay Work Product Decision

The latest work product decision in the litigation finance sphere — Acceleration Bay v. Activision Blizzard — bucks the near universal trend of courts finding that the work product doctrine shields disclosure of communications exchanged with an actual or prospective litigation funder.  Probably because it used the wrong legal standard.

The litigation in the District of Delaware pits Acceleration Bay, a tech incubator and investor, against some of the biggest names in the video game industry: Activision Blizzard, Electronic Arts and Take-Two Interactive Software. Acceleration Bay alleges that the defendants’ video games infringed on certain of its networking patents. The defendants had long been seeking any documents exchanged between Acceleration Bay and litigation funder Hamilton Capital. The court’s decision last month to permit discovery of these documents diverges both in reasoning and result from almost every other similar ruling — and has unsurprisingly drawn criticism. While the commentary thus far has focused on the decision being faulty as a matter of policy, what has gone unnoticed is that the decision was driven to a significant degree by the court’s use of an incorrect legal standard.

In deciding whether the documents should be turned over, the court asked if the “documents were . . . prepared with a ‘primary’ purpose of obtaining a loan, as opposed to aiding in possible future litigation.” Outside of the Fifth Circuit, inquiry into the “primary” purpose is the wrong question. Instead, the court should have asked whether the documents exchanged with Hamilton Capital were prepared “because of the prospect of litigation” — a standard that allows work product protection for documents prepared for more than one purpose.

How did it end up with the wrong test? The court relies on United States v. Rockwell, a Third Circuit decision from 1990, which correctly notes that the Third Circuit’s standard for work product protection is whether “in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.”  But the Rockwell opinion also cites the Fifth Circuit standard — whether “the primary motivating purpose behind the creation of the document was to aid in possible future litigation.” While the decades-old Rockwell opinion says these standards are “analogous,” they are not.  It’s now understood that the Fifth Circuit is in the minority in its use of the “primary purpose” test. See United States v. Textron, 577 F.3d 21, 32 (1st Cir. 2009) (Torruella, J. dissenting) (noting the “widely rejected ‘primary motivating purpose’ test used in the Fifth Circuit”).

The Acceleration Bay court cites the Third Circuit’s “because of” test but then uses the “primary purpose” test — without acknowledging the tension between these two divergent standards. The Delaware Chancery Court noted the exact distinction between these two standards and the problems it posed in the litigation finance context in Carlyle Investment Management v. Moonmouth Company: “Courts generally apply either the broader ‘because of litigation’ test or the narrower ‘primary purpose’ test. In the context of litigation funding, the choice of test may be outcome-determinative.”

Carlyle — one of, if not the, most thorough opinions discussing these topics in the context of litigation finance — is worth a read, especially in light of Acceleration Bay. Here’s an excerpt that explains the court’s reasoning that highlights the significance of the the differing standards:

Although dual purpose documents may receive work product protection, a document still must have been created “because of” the litigation.  In the litigation funding context, this analysis becomes blurry because the litigation itself arguably is part of the business. Potentially every document a third-party litigation-funding company creates is created “because of litigation” in that the company is in the business of funding litigation. . . . [I]n all probability, to get the litigation funder to supply the financing, the claim holder would need to convince her of the merits of the case. The negotiations between those two parties almost certainly would involve the “lawyers’ mental impressions, theories and strategies about” the case, which “were only prepared `because of’ the litigation.”  . . . Admittedly, in the context of third-party funding, the overlap between business and litigation reasons for the creation of the disputed documents is more extensive than usual. The policies underlying the work product doctrine, however, favor a finding of protection. . . . Thus, even though claim funding is the business of financing lawsuits, which means the Discovery Documents serve a business purpose, those documents simultaneously also are litigation documents and work product protection is appropriate.

Variants of this argument — that the communications were for financial or commercial rather than legal purposes — have been rejected by multiple courts using some version of the “because of” test for work product protection.  See, e.g., Miller UK v. Caterpillar (N.D. Ill. Jan. 6, 2014) (documents “do not necessarily cease to be protected because they may also have been prepared or used to help . . . obtain financing”); Lambeth Magnetic Structures LLC v. Seagate Technology Holdings, Inc. (W.D. Pa. Jan. 18, 2018) (discounting arguments regarding the “non-legal nature” of plaintiff’s relationship with a litigation funder because even if the relationship were “commercial, the materials nonetheless fall within work-product immunity because they were communications with Plaintiff’s agents and in anticipation of litigation”); In re Intern. Oil Trading Co. (Bankr. S.D. Fla. April 28, 2016) (“[I]t does not matter that Burford’s obvious purpose is to obtain a return on its investment, just as it does not matter that counsel’s purpose is typically to earn a fee.”).

But if the Acceleration Bay court got the wrong answer because it asked the wrong question, does that mean litigants within the Fifth Circuit or other courts that use the “primary purpose” test should expect the work product protection will not apply? Not necessarily. In an Eastern District of Texas case, the court rejected the argument that the documents exchanged with a funder were created for “business advice” rather than litigation purposes. Though it applied the Fifth Circuit’s “primary purpose” test it still found the documents were prepared in anticipation of litigation and thus protected. “[T]he documents and slide presentations created for potential investors contain information and work product that were prepared in assistance with Inpro’s counsel for the purpose of aiding future litigation. . . .  Some documents reveal Inpro’s overall litigation and licensing strategy and others provide information—such as balance sheets including licensing and litigation revenues—that show the implementation of that strategy. All of the documents were prepared, however, with the intention of coordinating potential investors to aid in future possible litigation.” Mondis Technology, Ltd. v. LG Electronics, Inc. (E.D. Texas May 4, 2011).

While the Mondis court agreed that the documents at issue there met the “primary purpose” test, as Carlyle indicated, using this test makes it a closer question. And in Acceleration Bay the combination of the wrong test and some unique circumstances may have made the difference. For example, prior to bringing suit, in 2014 and 2015, AB communicated with Hamilton Capital and its counsel, Reed Smith, and provided them with documents related to the patents.  Hamilton agreed to fund the litigation in February 2015. Prior to the funding agreement — when the documents at issue were exchanged — there was apparently no written confidentiality agreement in place though there was “an understanding of confidentiality” between Hamilton’s and AB’s counsel. Though the court does not lean on that rationale, in other cases the lack of a written confidentiality agreement has proven outcome determinative.

The defendants had also sought discovery of communications with Hamilton earlier in the case, but AB contended that it had no responsive documents. In connection with this representation, AB apparently indicated that it was not claiming any privilege over the Hamilton-AB documents. In September 2017, Hamilton’s counsel told defendants’ counsel that there were in fact responsive documents, triggering the defendants to move to compel production, which was initially decided by the case’s special master in November 2017. (The special master’s opinion references an earlier order requiring production of similar documents — which, like much of the case docket — is sealed.)

The Acceleration Bay court separately asserts that a second, independent ground to deny work product protection exists — “if a document sought ‘is prepared for a nonparty to the litigation, work product protection does not apply, even if the nonparty is a party to closely related litigation.’ Here, Hamilton Capital is not a party to the litigation. For that separate reason, the communications are not work product.” (quoting Moore’s Federal Practice § 26.70 (3d ed. 2015)).  The court offers this almost as an aside, but it also appears to be in error. While we do not know all the details of the documents at issue, presumably they were prepared by Acceleration Bay’s counsel at their client’s request and provided to Hamilton Capital. The rule quoted by the court is intended to capture situations where a non-party tries to assert work product protection over its own attorney’s work. For example, if Hamilton Capital tried to assert work product for materials its attorneys prepared at its request this law might be implicated. (Although some courts have extended the work product protection to a non-party in analogous circumstances.)

Finally, the court separately found that the common interest legal privilege did not shield the communications or documents exchanged between Hamilton and AB. The court reasoned that there was no agreement in place between the parties at the time, and that therefore “Plaintiff has not shown that Plaintiff and Hamilton Capital possessed identical legal interests in the patents-in suit or were otherwise ‘allied in a common legal cause’ at the time of the communications.” While we will save a more fulsome discussion of the common interest privilege in the litigation finance context for another day, this holding is consistent with that of several other courts.

The Acceleration Bay decision denying work product protection stands apart from the many courts that have found the doctrine applicable under similar circumstances. As the courts continue to grapple with this new area and the factual and legal challenges it presents, there may be other aberrations — and based on the various missteps in this opinion that seems to be what has happened here. While in this landscape there can be no guarantee a court won’t similarly misstep, attorneys who face this issue can learn from Acceleration Bay’s mistakes.