Counsel who have not been through the process of raising litigation funding often have questions about the risks of disclosing confidential information about their client’s case. The process of obtaining litigation funding necessarily involves sharing information about the facts, legal theories, damages and defenses of a claim, often coupled with discussions about the claimholder or counsel’s views on the strengths and weaknesses of each. Cases are more likely to get funded when a robust dialogue is established on these topics. Nonetheless, counsel should be aware of where the boundaries lie, and how to protect their clients from inadvertent waivers and fulfill their professional responsibility obligations.
Our goal in this article is to provide insight into how information sharing with funders has been viewed by the courts and works in practice. Experienced funders like Lake Whillans are highly attuned to the case law pertaining to privilege waivers. As described below, we help counsel establish appropriate safeguards that enable us to conduct due diligence on potential investments without unduly jeopardizing privilege.
Guideposts
Before proceeding further, counsel should consider what case law or rules will govern their conduct, and act accordingly. For example, in the context of arbitration, certain institutions have included rules that provide that communications with funders will not cause waiver. Several state jurisdictions, including for example Delaware and Illinois, have addressed privilege issues thoroughly in case law.
Absent specific guidelines, we recommend certain best practices based on existing rules and case law. First, the claimholder’s counsel should discuss the matter with the client and obtain informed consent to the sharing of information. Second, counsel should consider whether any protective order or confidentiality agreement bears upon the claimholder’s ability to share information, taking care to avoid violating any confidentiality obligation. Funders are regularly asked to acknowledge the terms of an applicable protective order. In some cases, the protective order may not permit sharing certain levels of information with the funder, and it’s important to communicate with the funder about those limitations.
Third, counsel should ensure that a nondisclosure agreement is in place between the claimholder and potential funder before any confidential information is shared. Nondisclosure agreements are a routine precursor to due diligence in litigation finance, and any reputable funder will have a standard form for this purpose. The agreement will generally prohibit the funder from disclosing to third parties confidential information received from the claimholder or its counsel and may also include terms expressly acknowledging the common interest shared by the claimholder and funder.
Avoiding waiver of privileges
Generally, sharing factual information (e.g., contracts, other documents, communications) with the funder will not pose any waiver issues. This is the material most likely to be disclosed during discovery, and important to a funder’s evaluation.
When determining which potentially privileged materials to share with a potential funder, counsel must be mindful of both attorney-client privilege and attorney work product privilege. The general rule is that material covered solely by the attorney-client privilege should not be shared, but material also covered by the attorney work product can be shared without waiving that protection. (Click here to review a summary of relevant court decisions supporting this conclusion).
One example illustrating this distinction is that in a contract dispute, a claimholder should not provide a funder with the advice the client received from its counsel during the contract’s negotiation that is privileged but isn’t protected as work product. In contrast, memos that are prepared by counsel in anticipation of litigation analyzing the adversary’s breaches and the strengths and weaknesses of the claims arising from the breach would be covered both by the attorney-client privilege and work product protection.
Although there is a strong argument that the common legal interest exception to waiver of attorney-client privilege should apply when information is provided to a prospective funder, the law governing this area is unsettled, and several cases have held that the exception does not apply. To avoid the risk of waiver, Lake Whillans makes clear to claimholders that they should not share with us any documents protected only by attorney-client privilege. A funder can generally conduct all necessary due diligence without receiving this material. In our example, the advice the client received about the contract during the negotiation process is unlikely to affect the outcome of claims about a subsequent breach of that agreement because the contract would be interpreted on its own terms and attorney-client advice that was not shared with third parties would normally not be disclosed in the litigation.
By contrast, the attorney work product privilege is generally not waived when information is shared with a funder. Where such information has been shared pursuant to a non-disclosure agreement, courts have found no waiver of the attorney work product privilege. The rationale is that the claimholder and funder have a common incentive to protect attorney work product from disclosure to the adversary and thus disclosure to the funder (particularly when an NDA is in place) is unlikely to substantially increase the risk that an adversary will receive the information, (the basic test which must be satisfied for work product waiver to occur). Thus, counsel can share with a prospective funder its mental impressions, conclusions, opinions, or legal research or theories, i.e., the quintessential work product that is a key factor in a funders’ analysis, without waiving the protection that applies to this material.