Litigation Finance: Ethics Q & A

I recently had the pleasure of participating in a panel discussion on litigation finance hosted by the Association of Business Trial Lawyers in Ojai, Calif. The audience was engaged and asked a variety of questions, including many on ethical considerations related to litigation finance.

Since this topic seems to be top of mind for lawyers when it comes to litigation finance, we offer the following sample Q&A:

But what about champerty? 

Champerty–which has been defined by the U.S. Supreme Court as “[helping another prosecute a suit] in return for a financial interest in the outcome”–is a doctrine that finds its roots in medieval England. (Today, the UK actively encourages litigation finance).

Like many traditions inherited from England, the prohibition on champerty is fading in the United States where it ever existed at all. Federal law never adopted the prohibition on champerty; neither did states such as California and Texas. Other states, such as Massachusetts, adopted the prohibition on champerty but have since abolished the concept entirely. Others, like New York and Illinois, now construe the prohibition on champerty so narrowly that it would not normally apply to commercial litigation funding arrangements.

There are still some states, however, that have some restrictions on champerty that may limit or prohibit litigation financing. So while a litigation funder will confirm that champerty is not an issue, in most instances, it should not be of particular concern to companies seeking financing for commercial matters.

Are communications with funders protected by the attorney-client privilege?

Communications with a funder are not per se protected by the attorney-client privilege, since the financier, while often comprised of trained attorneys, is not acting as the client’s legal counsel.

There is an unsettled question as to whether the common interest exception would nonetheless prevent a waiver over otherwise privileged communications shared with a financier; some courts have ruled that it does not. At Lake Whillans, we prefer to avoid the possibility of waiver since we believe that privileged documents are not necessary to our analysis of the case, and thus need not be shared with us.

If my client cannot rely on the attorney-client privilege, then are communications with a litigation financier about the merits of the case subject to disclosure to my adversary?

Courts have repeatedly held (and scholars agree) the work product doctrine protects communications with a litigation funder against disclosure, particularly where there is an agreement in place to maintain confidentiality, as those communications necessarily contain counsel’s “mental impressions, theories and strategies.”

For example, the Delaware Court of Chancery examined this issue in depth in 2015 and held in Carlyle Investment Management LLC v. Moonmouth Company SA that a third party was entitled to a protective order preventing the disclosure of communications regarding a litigation finance arrangement and the unredacted version of the relevant agreement, reasoning:

In 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.” Similarly, the terms of the final agreement—such as the financing premium or acceptable settlement conditions—could reflect an analysis of the merits of the case.

The court, in an apparent endorsement of the equalizing benefit of litigation funding, further observed:

No persuasive reason has been advanced in this case why litigants should lose work product protection simply because they lack the financial means to press their claims on their own dime. Allowing work product protection for documents and communications relating to third-party funding places those parties that require outside funding on the same footing as those who do not and maintains a level playing field among adversaries in litigation.

To learn more about these issues, visit our collection of ethics-related articles, see our presentation, or reach out to us. We regularly give in-house seminars on the ethics of litigation funding and would be happy to present at your place of business.