Litigation Finance: Work Product & Discovery in the Wake of Gharabe v. Chevron

The closely watched case of Gbarabe v. Chevron – a class action against the oil giant based on an oil rig explosion off the coast of Nigeria – has been portrayed as a cautionary tale for the world of litigation finance. The defense attorneys’ dogged pursuit of the details of plaintiff’s outside funding, the story goes, succeeded, and aided in the attack on the adequacy of plaintiff’s counsel. The defense did successfully defeat class certification, but litigation funding ultimately played little or no role in the case’s demise.

The casual reader learning about Gbarabe might assume that litigation finance arrangements are routinely disclosed or discovered.  As discussed recently, there is currently no automatic disclosure regime for litigation finance. The litigation finance arrangements in Gbarabe came to light only because of the narrow circumstances presented there: the court had to determine whether counsel could adequately represent the class, counsel conceded litigation funding had relevance to that inquiry, and counsel did not assert privilege over the funding agreement. Gbarabe is an outlier.  In nearly every case where similar discovery has been sought, it has been denied.

Those courts faced with the disclosure issue have generally found that a party’s communications with actual or prospective funders are shielded from production based on the work product doctrine, which protects “documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer or agent).” Fed. R. Civ. P. 26(b)(3)(a).  As explained in a recent case, Viamedia, Inc. v. Comcast Corp., the doctrine serves “to protect an attorney’s thought processes and mental impressions against disclosure.” Communications between a party, its attorneys and actual or prospective litigation funders necessarily contain and reflect “opinions by . . . counsel regarding the strength of . . . claims, the existence and merit of . . . defenses, and other observations and impressions regarding issues that have arisen in this litigation,” and fall squarely within this protection. Doe v. Society of Missionaries of Sacred Heart (N.D. Ill. May 1, 2014). The “the terms of the final agreement—such as the financing premium or acceptable settlement conditions” similarly “reflect an analysis of the merits of the case.”  Carlyle Investment Management v. Moonmouth Co. (Del. Ch. Feb. 24, 2015).

Parties seeking disclosure of communications between claimants and funders argue that even if they do constitute work product that protection has been waived.  This argument has been repeatedly rejected. While disclosure to a third-party can result in waiver, it generally will not when the disclosure is done pursuant to a non-disclosure agreement and steps are otherwise taken to control the confidential information. As explained in Viamedia, “the point of the protection is not to keep information secret from the world at large but to keep it out of the hands of one’s adversary in litigation.” In that case, the court concluded that the disclosure to litigation funding firms pursuant to an NDA did not result in a waiver because it did not make it “substantially more likely that its work-product protected information would fall in the hands of its adversaries.” As several courts have observed, “litigation funders have an inherent interest in maintaining the confidentiality of potential clients’ information.” See, e.g., U.S. ex rel. Fisher v. Ho (E.D. Texas March 15, 2016).

Viamedia is the latest of numerous cases that have examined the issue of work product protection for communications or agreements with actual or prospective funders and reached similar conclusions. (A partial list follows; please visit this page for a comprehensive list of relevant cases that will be regularly updated.)

• In a patent infringement case, the IP holding company that owned the patent at issue reached out to various “investment brokers and potential investors with slide presentations and other documents that contained disclosures of Inpro’s licensing and litigation strategies and also estimates of licensing and litigation revenues.” The court rejected the argument that these documents were not created for litigation purposes but rather for “business advice” and found the work product protection applicable because the documents were prepared “with the intention of coordinating potential investors to aid in future possible litigation.” Because the documents were shared pursuant to an NDA the protection was preserved.  Mondis Technology, Ltd. v. LG Electronics, Inc. (E.D. Texas May 4, 2011).

• In a trade secret misappropriation case, the court, in an expansive opinion discussing many issues relevant to litigation funding, including champerty, maintenance, and issues related to the “real party in interest,” held that documents provided subject to an NDA did not lose their work product status when shared with a funder, but also held that certain “damage estimates, summaries or worksheets” shared with prospective funders without an NDA did need to be turned over because work product protection had been waived by failing to protect the material from broader disclosure through an NDA. The court otherwise found the “deal documents” in the case irrelevant having “nothing to do with the claims or defenses in the case.” Miller UK v. Caterpillar (N.D. Ill. Jan. 6, 2014).

• In a complex dispute related to the propriety of funding foreign litigation against plaintiffs by a company in liquidation in the foreign jurisdiction, the court concluded that although in a funded case “the overlap between business and litigation reasons for the creation of the disputed documents is more extensive than usual” the work product protection still applied. This extended not just to communications with the funder but also to “the terms of the final agreement—such as the financing premium or acceptable settlement conditions—[because it] could reflect an analysis of the merits of the case.” As the court explained, ”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.” Carlyle Investment Management v. Moonmouth Co. (Del. Ch. Feb. 24, 2015).

• In an involuntary bankruptcy case brought by an individual who had a business dispute with the bankrupt entity, the court found work product protection was not waived by disclosure to a funder reasoning “it does not matter that [the funder’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.” The court did order production of the funding agreement because it was “central to one theory presented” in the case, but allowed redaction of the payment terms and other terms that would reveal counsel’s “mental impressions and opinion” of the litigation. In re Intern. Oil Trading Co. (Bankr. S.D. Fla. April 28, 2016).

If all of these cases have found similarly that a party’s communications with its funder, including the final agreement, constitutes protected work product, what is the story with the Gbarabe case? First of all, the case was a class action, and the plaintiff conceded the relevance of counsel’s funding agreement to determining the adequacy of representation; an essential element in the class action context. (A funding agreement will not always be relevant to an adequacy determination — such as where concerns about counsel’s ability to fund the action are “purely speculative.” See Kaplan et al. v. SAC Capital Advisors LP et al., No. 12-cv-09350 (S.D.N.Y. Sept. 10, 2015)). Second, the plaintiff had already turned over to the defense a redacted copy of the litigation funding agreement before the discovery dispute made its way to the court. Third, and very significantly, as the court highlighted “plaintiff does not assert that the agreement is privileged.” Instead, plaintiff argued that the “contractual obligation to preserve the confidentiality of the funder’s identity” prohibited production. The court concluded that the funding agreement did not actually prohibit plaintiffs from producing the agreement, and that, even if it did, “plaintiff does not cite any authority for the proposition that such a provision would override discovery obligations or a court order.”

In the end, the court found that plaintiff’s counsel could not adequately represent the class and, for that and other reasons, denied class certification. In the court’s exhaustive opinion denying class certification,  litigation funding was pointedly not cited as a reason. Instead the court noted counsel’s “complete disregard for scheduling orders”; “lack of familiarity with or understanding of the Federal Rules of Civil Procedure and the Civil Local Rules”; “fail[ure] to diligently prosecute the case”; submission of “deficient” expert reports; failure to produce data underlying the expert reports; and class member evidence “riddled with falsity and unreliability.”

So what does Gbarabe tell us about litigation finance? Not much. It was an unusual litigation funding case and one in which counsel did not resist the disclosure of the litigation finance agreement on work product or other privilege grounds. In a more typical case (especially outside the class action context), work product protection should continue to protect the funding agreement (or at least its most sensitive terms) and other communications with prospective or actual funders from potentially prejudicial disclosure to an adversary.