As we discussed in our articles on the process of securing commercial litigation finance and claim valuation, litigation funders perform due diligence on potential investment opportunities, including evaluating the merits of the claim, the likely damages, the likely duration of the claim, and other factors. This diligence process typically includes the exchange of documents and information between the claimholder and/or its counsel on the one hand and the litigation finance company on the other. Each of these parties have an interest in the fulsome sharing of information (to enhance the likelihood of receiving funding) and the protection of the information shared (to not damage the underlying claim and investment). How can these dual aims best be accomplished? What ethical considerations must counsel bear in mind?
Steps to Take before Disclosing Confidential Information to a Prospective Litigation Funder
Before a company or its counsel discloses confidential information to a prospective litigation funder, it should:
(i) take steps to understand the information exchange process from start to finish;
(ii) consider whether any applicable protective or confidentiality orders/agreements limit its ability to share information; and
(iii) take steps to maintain confidences and guard against waivers (discussed below).
Counsel, who have an ethical duty to maintain the confidentiality of information related to the representation, should also be sure to inform their client of the risks of disclosure of information and obtain informed client consent before proceeding to share confidential information.
Steps to Maintain Confidences and Guard against Waivers
The first step a company should take to maintain confidences and guard against waivers is to enter into a non-disclosure agreement with the prospective litigation funder. Litigation finance companies routinely enter into non-disclosure agreements with claimholders and will typically have a standard form they can provide to counsel. These agreements will generally prohibit the litigation funder from disclosing to third parties the confidential information received from the company or its counsel and may also include language concerning the common legal interest shared by the company and the litigation funder which, as discussed below, can aid in guarding against claims of waiver.
The second step a company should take to maintain confidences and guard against waivers is to consider what information it should and should not share with the litigation funder. Documents and information such as the contract at issue, correspondence between the litigation adversaries or prospective adversaries, relevant non-privileged emails and attachments, as well as any available pleadings generally provide the bulk of most useful information, while presenting little risk of waiver (absent restrictions from a protective or confidentiality order or agreement) as such material will likely be produced by the company in discovery in any event. Certain confidential information whose value depends on the company’s efforts to protect the secrecy of the information, such as a company’s trade secrets that form the basis of a trade secret misappropriation claim, can generally be shared once a non-disclosure agreement has been entered into with the prospective litigation funder. The two key areas of consideration, therefore, are documents and information that are generally protected from disclosure in discovery pursuant to the attorney-client privilege and the attorney work product doctrine.
Attorney-Client Privilege
Litigation finance companies do not generally need attorney-client privileged materials in order to make an investment decision and a company should generally refrain from providing such materials to a prospective litigation funder to avoid any risk of waiving the privilege. We at Lake Whillans, for example, make clear upfront that we do not want to receive any documents protected by the attorney-client privilege. Why? Generally, the attorney-client privilege is waived whenever privileged information is shared with a third party. While we believe that the common legal interest exception to waiver of the attorney-client privilege should apply when information is provided to a prospective litigation funder, the law governing this area is unsettled (with several cases holding the exception does not apply) and provision of such information would raise a risk of waiver.
Attorney Work Product
Unlike the attorney-client privilege, the attorney work product protection is generally not waived when information is shared with a third party so long as it is not shared in a manner that makes it substantially more likely that the information will fall into the adverse party’s hands. Where such information has been shared with a litigation funder pursuant to a non-disclosure agreement, courts have found no waiver of the attorney work product privilege. It has been noted in this connection, that the company and litigation funder have a common incentive to protect the attorney work product from disclosure to the adversary. For a prospective litigation funder, the ability to evaluate the claim based on non-privileged factual information and litigation counsel’s mental impressions and theories of recovery (covered by the attorney work product doctrine) is generally sufficient.