Third-party litigation funding has been a growing trend in recent years as a means for companies to offset the risks and high costs of litigation. Third-party litigation funding involves investors who contribute large sums of money to parties on a non-recourse basis to pursue their claims. Generally, investors only receive a return on their investment if the litigation is successful or if a favorable settlement agreement is reached. With the amount of risk that this arrangement poses to investors, litigation funding groups perform extensive due diligence on the merits of the case, both as to liability and possible damages, to determine whether the investment is worth the risk. Communications necessary to enable the investor to ascertain that risk, however, raise discoverability issues for eventual litigation. Three recent cases have addressed whether certain information disclosed to third-party litigation funding groups and potential investors must be produced during discovery.
In Leader Technologies, Inc. v. Facebook, Inc, the court in the District of Delaware upheld a magistrate judge’s ruling that the common interest privilege did not exist between the patentee and prospective litigation financing companies.1 The common interest privilege is an exception to the general rule that attorney-client privilege is waived upon disclosure of privileged material to a third party.2 The party claiming the privilege should establish that “the disclosures would not have been made but for the sake of securing, advancing, or supplying legal representation.”3 For the communication to be privileged under the common interest doctrine, the interests between the parties must be identical and legal in nature, not purely commercial.4
In Leader Technologies, Leader, the patentee, withheld documents that were shared with prospective litigation financing companies on the basis that they were privileged under the common interest doctrine.5 After considering that Leader had the burden to establish that the documents were privileged, surveying case law in the Third Circuit regarding the common interest doctrine, and taking into account other policy considerations and ethical guidelines, the magistrate judge ordered production of the documents.6 Leader contended that the magistrate judge’s order was erroneous because it was based on the idea that “that no common legal interest protecting attorney-client or work product privileged information could exist because a deal was not consummated between Leader and the litigation financing companies.”7 Leader failed to argue any other specific errors in the ruling.8 Though Leader disagreed with the ruling, the court found that mere disagreement in the face of the magistrate judge’s complete and well-reasoned analysis was not a sufficient basis to conclude that the order was clearly erroneous.9
In Mondis Technology, Ltd. v. LG Electronics, Inc., the court in the Eastern District of Texas found that documents created for potential investors were protected by the work-product doctrine, and disclosure of these documents to the investors did not create a waiver because they were disclosed subject to a non-disclosure agreement.10 Mondis’s intellectual property holding company, Inpro, sought investors to fund potential litigation and licensing programs.11 To further that goal, Inpro provided slide presentations and documents pertaining to the patents-in-suit that disclosed Inpro’s licensing and litigation strategies and estimated the potential revenues from such strategies to potential investors under a non-disclosure agreement.12 Mondis argued that the documents were protected under the work-product doctrine because they were created in anticipation of litigation, or in the alternative, were privileged and a waiver did not occur because of the common interest doctrine.13 TPV, the party seeking the documents, argued that they were entitled to the documents because the work-product doctrine did not apply to materials used to raise funding for litigation.14 Moreover, the documents were not protected under the attorney-client privilege because the advice was business advice, not legal advice.15
The court held that the documents and slide presentations created for potential investors were protected work product because they were created for possible future litigation and revealed implementation of the litigation strategy.16 The disclosure of the work-product to potential investors did not waive protection because a non-disclosure agreement was in place between Mondis and the potential investors, and this manner of disclosure “did not substantially increase the likelihood that an adversary would come into possession of the materials.”17 The court did not rule on the issue of attorney-client privilege.18
In a more recent case in the Eastern District of Pennsylvania, Devon IT, Inc. v. IBM Corp., the court found that confidential information shared with a third-party litigation funding group under a confidentiality, common interest and non-disclosure agreement was privileged.19 When Burford Group LLC, a third-party funding group, was in the process of evaluating Devon plaintiffs’ claims, Devon provided confidential information to Burford, including documents selected by counsel, legal memoranda, and drafts of court papers, pursuant to a non-disclosure agreement that was executed in March 2010.20 In March of 2011, Burford’s wholly-owned subsidiary and Devon executed a funding agreement.21 Defendants subpoenaed the Burford Group and its related entities, seeking production of numerous documents, including all communications between Burford and Devon, particularly communications with in-house and outside counsel for Devon.22 In response, plaintiffs filed a motion for protective order and to quash the third-party subpoena of the Burford Group, which the court granted.23 The court found that the subpoenas targeted documents prepared by Devon’s counsel in anticipation of and during litigation that would have revealed litigation strategy and mental impressions of counsel, and as such, those documents were protected by the work-product doctrine.24 But the court also found that production of the documents requested “would intrude upon attorney-client privilege under the ‘common-interest’ doctrine” because Burford and Devon have a common interest in the successful outcome of the litigation.25 The court additionally found that the attorney-client privilege and work-product doctrine were not waived because the documents were shared with Burford pursuant to a confidentiality, common interest, and non-disclosure agreement that explicitly defined the common interest material.26
Given the differing views on third party litigation financing and discovery concerns, care should be given as to what information is disclosed to potential investors. Specifically, consideration should be given as to whether disclosure to potential investors should be limited to documents that otherwise must be produced in litigation. Additionally, a confidentiality, common interest and non-disclosure agreement should be in place with any potential investor before any disclosure takes place. It would also be prudent to define specifically what common interest material is covered under the agreement. It is important to recognize that privilege issues are decided regionally, and thus whether materials shared with potential investors are shielded from discovery will depend upon the information disclosed and where the case is ultimately filed.