Introduction
“Third party funding is a feature of modern litigation.” These opening words of the judgment of the English Court of Appeal in Excalibur1 reflected the reality that over the course of the last 20 years the role of third party funding in major litigation, including competition litigation, has become pervasive in many jurisdictions, including England, the US and Germany, and in international arbitration. Indeed, funders find competition litigation particularly attractive as an investment opportunity, where often the litigation arises as the result of a conclusive finding of a breach of competition law by a local or regional regulator. Breach has already been established, leaving only causation and quantum to be determined. But the involvement of an additional entity in the assessment of the merits of a claim can lead to questions about the application of privilege.
The underlying purpose of privilege is to allow candid and transparent communications between lawyers and clients without concerns about disclosure of those communications to other parties in litigation. The impact of third party funding on privilege remains an area with some uncertainty, in particular, how privilege can be protected when communicating with and providing documents to a third party funder.
Before deciding to fund a claim, a funder will usually conduct comprehensive due diligence in order to evaluate the strengths and weaknesses of the claim and the potential return on its investment. As part of the due diligence process, the funded party will often be required to provide information and documents to the funder that would otherwise be typically protected by privilege.
This raises an important concern: would a party that discloses privileged documents or communication to a third party funder to secure funding risk waiving the privilege? In this article we address this issue through the lens of common and civil law jurisdictions, namely the US, England and Wales, and Germany. We also examine the impact of third party funding on international arbitration.
The US
The US: attorney-client privilege and the work product doctrine
In the US, attorney-client privilege protects communications between attorney and client made in confidence and created for the purpose of seeking, obtaining or providing legal assistance. The doctrine of attorney work product ensures that “opinion” documents (which reflect an attorney’s opinion) created in anticipation of litigation and prepared by an attorney or their agent are protected from disclosure.
Most US states do not regulate litigation funding companies. Among the few states that have enacted any statutory regulation, only three specify that disclosures of otherwise-protected communications to a third party funder do not constitute a waiver of claims to attorney-client privilege or work product protection.2 Therefore, the current landscape of discoverability of information shared with third party funders has been drawn by the courts.Prior to 2014, only a relatively small number of courts had considered the issue. Miller, decided that year, provided the first extensive discussion of, and has become the leading decision on, the applicability of these discovery protections in the third party litigation context.3 As the issue has been addressed with increasing frequency in recent years, the picture has come more clearly into focus, with consistent themes emerging in more recent decisions.
As is discussed below, courts are divided on whether the shared interest of clients and third party funders in the successful outcome of a litigation is sufficient to sustain claims of attorney-client privilege under the common interest doctrine. However, courts have held with great consistency that work product protection can apply to funding agreements and due diligence documents, even in cases in which the attorney-client privilege is found to have been waived.4
Attorney-client privilege and “common interest” analysis
Under US common law, the attorney-client privilege protects confidential communications between a lawyer and client for the purpose of providing legal advice.5 Because the purpose of the attorney-client privilege is to encourage frank communication between lawyer and client by assuring confidentiality, disclosure to a third party that eliminates that confidentiality constitutes a waiver of the privilege.6 The common interest doctrine is an exception to that general principle, and allows communications that are already privileged to be shared with third parties that have a “common legal interest” without a resultant waiver.7
Attorneys’ legal analysis can be central to a third party funder’s due diligence when investing in the pursuit of a legal claim. Thus, the common interest doctrine is commonly invoked as an exemption from normal waiver rules in the litigation funding context. However, there is no consensus among US courts as to how narrowly “common interest” should be construed
Some courts have interpreted the common interest doctrine to require a common legal interest between the client and the third party funder and not simply a commercial interest. The court in Miller held that a client’s relationship to a litigation funder was merely “a shared rooting interest in the successful outcome of a case”, and thus not a common legal interest, in which
“there was no legal planning with third party funders … litigation was not to be averted, as it was well underway, and Miller was looking for money from prospective funders, not legal advice or litigation strategies”.8
Similarly, another widely-referenced case, Leader, held that a plaintiff and litigation funder did not share a common legal interest sufficient to extend the privilege—in spite of an executed common interest agreement—because the court held common interests must be “identical, not similar, and be legal, not solely commercial”, and “there should be a demonstration that the disclosures would not have been made but for the sake of securing, advancing, or supplying legal representation”.9 Thus, courts requiring identical legal interests often find that communications between funders and clients are not protected by attorney-client privilege.10
However, a number of other courts have construed the doctrine more broadly, requiring only a “substantially similar” legal interest or a “common enterprise” between the third party and the privilege holder. For example, in Rembrandt, the court found a common legal interest among a patent holder and consultants. There, an agreement to enforce and monetise certain patents through litigation was sufficient to invoke the common interest doctrine, and attorney-client communications which were shared among the community of interest were shielded from discovery. 11 More recently, a bankruptcy court in Florida considered and declined to follow Leader, holding that the common interest doctrine applied to communications with a litigation funder that financed an action to pursue plaintiff’s claim against a debtor. The court instead adopted the “more expansive” common enterprise approach, which requires only that the “third party and the privilege holder are engaged in some type of common enterprise and that the legal advice relates to the goal of that enterprise”.12
Thus, no consensus exists as to whether the common interest exception to the attorney-client privilege applies to documents shared with litigation funders, and parties should not rely on such protection. Notably, however, even courts that are reluctant to extend the attorney-client privilege to third party litigation funders under the common interest doctrine are likely to find that the work product doctrine (discussed below) applies and shields such material from discovery.
Originally published by Global Competition Litigation Review – Issue 3 2021
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