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How to protect confidentiality during litigation funding

If you’re involved in high-stakes litigation, few things are scarier than the prospect of accidentally exposing confidential information to discovery by your opponent.  This can happen when a litigant shares otherwise protected information with a third party; disclosure waives protection.

That may seem like an insurmountable obstacle for a litigant interested in exploring litigation funding, because the process requires sharing sensitive information with a funder.

The initial disclosures occur during the diligence process, as the funder evaluates the merits, potential damages and duration of the case.  If the funder invests in your case, you may also need to share periodic case updates.   Our clients often come to view us as team members.  We always make ourselves available at Validity to talk case strategy if the client and counsel desire.  That kind of exchange can be of tremendous value, but only if information can be freely shared.

So must a litigant choose between securing the resources to litigate or securing the confidentiality of sensitive information?

Absolutely not.

Many judicial decisions have extended protection to cover information that has been shared with funders pursuant to a written confidentiality agreement.  The good news is you can have your funding and your confidentiality too, as long as both you and the funder take certain precautions.

HOW TO PROTECT COMMUNICATIONS DURING LITIGATION

The legal doctrines that most often come into play are work product protection and the attorney-client privilege.

Work product protection  

The work product doctrine shields from discovery any documents and tangible materials—including your lawyer’s thought processes and mental impressions—that have been prepared in anticipation of litigation.

The doctrine exists to prevent your opponent from gaining access to the information.  Sharing the information with a third party risks waiving the protection if you do so in a manner that increases the likelihood that your opponent can access it.

Courts have generally held that information prepared in anticipation of litigation and shared with a funder remains protected as long as the parties have signed a non-disclosure agreement that indicates the confidential nature of the information and requires the funder to take steps to prevent the opposing party from accessing it.

Attorney-client privilege

The attorney-client privilege protects communications between a lawyer and client. It exists to encourage frank discussion and advice within the lawyer/client relationship.  Disclosing those communications to a third party generally waives the privilege unless the recipient of the privileged information has a common legal interest with the client.

Third parties that share a common interest tend to be consultants, experts, insurers or indemnitors.  But does a funder have a common legal interest?

It depends.

Once a funder has decided to invest in a claim, establishing common interest–although a state-by-state inquiry—is relatively straight-forward.  The funding agreement you and the funder sign should include language regarding the nature of the funder’s investment and return based on the litigation outcome, and it should use the term of art “common interest.” if applicable in your jurisdiction

Common interest is more difficult to establish during the diligence process because you and the potential funder still have an arms-length relationship.  This area of the law is still developing, and some courts have declined to extend attorney-client privilege to communications shared with a funder before the funding relationship is memorialized in a contract.

The safest way to maintain attorney-client privilege is to simply avoid sharing it with the funder during diligence.  This is easier than it may sound—generally a funder should not need to see much, if any, attorney-client communication in order to assess a case.   If the funder does request information you believe is privileged, take the opportunity to bring this to their attention and discuss whether it’s truly essential to the diligence process.  If underwriting the case depends on the transmission of privileged information, the case may not be suitable for funding.

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Best practices to preserve confidentiality

  1. Before beginning diligence with a funder, sign an NDA that clearly identifies the confidential and privileged nature of the information you are sharing and articulates the funder’s obligation to maintain confidentiality
  2. During diligence, avoid disclosing of information that falls under the attorney-client privilege
  3. Before you sign a non-disclosure or a funding agreement, ensure it contains language articulating the funder’s interest in the litigation outcome, using the term of art “common interest” if applicable in your jurisdiction.