Applying the Common Interest Doctrine to Third-party Litigation Funding

• Citation: Vol. 66 No. 6
• Publication year: 2017

Applying the Common Interest Doctrine to Third-Party Litigation Funding

Jeffrey Schacknow

APPLYING THE COMMON INTEREST DOCTRINE TO THIRD-PARTY LITIGATION FUNDING

Abstract

Third-party litigation funding is an emerging industry that provides financial backing to plaintiffs. Typically, third-party litigation funders provide money in exchange for a percentage of damage returns. If the plaintiff's claim fails, then the third-party litigation funder loses its investment.

To decide whether a given plaintiff's claim is a good investment, the third-party litigation funder assesses the claim's merits by conducting due diligence over a large swath of documents. Often, these documents are protected by attorney-client privilege. Under normal waiver rules for attorney-client privilege, when privileged documents are disclosed to a third party, the privilege holder impliedly waives the privilege protection.

As an exemption from normal waiver rules for attorney-client privilege, the common interest doctrine has developed, preventing a waiver when a disclosure is made to a third party sharing a common legal interest with the privilege holder. Courts vary in their approaches to defining what constitutes a common legal interest, but typically the third-party litigation funder's commercial interest in a lawsuit is insufficient.

Although superficially this may appear a legitimate result (as the funders invest in a lawsuit without providing any direct legal assistance), it is largely incongruent with how courts apply the common interest doctrine for insurers and re-insurers. Most courts find that insurers of defendants (and re-insurers of insurers defending claims) have sufficiently common legal interests with privilege holders to invoke the common interest exemption from normal waiver rules.

In these insurance situations, sharing liability—to the extent that it constitutes a collaborative effort towards a joint defense of a claim—is sufficient to indicate a common legal interest. These insurers allow defendants to share the inherent risks with their lawsuits.

Consequently, third-party litigation funders deserve the same protection (afforded to insurers and re-insurers) offered by the common interest doctrine.

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Recognizing the common interest doctrine to protect documents disclosed to insurers and third-party litigation funders effectuates the policy goal of attorney-client privilege; it enables litigants to most effectively obtain legal counsel.

Introduction............................................................................................1462

I. Defining Attorney-Client Privilege and Work-Product Privilege.......................................................................1467

A. Attorney—Client Privilege ....................................................... 1467
B. Common Interest Doctrine ..................................................... 1468
C. Work-Product Privilege.......................................................... 1468

II. Survey of Caselaw Surrounding Privilege Problems for Third-Party Litigation Funders...............................................1469

A. Attorney—Client Privilege and Common Interest Doctrine .... 1472
B. Work-Product Privilege and Waiver ...................................... 1475
C. Takeaways from Caterpillar.................................................... 1478
D. Other Courts' Understandings of Attorney-Client Privilege and Common Interest Doctrine for Third-Party Litigation Funding .................................................................................. 1479

III. Privilege Problems for Insurers and Re-Insurers...............1480

A. Common Interest Doctrine for Insurers .................................. 1481
B. Common Interest Doctrine for Re-Insurers ............................ 1482

IV. Analysis of the Disparate Treatment of the Common Interest Doctrine........................................................................1485

A. Two Approaches to the Common Interest Doctrine ............... 1485
B. A Uniform Common Interest Doctrine ................................... 1489

Conclusion...............................................................................................1490

Introduction

Although third-party litigation funding has only recently gained traction in the United States, the idea of a party not directly involved in a given lawsuit providing capital to fund that lawsuit is not a modern business concept.¹ Previously, courts used the terms "maintenance" and "champerty" to describe

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various business arrangements where a party not directly involved in a suit contributed funds to one of the litigants.²

Tracing its origins to these historical antecedents, third-party litigation funding, in its modern form, originated in the 1990s in Australia.³ Following its start in Australia, third-party litigation funding has quickly emerged in the United states as an attractive investment option.⁴

What initiated as loan arrangements for primarily small lawsuits has grown into an industry focused on complex investment deals involving millions of dollars.⁵ Whereas the original model for third-party litigation funding provided small amounts of money through nonrecourse loans, the predominant mechanism is now to fund lawsuits in exchange for a share of the plaintiff's recovery.⁶

A number of diverse players have entered the industry. Primarily, these include hedge funds and private equity firms seeking to diversify their portfolios,⁷ high net worth individuals looking for a new investment opportunity,⁸ and companies whose primary business focus is investing in lawsuits.⁹

The industry attracts investors because the rate of return on investments is correlated with neither the performance of the stock market nor the health of the

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economy.¹⁰ The merits of a company's potential legal claim, for example, have nothing to do with its stock price.

Some estimates suggest that investors in the U.S. third-party litigation funding market currently contribute upwards of $1 billion directly to plaintiffs' firms,¹¹ and the potential market is close to $33 billion.¹² Moreover, the nature of the jury trial and the consequent possibility of enormous damage awards creates the potential for third-party litigation funders to realize huge returns on their investments.¹³ In some lawsuits, the availability of punitive and treble damages makes investing even more attractive to prospective third-party litigation funders.¹⁴

However attractive the upside, investing in a lawsuit is not without risk. To mitigate risk, prospective third-party litigation funders conduct due diligence over large portions of information related to a case.¹⁵ Part of this due diligence process involves the plaintiff preparing documents for the third-party litigation funder and informing the third-party litigation funder about the case's merits.¹⁶ Often, case information conveyed to the third-party litigation funder is privileged.¹⁷ After assessing the risk¹⁸ of a particular lawsuit, the third-party litigation funders adjust the percentage of damages they receive from an investment.¹⁹ In some instances, third-party litigation funders draw up

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arrangements providing that they receive the first portion of any damages awarded.²⁰

The industry's emergence has drawn polarizing reactions.²¹ Some commentators denounce the industry as a vehicle for funding frivolous lawsuits²² that needlessly extends the length of litigation.²³ Proponents of the industry respond that they are incentivized to fund meritorious claims,²⁴ claims which are too costly for a plaintiff to litigate without additional funding.²⁵ These investors allow cash-strapped plaintiffs to share the risk inherent with any lawsuit.²⁶

Rather than adding to the vast commentary on the relative merits and shortcomings of third-party litigation funding, this comment analyzes novel concerns appearing before courts arising from the emergence of this industry. Specifically, courts are wrestling with whether information plaintiffs share with prospective funders, as a part of the funders' due diligence, is protected by either attorney-client privilege or work-product privilege.²⁷

This comment examines two central issues regarding information shared with third-party litigation funders. First, it considers whether material prepared by a plaintiff for review by third-party litigation funders is protected by

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attorney-client privilege. If so, this Comment seeks to answer whether disclosure to a third-party litigation funder constitutes waiver of privilege, or the disclosure is exempt from waiver because of the "common interest doctrine."

Second, and notwithstanding the attorney-client privilege question, this Comment considers whether material prepared by the plaintiff for review by third-party litigation funders is protected by work-product privilege. If so, it considers whether disclosure to a third-party litigation funder constitutes waiver of work-product privilege.

This Comment proceeds in four parts. Before addressing the questions of attorney-client privilege and work-product privilege, this Comment provides some background information on both. After laying that foundation, this Comment surveys caselaw surrounding issues of privilege and waiver in the context of third-party litigation funding. This discussion is timely, as the Supreme Court has yet to address the issue, and different jurisdictions have varied approaches.²⁸ To resolve the jurisdictional splits, this Comment examines legal arguments from the insurance industry. By considering third-party litigation funding as a plaintiff's equivalent to what insurers provide for defendants, it will be easier to get away from ideological criticisms of third-party litigation funders. This Comment seeks to answer legal questions about the applicability of work-product privilege and attorney-client privilege and does not make partisan policy arguments either...