Navigating Confidentiality in Litigation Finance: Current Trends and 4 Best Practices To Follow
- “How can I protect client confidentiality while providing funders with the information necessary for them to evaluate my case?”
- “How can I ensure that the information won’t wind up in the hands of opposing counsel?”
At times, these concerns result in a reluctance to be forthcoming in the diligence process with funders, which can result in not getting funding at all.
While practitioners are correct and ethically obligated to protect client confidentiality, funders actually need to review and engage in an open exchange about the merits of a case as part of their due diligence process. After all, before making a nonrecourse investment, they need to understand the risk profile of the case. This includes the sharing of work product information by clients and their counsel during that process. The key is balancing a funder’s due diligence needs with counsel’s confidentiality obligations. This balancing act is essential to a successful litigation finance transaction.
While careful navigation of these issues remains imperative for clients and their counsel, most U.S. court decisions overwhelmingly show a trend towards protecting litigation finance information from discovery, when non-disclosure agreements and other protections are in place which is a step we help oversee on behalf of our clients.
The Confidentiality Landscape
When clients enter into a litigation finance transaction, two types of information can be at risk for disclosure:
- the litigation investment or funding agreement itself
- non-deal documents shared between the parties such as due diligence materials, negotiations, and post-agreement communications. Often discovery requests propounded by opposing parties will seek these types of information.
Typically, how courts respond to a motion to compel will depend on whether the client and funder have appropriate non-disclosure agreements in place, and the arguments regarding relevance and privilege that they raise in response.
Current Legal Trends
In Westfleet Advisors’ most recent white paper on litigation funding and confidentiality, we analyzed 106 written decisions on the discoverability of litigation funding, reporting on trends in the case law. Below are some key takeaways from that report:
- Particularly over the past five years, there has been a significant uptick in the number of court decisions regarding the discoverability of litigation funding documents, resulting in a robust body of case law that can provide guidance to practitioners.
- A review of those cases and prior opinions reveals that courts will most often deny or limit disclosure because the information sought is irrelevant to the underlying case, protected by the work product doctrine, and/or protected by the attorney-client privilege.
- Indeed, as the body of case law becomes more robust and develops each year, more and more courts are denying disclosure of litigation finance transactions.
- Of the 106 opinions reviewed, 72 or 68% of the cases resulted in no significant discovery or discovery on a redacted basis of litigation finance documents. Of the 34 or 32% of cases in which discovery was allowed, there were typically outlier reasons for the court’s decision, such as the absence of an NDA between the funder and client, the concession by the client that the agreement was relevant to the underlying dispute, or a factual link between a person related to the funder (e.g., an investor or employee) and the underlying case – making the funding agreement relevant.
- In recent years, a few courts and tribunals – the District of Delaware, District of New Jersey, and the ICC — have employed local rules requiring disclosure of litigation funding agreements. These disclosure requirements are the exception not the rule and are limited in scope, typically to the funder’s identity, its financial interest, and whether the funder has control of the litigation or settlement.
- There are special interest groups, such as the U.S. Chamber of Commerce that are pushing for legislation at the state and federal level to require disclosure of litigation finance agreements but thus far only a few statutes have been enacted at the state level and they are limited in scope, typically focusing on investment in litigation by foreign actors and funder control rather than requiring disclosure of funding documents.
Best Practices
What this evolving body of case law tells us is that generally, if practitioners employ the best practices below, the risk that information underlying a funding transaction will be discoverable is relatively low. These best practices are:
- Always have an NDA in place. Always ensure that clients sign NDAs with funders before sharing work product or other privileged information with them. Include explicit confidentiality expectations and work-product protection clauses in the NDA.
- Draft funding agreements carefully. Structure any financing agreements between clients and funders to maintain privilege and work-product protection. Avoid unnecessary case strategy details in these documents.
- Know your jurisdiction. It is imperative that practitioners familiarize themselves with the local rules and any case law on discoverability that might have come out of the jurisdiction in which their case is pending. In other words, know the rules and plan accordingly.
- When facing discovery demands, always invoke relevance arguments, work product, and attorney-client privilege. To reduce the risk that a court will compel discovery of a litigation finance transaction, assert all three arguments in response to a motion to compel, citing relevant case law and policy considerations.
In Conclusion
With the use of litigation funding continuing to grow, we can expect to see more discovery disputes and thus, opinions discussing whether, and, if so, the extent to which litigation funding documents are discoverable. Given the current body of case law, we expect that the legal landscape will continue to favor protecting confidential information exchanged between clients and funders when an NDA is in place and proper arguments regarding confidentiality and relevance are made. With these protections in place, practitioners can confidently engage with funders while safeguarding client confidentiality. For more guidelines and support through the litigation funding process, please reach out with questions or to learn more.
