Attorney-Client Privilege and Litigation Funding in New York

For general background on the analogy between venture capital and litigation funding please read this post. To review our assumptions please click here. This essay should be cited as Maya Steinitz and Abigail C. Field, “A Model Litigation Finance Contract” Iowa Law Review (forthcoming) available at www.litigationfinancecontract.com.

This essay addresses the law and economics of information sharing between funders and plaintiffs.  It describes the inherent information asymmetry between funders and plaintiffs – a challenge to both parties – and then discusses the implications of the attorney–client privilege and work product doctrines.  The suggested contract language aims to maximize information sharing and minimize the risk of waiving the protections offered by the attorney client privilege.

The attorney client privilege and the work product doctrine are matters of state law. Because we have chosen New York law to govern our model contract we analyze the issues under that law.

Information asymmetry between funder and plaintiff

Litigation financiers face a systemic information asymmetry problem.  Like venture capitalists, who invest in start-up companies, their money is locked in an investment they are unfavorably positioned to understand relative to the plaintiff and its attorney. It is the plaintiff who is familiar with the facts and documents of the case, and the plaintiff controls its efforts, including its truthfulness, cooperation and good judgment.  The information asymmetry makes it difficult for funders to vet litigations for possible investment ex ante and difficult to monitor ex post.  They may thus leave worthy plaintiffs without funding or deprive funded litigations from valuable non-cash contributions by the funder such as monitoring, strategy development and more.

The Attorney – Client Privilege

The information asymmetry in the litigation finance context is exacerbated by the incentive not to disclose information to third parties – including funders – created by the attorney client privilege.  The attorney client privilege is, generally, extended to communication between a client and an attorney for the purpose of seeking legal advice and waived if the communication is disclosed to a third party, unless the client and the third party are united by a ‘common legal interest.’  A common commercial interest is universally deemed insufficient, but courts differ (even within New York) on whether the common legal interest must be similar or identical. Waiver of the privilege can damage plaintiff’s chances of winning the claim, an undesirable outcome from both the plaintiff and funder’s perspective.

In a litigation financing life cycle, the existence of a common legal interest must be analyzed in three different contexts: communication between plaintiff and potential funders; communication between plaintiff and a funder; and communication between a funder and investors, whether shareholders in the funder, investors in a litigation-backed security, or investors purchasing part of the funder’s investment in the particular claim. We refer to that last category of investor as secondary funders, and see them as akin to reinsurers.  Based on case law, we believe New York judges are extremely unlikely to find a common legal interest between potential funders and plaintiffs or between investors in litigation-backed securities and plaintiffs. Disclosure of privileged information to such parties almost certainly waives the privilege. Similarly, based on cases in the reinsurance context, we believe disclosure to secondary funders risks waiver, but the analysis will be very fact specific and dependent on how involved in the case the secondary funder is. Any disclosure to investors in a publicly traded litigation finance company of course waives the privilege, as would disclosure to investors in litigation-backed securities. Waiver by disclosure within a privately held litigation finance company would track existing privilege doctrine, provided a common legal interest exists between the plaintiff and the funder.

For the litigation finance industry the biggest question is: Do the funder and the plaintiff share a privilege-protecting common legal interest?  While no case on point has been decided in New York by either a state or federal judge, cases in other jurisdictions have come out both ways.  More generally, New York law regarding a possible common legal interest between plaintiffs and funders is unsettled. New York’s Court of Appeals has never decided a case applying the common interest doctrine in a civil context, much less a litigation finance one. Indeed, it has only decided one in the criminal context, twenty years ago. Federal courts have filled this vacuum, but incoherently.  One line of cases suggests plaintiffs and their funders would benefit from a common legal interest; another line of cases does not.  Despite being urged at least twice to legislate the common interest doctrine, the New York Legislature never adopted the recommendations, leaving the doctrinal development to the common law.

Without embracing the very generous extension of the common interest doctrine reflected in some of the cases, we believe funders and plaintiffs should be able to communicate without waiving privilege.  We view litigation funders as real parties in interest and therefore they should be seen as akin to co-clients of the plaintiff’s litigation counsel, entitled to the protection of the privilege in their own right, whether or not they have both entered attorney-client relationships with the counsel.  Conceptual support for such analysis can be found in the insurance context, where the insurer – which funds a litigation but also subrogates the funded party and has a duty to defend – is usually deemed a co-client and afforded the privilege. Moreover, a Florida court held a litigation funder that had significant control over the litigation was a real party in interest.  Nonetheless, it is not obvious that without subrogation it is accurate to conceptualize a funder and a plaintiff as co-clients of the attorney conducting the claim, particularly since review of existing contracts reveal that at times parties actually disclaim co-client status. The analogy is also weakened by conflicts of interest between the funder and plaintiff that could make it ethically impossible for an attorney to represent both.

A different solution to the privilege problem does not rely on the common interest doctrine—having the funders serve as plaintiffs’ co-counsel. Litigation funders are typically lawyers and/or have lawyers as their principals, and the funders pick and seek to influence cases based on their own litigation expertise, so this approach is plausible. As an added benefit, the fiduciary duty imposed by the attorney-client relationship would minimize the impact of the conflicts of interest between funders and plaintiffs. However funders are unlikely to accept such an arrangement.

In sum, under New York law, sharing attorney-client privileged material with potential funders would almost certainly waive attorney-client privilege; sharing it with a funder may waive the privilege and must be done with caution; and sharing it with most investors almost certainly waives the privilege.  As a result, we propose contract provisions that require the plaintiff’s fully informed consent before sharing attorney client privileged material  with funders and prohibit it in other contexts.

The Work Product Doctrine

Even though communication between funder and plaintiff may waive the attorney-client privilege protection such communications would otherwise have, the information asymmetry problem can be substantially addressed by sharing attorney work product. In a narrow sense, “Attorney work product” has different definitions under the federal doctrine, and New York doctrine (which one applies depends on the case). However, when considering a second category of material protected in New York—trial preparation materials—the scope of what is protected is essentially the same. Combining both “attorney work product” and “trial preparation materials”, New York protects an attorney’s “mental  impressions,  conclusions,  opinions  or  legal theories” or other “work product” as well as materials “prepared in anticipation of litigation or for trial by or for another party, or by or for  that  other  party’s  representative…”[1] This formulation mirrors the federal one.

Fortunately for litigation finance, both federal and New York case law reflect a permissive approach to sharing work product with third parties without waiving the privilege, stated by the New York Court of Appeals in 2008 thus: “The qualified privilege governing trial preparation materials “is waived upon disclosure to a third party where there is a likelihood that the material will be revealed to an adversary, under conditions that are inconsistent with a desire to maintain confidentiality””[2]. Under that standard, work product can be shared freely with all three categories of litigation financiers – potential funders, actual funders and secondary funders – provided that the work product is shared pursuant to a confidentiality agreement and the information recipients are not associated with the opposing side.

A note on incorporation of claims and information asymmetry

Finally, we believe it is possible to bypass the attorney-client privilege problem entirely by incorporating the claim and having both the plaintiff and funders be shareholders.  The corporation itself would be the client, both parties would be able to be informed, and a host of other litigation finance issues could be mediated by existing corporate governance doctrines. Nonetheless our model contract is not focused on that scenario.



[1] NY CPLR 3101(b) and (d)(2).

[2] People v. Kozlowski, 2008 NY Slip Op 7759, 23-25 (N.Y. 2008) (citation omitted).

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