Originally published with Bloomberg Law.
There is something curious about the emerging caselaw on whether defendants are entitled to discovery into a plaintiff's communications with litigation funders.
The overwhelming majority of cases deny discovery on one of two grounds: they hold either that the requested discovery is irrelevant to the case, or that communications with funders are protected by the work product doctrine.
But courts rarely rely on a third defense—the attorney-client privilege—to deny discovery. This is surprising because there are many strong arguments why the privilege should protect communications with litigation funders. Indeed, several state statutes regulating litigation funding expressly provide that communications with funders are protected by the attorney-client privilege. See, e.g., Neb. Rev. Stat. § 25-3306; Neb. Rev. Stat. § 604C.240; Vt. Stat. Ann. Tit. 8 § 2255.
Why hasn't the attorney-client privilege emerged as a leading defense against discovery into litigation funding? One reason is that the “relevance” and “work product” defenses prevail most of the time, so courts usually have no reason to decide whether the attorney-client privilege provides additional protections against discovery. Another reason is that when the attorney-client privilege has been raised as a defense, it has not fared particularly well—though that may be because some of the strongest reasons why the privilege applies were not addressed in those cases.
The attorney-client privilege risks sinking under the waves as a forgotten defense against disclosure.
This is a problem. If litigants find themselves before a judge who does not accept the relevance and work product defenses, leaving strong arguments about the attorney-client privilege on the cutting room floor can mark the difference between winning and losing a motion to compel. And the attorney-client privilege provides a sturdier shield against disclosure than the work product doctrine. That's because the attorney-client privilege is generally absolute, whereas defendants can overcome work product protections by showing a “substantial need” for the materials.
The attorney-client privilege should play a more central role in protecting plaintiffs’ communications with litigation funders.
This article argues that conversations with funders should be protected by the attorney-client privilege because that privilege covers discussions with third parties whose involvement is highly useful to securing the lawyer's effective representation of the client. Second and third articles will outline two additional, wholly independent reasons why the attorney-client privilege should protect communications with litigation funders.
The Attorney-Client Privilege
The attorney-client privilege protects confidential communications between client and lawyer that are made for the purpose of obtaining or providing legal advice. If a CEO calls outside counsel for advice on a potential breach of contract suit against a wayward supplier, the discussions between client and counsel should be privileged.
However, the presence of a third party usually waives the privilege. If the CEO asks their lawyer for that same advice over lunch when a mutual friend is also present, the privilege is probably waived.
But there are important exceptions to the principle that the presence of a third party waives the attorney-client privilege. One exception is the “agency exception,” which provides that the presence of a third-party to conversations between attorney and client does not destroy the attorney-client privilege if the third party's involvement is “highly useful” or “reasonably necessary” to securing the lawyer's effective representation of the client. This exception ought to protect communications with litigation funders.
The simplest application of the agency exception involves a client who does not speak English. The lawyer needs a translator to understand their client's case. Most everyone agrees that the presence of a third-party interpreter at conversations between lawyer and client should not waive the attorney-client privilege.
The agency exception has been extended to other situations that bear an analogy to conversations with litigation funders. The leading case is United States v. Kovel, where the Second Circuit, per Judge Henry Friendly, held that the attorney-client privilege was not waived by the presence of an accountant who assisted a lawyer and client in navigating a complex tax law issue.
The court explained that “the presence of the accountant is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.” United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961). The court recognized that “the complexities of modern existence prevent attorneys from effectively handling clients’ affairs without the help of others,” including secretaries, clerks, and other aides.
Other appellate courts have reached similar conclusions. The D.C. Circuit has extended the privilege to an intermediary between client and counsel when “the use of an agent for communication between the attorney and the client [was] ‘reasonably necessary’” to facilitate the legal representation. In re Lindsey, 158 F.3d 1263, 1279 (D.C. Cir. 1998). The Eighth Circuit has articulated the test as whether the third party's “services are a necessary aid to the rendering of effective legal services to the client.” United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972).
Another leading case, In re Grand Jury, extended Kovel to communications among a client, her lawyers, and a public relations firm retained to help the client avoid an indictment. The court acknowledged that the consultants were not hired to help the lawyers advise their client on the technical “requirements of the law,” but the court nevertheless held that “the privilege extends to communications involving consultants used by lawyers to assist in performing tasks that go beyond advising a client as to the law.” In re Grand Jury Subpoenas, 265 F. Supp. 2d 321, 330-31, 326 (S.D.N.Y. 2003).
Relying on a U.S. Supreme Court opinion, the Grand Jury court explained that lawyers today “‘cannot ignore the practical implications of a legal proceeding for the client,’” and that those duties sufficiently include “efforts to influence public opinion in order to advance the client's legal position.”
These cases stand for the proposition that clients should be able to involve third parties in their communications with counsel, without waiving the attorney-client privilege, when doing so is highly useful or reasonably necessary to securing effective legal representation. This logic need not be extended far to protect communications with litigation funders, especially when claimants need a funder's financial assistance to secure legal counsel to bring their case. In that circumstance, the client needs the funder's assistance no less than a non-English-speaker needs a translator, an innumerate lawyer needs an accountant, or a lawyer lacking press savvy needs a PR consultant to effectively perform their job.
Indeed, at least one federal court has already applied this line of cases to protect communications with litigation funders. In International Oil Trading, a federal bankruptcy court explained that in Florida the agency exception “protect[s] communications with any party who assists the client in obtaining legal services,” and it found this test easily satisfied in the case of an individual who sought litigation funding to enforce a judgment. In re Int'l Oil Trading Co., LLC, 548 B.R. 825, 834 (Bankr. S.D. Fla. 2016).
The court held that the exception applies “for the very reason that litigation funders exist—because without litigation funders, parties owed money, or otherwise stymied by deep-pocketed judgment debtors, might have reduced or no ability to pursue their claims.” “Litigation funders may be essential to the provision of legal advice in such cases,” the court explained, because “[a]bsent the ability to communicate with funders without waiving privilege,” plaintiffs might be left without any legal services.
Litigation is expensive, and lawyers need money to render effective legal services, no less than they may need the assistance of translators, accountants, and PR consultants. There is no question that plaintiffs engage litigation funders “for the purpose of obtaining legal advice from the lawyer,” Kovel, 296 F.2d at 922, and “the ability of lawyers to perform some of their most fundamental client functions … would be undermined seriously,” In re Grand Jury, 265 F. Supp. 2d at 330, or indeed totally eliminated, without litigation funding.
Critically, if a plaintiff is wealthy and does not need litigation funding, their communications with counsel would not need to include a third-party funder, and they would undoubtedly be protected. The litigation funder is only introduced to secure and facilitate the lawyer's services, no less than a translator, accountant, or PR consultant facilitates the lawyer's services. Claimants who cannot afford to self-finance their claims should not be forced to bring their claim only at the price of having otherwise privileged communications divulged to the defendant.
Finally, extending the agency exception to include litigation funders furthers the purpose of the attorney-client privilege, which is to promote the effective administration of justice. See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).
The case law already embraces that litigation funding does so by allowing “plaintiffs who would otherwise be priced out of the justice system to assert their rights,” Maslowski v. Prospect Funding Partners LLC, 944 N.W.2d 235, 241 (Minn. 2020), and permitting “lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation,” Lawsuit Funding, LLC v. Lessoff, 2013 NY Slip Op 33066[U], BL 343470 (Sup. Ct. Dec. 4, 2013).
Litigants should more frequently rely on the agency exception to the attorney-client privilege to protect their conversations with funders. The argument has strong support in case law, and in the reasons behind both the privilege in general and the agency exception in particular.