August 15, 2022
Originally published with Bloomberg Law.
Courts generally deny discovery into a claimant's communications with litigation funders, relying primarily on the arguments that such discovery is not relevant to the case, and that the communications with funders are protected by the work product doctrine. These are powerful arguments, but so too is a third argument that rarely features in the caselaw—the attorney-client privilege.
This article contends that the “common interest” exception to the attorney-client privilege ought to provide a strong defense against efforts to discover a plaintiff's communications with litigation funders. Two related articles provide separate arguments why the attorney-client privilege ought to apply, based on the agency exception to waiver of the privilege, and the argument that funders can be viewed as “external CFOs” to a claimant.
The attorney-client privilege protects confidential communications between client and lawyer that are made for the purpose of obtaining or providing legal advice. Although the presence of a third party usually waives the privilege, the “common interest” exception provides that communications among separate parties with a common interest in a case do not waive the privilege. The common interest exception is the exception most frequently discussed in the case law about litigation funding.
Consider two co-defendants represented by separate counsel. The common interest exception allows those defendants and their counsel to coordinate a legal defense without waiving the attorney-client privilege. This makes good sense: these parties with a shared interest in a successful outcome should be able to cooperate without giving the other side full access to their shared files.
The common interest doctrine has been widely extended to civil cases, and it generally protects communications among parties who “share a substantially identical interest in the subject matter of a legal communication.” Crane Sec. Techs., Inc. v. Rolling Optics, AB, 230 F. Supp. 3d 10, 16 (D. Mass. 2017).
Courts are divided over whether the common interest exception protects communications with third-party litigation funders. One leading case upholding the privilege is Devon IT v. IBM, where a federal court in Pennsylvania held that the common interest exception protected communications between a plaintiff and its litigation funder because they shared a “common interest in the successful outcome of the litigation which otherwise [the plaintiff] may not have been able to pursue without the financial assistance of [the litigation funder].” No. 10-2899, 2012 BL 451594 (E.D. Pa. 2012).
On the other side of the divide sits Miller UK v. Caterpillar, where an Illinois federal court held that the doctrine requires a “common legal interest,” and ruled that funders and claimants at most share a commercial interest in the case's success, which the court said is insufficient to trigger the exception. 17 F. Supp. 3d 711, 732 (N.D. Ill. 2014).
Do claimants and litigation funders share a “common” interest in the success of the claimants’ legal claims? And is the common interest between the claimant and the funder sufficiently “legal” to warrant protection? (For an especially helpful primer on the common interest exception, see Kenneth Duvall, The Common Interest Privilege.)
Although there are few cases addressing these questions in the context of litigation funding deals, the law in many jurisdictions is quite favorable to funded parties in a closely analogous scenario— discussions about the sale and licensing of patent rights.
In these patent cases, courts apply the attorney-client privilege to protect the confidentiality of communications concerning a commercial transaction whose success turns primarily or even entirely on the outcome of a legal dispute. This case law was not addressed in either Devon or Miller (where the plaintiff relied only on Devon), but it ought to provide robust support for applying the common interest exception to litigation funding discovery disputes.
The leading case is In re Regents of University of California, where the Federal Circuit Court of Appeals held that the common interest exception protected communications between a patent owner and its licensee because they both “shared the interest that [the patent owner] would obtain valid and enforceable patents.”
The court explained that the patent owner was “a university seeking valid and enforceable patents to support royalty income,” while the licensee was “an industrial enterprise seeking valid and enforceable patents to support commercial activity.” The common interest exception applied, the court held, because “[v]alid and enforceable patents on the [patent owner's] inventions are in the interest of both parties.” 101 F.3d 1386, 1390 (Fed. Cir. 1996).
Other courts have followed this logic, holding that conversations between patent owners and potential purchasers of those patents are protected by the common interest exception. For example, the Northern District of California has held that the common interest exception protects legal discussions between the owner and purchaser of a patent, ruling that the parties to the business transaction “share a common legal interest in the issue of whether the technology that [the inventor] sold to [the purchaser] was patentable and whether it infringed any patent. They also share a common business interest in the sale of the technology.” Britesmile, Inc. v. Discus Dental, Inc., No. C 02-3220, 2004 U.S. Dist., (N.D. Cal. Aug. 10, 2004).
A Massachusetts federal court has held that conversations between a patent owner and prospective purchaser “in furtherance of [the] purchase of the patents, insofar as they concern the strength and enforcement of the patents that [the purchaser] was seeking to purchase, are privileged,” reasoning that “[t]his is a common-sense application of the Regents holding.” Crane, 230 F. Supp. 3d 10 at 20.
Similarly, a Kansas federal court held that the attorney-client privilege protected communications between a patent holder and prospective purchasers of those patents, because the patent holder “has sufficiently shown that it had a substantially identical common legal interest in the validity, enforceability, and potential for infringement of the patents-in-suit at the time it disclosed the communications to … prospective patent purchasers.” The defendant argued that Kansas cases typically require an identical legal interest where a party seeks to assert the common interest doctrine, but the court held that the legal interest was sufficiently identical in the patent-sale context. High Point SARL v. Sprint Nextel Corp., 2012 BL 16694 (D. Kan. Jan. 25, 2012).
These decisions are highly persuasive authority for the common interest exception's application to litigation funding discussions—particularly in patent matters, but in commercial matters too. Litigation funding transactions are hybrid legal/commercial transactions in the same way that patent sales are: one party considers an investment with another party, with the success of that investment based primarily or entirely on the success of a legal claim. Under this line of cases, that is enough for the common interest exception to apply.
Notably, a patent holder's decision to monetize its patents by selling those patents, as opposed to securing litigation funding for those patents, is often based simply on the patent holder's personal preference for how to monetize the asset. In fact, many patent holders simultaneously evaluate proposals for both a sale of their patents, and for fees-and-costs funding. It is hard to see why a breakfast conversation with a prospective purchaser of patents should be covered by the common interest exception but a lunchtime conversation with a prospective funder of those same patents should not.
This reasoning is particularly persuasive in those jurisdictions that follow the Restatement's lead and do not require that the “common interest” must be predominantly “legal” in nature. See Restatement (Third) of the Law Governing Lawyers § 76 cmt. e (2000). But even where the common interest must be “legal,” cases like the Regents decision make clear that a shared interest in the success of patents, and by extension other legal claims, ought to be considered sufficiently “legal” for purposes of the common interest exception.
Finally, litigants should be aware that the argument in support of the common interest exception is especially strong as applied to communications after a litigation funder has invested in a case. Even cases that resist applying the common interest exception broadly to conversations at all stages of a transaction have nevertheless held or suggested that the exception applies to communications after the deal is consummated, because at that point the parties even more clearly share a common interest in enforcing the legal claim at issue. See Xerox Corp. v. Google Inc., 801 F. Supp. 2d 293, 303–04 (D. Del. 2011); In re JP Morgan Chase & Co. Sec. Litig., 2007 BL 84417 (N.D. Ill. Aug. 13, 2007).