For the most part, litigation funding contracts are not discoverable. Generally, court systems see non-recourse funding agreements as outside the discovery purview. In fact, most judges seldom agree to the demands for third-party financing discovery.
Here’s a closer look at legal funding, work product, and common interest doctrines, plus recent examples involving litigation finance discovery requests, which are frequently turned down due to lack of relevance.
What is a litigation funding agreement?
Litigation financing is a non-recourse financing agreement between a third-party firm, a plaintiff, or an attorney. Under these agreements, an investor will consent to pay all or part of the litigation costs or provide upfront capital to a plaintiff in exchange for a portion of a future settlement or award.
First, a plaintiff or an attorney applies for funding, and then they will receive a nondisclosure agreement before any communication about the dispute begins. The funder will carry out their due diligence to assess risk, strengths and weaknesses, the chance of victory, possible recovery, and litigation strategy before deciding whether to finance that case. They will also communicate with the lawyer in charge of the case throughout this process and examine public and private matters relating to the dispute.
Once the case gets approved for financing, the litigation funding document may reflect the opinions of counsel about the merits, viability, and strengths of various claims and defenses. It will also contain information on risk considerations, the anticipated rate of return, and the allocation of cash among investors. The details of the connection between the investor and the litigant are also set down in these agreements.
While funders wait for a positive outcome of a dispute, plaintiffs can benefit from this kind of arrangement by receiving money right away without running up debt through loans or credit card issuances.
Unlike traditional banks, non-recourse funding agreements state that no payment is due until the case is successfully resolved and the compensation is paid to the attorney’s trust account.
Are litigation funding documents protected from discovery?
The need to disclose correspondence and documents about litigation funding agreements has risen because of the growing usage of litigation funding. Such requests are usually made by affluent litigants who want to drain a party’s resources by asking for a discovery unrelated to the case’s claims or defenses.
In the simplest terms, most legal funding agreements are protected from discovery. More than half of the federal and state cases did not permit any financing discovery from the litigation to the defendant. In most cases, the discovery was rejected, at least partially.
Does the work product doctrine protect litigation funding materials?
The work-product doctrine limits the discovery of third-party litigation funding, which makes it the primary defense against disclosure.
The work product is part of the attorney-client privilege, and it works by rejecting the exposure of documents created in anticipation of litigation by attorneys or those under their supervision during the representation of a client.
The privilege doctrine protects funding materials following a nondisclosure agreement or confidentiality agreement with a litigation advance lender. These agreements establish and record the parties’ understandings of disclosure, reducing the likelihood of the defendant’s knowledge of the investment.
Does the common interest doctrine allow the discovery of third-party funding agreements?
The attorney-client privilege safeguards communication systems made in assurance between an attorney and a client to receive or deliver legal advice. Documents and communication provided to a third party are subject to the attorney-client privilege. However, smaller courts are becoming more inclined to conceal legal finance agreements from discovery under the common interest doctrine.
For example, in the Oil Trading Company case in Florida, the court concluded that a client’s disclosure of privileged case information to a third party would not waive the attorney-client privilege. Essentially, the litigation funding agreement contained a confidentiality provision, and secrecy was maintained in all their communications.
Some argue that the attorney-client relationship does not apply to litigation funders. However, a common enterprise” approach is being applied by many courts as an exemption to the privilege.
Most courts are starting to determine that sharing attorney-client privileged materials with a litigation funder does not constitute a waiver of the privilege because the participation of the funder depends on the evaluation of the case’s merits.
Nowadays, the attorney-client privilege is no longer being waived for material exchanged with the lawsuit funder.
Litigation funding discovery gone wrong
The Gbarabe v. Chevron case
In the Chevron class action lawsuit, the court approved the defense’s request, an oil company, to order the disclosure of the legal finance arrangements to assess the plaintiff’s counsel competence.
Unfortunately, the court rejected the plaintiff’s attorneys’ claim that they had a legal responsibility to protect the contents of the agreement and the funder’s identity since the attorney did not use the work-product doctrine.
With this discovery, the defendant learned who oversees the case inside and outside the courtroom. Although the defendant defeated the class certification, litigation funding discovery played no role in this defeat.
Pelvic Mesh case
Another discovery was granted to the Hernia Mesh defendants, who found out that plaintiffs who did not need surgery ended up getting surgery to increase the value of their claims. In this case, a legal financier persuaded pelvic mesh litigants to undergo unnecessary surgery to boost the value of their lawsuits. In January 2021, the funder was indicted.
The defense’s unsubstantial excuse for this discovery is to determine whether agreements for third-party funding lead to conflicts of interest for judges, counsel, and parties.
On the other hand, defendants state that they cannot properly assess a case’s value and litigation strategy without knowing the existence of a funding agreement. In other words, since a defendant’s tactic is to delay settlements, their knowledge of legal funding agreements would allow them to prey on a plaintiff’s financial situation by knowing exactly how long or short they would need to set back litigation.
Is litigation funding ethical?
Litigation funding has grown in popularity over the decade as a resource for lawyers and their clients who lack the funds to defend themselves effectively on legitimate claims against corporate giants.
People are coming to understand that litigation funding is ethical since it levels the playing field by allowing plaintiffs, attorneys, or both to fight legitimate lawsuits they otherwise wouldn’t be able to pursue. Additionally, this type of financing does not affect the lawyer’s obligations to their client as long as they act in the client’s best interest.
In recent times, more lawyers and litigants have been reaching out to litigation funders with hopes of mitigating the financial risks associated with legal claims facing extremely wealthy defendants.
Defendants argue that the plaintiff has no justification for settling for less than that sum offered if the funder has a right to the first dollar recovered. Certainly, legal finance can help plaintiffs hold off for a fair settlement instead of taking an undervalued offer from well-capitalized defendants who take advantage of them. However, the impact of funding on the plaintiff’s litigation to settle is not a factor because the funder does not influence the case.
For a plaintiff or an attorney who lacks the financial means to move forward with a case, lawsuit finance can help bridge this gap, making it an ethical option to pursue as long as the company is legitimate.
Many courts concur that attorney work product and common interest doctrine provided to a litigation funder is shielded and off-limits from discovery when determining whether such documents or communications are discoverable.
Whether plaintiffs should be obliged to disclose funding arrangements to defendants will continue to be a hot topic on the federal and state levels.
Considering the points discussed above, keeping the agreement under the veil is more beneficial and a win-win situation for the law firm and the plaintiff. Why? Because non-recourse finance gives plaintiffs, law firms, and businesses access to the money they need without worrying about paying back the money if the case is unsuccessful. Rates differ from lender to lender and case. Thankfully, with Baker Street Funding, you will get lower rates than other funding firms and terms that work for you.
Learn more about our funding options today.