Alternative Litigation Funders

and Commercial Claim Holders:

A Common Interest

or a Common Problem?

Michele DeStefano, April 2013

19th Annual Clifford Symposium

DePaul University

What

is A

ltern

ati

ve

Liti

gati

on F

undin

g?

Parties unrelated to a

lawsuit provide funds

to a claim holder to help fund the party’s

pursuit of a potential

or pending lawsuit. No recourse if claim

holder loses

Types

and

Nom

encl

atu

re

Nomenclaturethird-party fundingthird-party litigation

funding or financingalternative litigation

funding or financingMost apt: claim funding

Consumer claim fundingCommercial claim

funding

Em

erg

ing Indust

ry

in U

.S. but

aro

und in

som

e f

orm

for

years

Non-Recourse Loans

Transfer of claim in Bankruptcy proceedingsTransfer of Patent Law

ClaimsContingency Fees

Analo

gie

s to

C

laim

Fundin

g

Contingency FeesInsurer/Insured

Relationship

Law

regula

ting

the in

dust

ry

Maintenance: helping

another prosecute a

suitChamperty: maintaining a suit in

return for a financial

interest in the outcomeModel Rules of

Professional Conduct

Unit

ed S

tate

s

27 states permit champerty with varying

restrictions15 states prohibit champerty. • Usually by declaring

litigation finance contracts

unenforceable;• Sometimes by allowing

defendant to raise litigation

finance contract as affirmative defense;

• Rarely by making champerty a crime.

Unit

ed S

tate

s

A billion dollar business• Hedge Funds• Commercial banks

• Claim Funders:• Juridica• Burford• BlackRobe Capital

• IMF• Fullbrook

Type a

nd T

imin

g

Contract with claimholder or law firmFlat percentage of

recoveryWaterfall Approach

Leve

ls o

f C

ontr

ol

Passive• Is there such thing in

commercial context?

Leve

ls o

f C

ontr

ol

Active• Some level of control

and influence over litigation strategy and

tactics• Sometimes includes value added services:

public relations, financial analysis, government relations

Leve

ls o

f C

ontr

ol

Acquired• Funder acquires controlling interest in

claim or asset• Ex: Funder might buy or

acquire a dormant subrogation claim or

claim held by a liquidator or trustee

Com

merc

ial

Cla

im F

undin

g

Exa

mple

Small company patents a special technology for tracking location on a

mobile device for use

in a mapping app Apple uses it without

permission in its newest IPADSmall company can’t

afford to sue Apple

Scr

ubbin

g a

nd t

he

need f

or

info

rmati

on

Funders may want/need confidential

information: • Before deciding to fund:

due diligence to evaluate a case

• After funding, to assess

case and litigation strategy

3 A

reas

of

Confidenti

alit

y

Attorney-Client PrivilegeWork-Product Doctrine

Confidentiality and Non-Disclosure Agreements

Presu

mpti

ons

Attorney-Client Privilege will not apply

to communications between funders and

claim holdersWork-Product Doctrine

will apply to work shared with (and done

by) claim holdersNot clear that either

are bullet proof assumptions

Rock

, Pa

per,

Sci

sso

rs

What

We C

an L

earn

Fr

om

Bart

Sim

pso

n Ro-Sham-Bo (Rock Paper Scissors)Rock = AC PrivilegePaper = Wk ProductScissors = NDAs

Att

orn

ey-

Clie

nt

Priv

ilege

A communicationMade between

privileged personsIn confidenceFor the purpose of obtaining or providing

legal assistance for the client

Att

orn

ey-

Clie

nt

Priv

ilege

Rule of EvidenceAllows Lawyer or

Client to refuse a request to disclose information communicated

between privileged persons

Why

Does

the

Att

orn

ey-

Clie

nt

Priv

ilege M

att

er?

Evidentiary RuleTime, Litigation Costs

Broader in scope than

Work Product Doctrine

Att

orn

ey-

Clie

nt

Priv

ilege Assumption• Attorney-client

privilege is waived

when communications are

shared with claim funder

Att

orn

ey-

Clie

nt

Priv

ilege Exceptions to

Waiver• Kovel/Agency Exception

• Functional Equivalent• Common Interest

Kove

l/A

gency

Exc

epti

on

Communications with third parties may not waive the

privilege if:• Narrow Interpretation:

Necessary to provision

of legal advice and merely translate

• Broad Interpretation:

Facilitates provision of

legal advice

Kove

l/A

gency

Exc

epti

on

Caveat: • Primary Purpose of the communication must be for the provision of legal advice or services

Kove

l/A

gency

Exc

epti

on

What does this mean for

Claim Funders? • Third party funders may

be protected because they

facilitated the provision of

legal services and advice

• Stronger argument ex post

than ex anteCaveat: the Primary Purpose of the communication must be

for the provision of legal

advice or services

Funct

ional

Equiv

ale

nce

Exc

epti

on

Narrow Approach• Won’t protect

communications and

work with third party

fundersBroad Approach• Weak argument but

shows that a blanket

assumption that a/c privilege does not apply

is misplaced

Com

mon Inte

rest

D

oct

rine

Requires common legal interest -- not just common commercial interest

The common Legal interest must be identical or “substantially

identical”

Unpack

ing t

he

Com

mon Inte

rest

D

oct

rine What do Courts mean

by “identical legal interest” or that the interest must be “legal” not “commercial”?

Identi

cal &

Legal

(not

com

merc

ial)

In

tere

st

Attorney represents

both of the partiesCooperation toward a

common legal goal and

actual shared legal interest i.e., more than

mere “hopes it wins so

that it can get money”

(Grochocinski, 327)Joint litigation, litigating together even

if with different attorneys (Nidec, 580)

Unpack

ing t

he

Com

mon Inte

rest

D

oct

rine One case in Claim

Funding Context • Leader v. Facebook c• No common interest

between patentee and

commercial claim funder

Subst

anti

ally

Id

enti

cal/Sim

ilar

Le

gal I

nte

rest

Patent Law Context• Some type of common

enterprise and legal advice relates to goal of

that enterprise• Common interest in securing legal advice on a

common matter• E.g. agreement btwn third

party and privilege holder

to “enforce and exploit

[certain] patents through

litigation” (Rembrandt *7)

Rati

onale

“We shouldn’t restrict

communication between

buyers and sellers, erects

barriers to business deals,

and increases the risk that

prospective buyers will not

have access to important

information that could

play key roles in assessing

the value of the business

or product they are considering buying.”(Regents &

High Point)

Cave

ats

Patent law not direct

analogyInsurance analogy may be more appropriate and

common interest found therePre-discussions may

be seen differently than post

ND

As

Work

Pro

duct

D

oct

rine

Work

Pro

duct

D

oct

rine

Work

Pro

duct

D

oct

rine

Is the work created by

the claim funder considered work product? Is work product

protection waived if shared with the claim

funder?

Work

Pro

duct

D

oct

rine Protects tangible

documents (or intangible equivalent)

prepared during or in

anticipation of litigation

Work

Pro

duct

D

oct

rine

Rule of Discovery (e.g., Federal Rule of

Civil Procedure adopted by most state

courts) Allows a Lawyer to refuse a request to disclose information created in anticipation

of litigation

Work

Pro

duct

D

oct

rine Is the work created by

the claim funder considered work product?

Is w

ork

cre

ate

d b

y fu

nder

consi

dere

d

work

pro

duct

?

Potential Work created

by Funder• Financial analysis and

charts created by funder

during due diligence

and/or after funding?• Analysis and work

prepared by strategic

advisors or other experts

provided by funder?• Contract between the

claim funder and the

claim holder?

Is w

ork

cre

ate

d b

y fu

nder

consi

dere

d

work

pro

duct

?

Doctrine is designed to

embrace collaboration

with nonlawyersApplication of the

broader and more popular “because of”

test that tangible and

intangible work-product

of the third party funder

were created “because

of” the pending litigation.

Work

Pro

duct

D

oct

rine

Is work product protection waived if shared with the claim

funder?

Is w

ork

pro

duct

pro

tect

ion w

aiv

ed if

sh

are

d w

ith f

under?

Doctrine is designed to

embrace collaboration

with non-lawyersOnly waived when

disclosure substantially

increases opportunity

for potential adversaries

to obtainMondis v. LG work product doctrine not

waived for docs shared

with potential investors

in patent law context

Work

Pro

duct

D

oct

rine

The Common Interest

Twist• Courts apply common

interest doctrine when

analyzing work product

doctrine waiver. • Courts sometimes ask:

Can sharing work product with a funder

substantially increase

possibility of disclosure

to an adversary . . .

Work

Pro

duct

D

oct

rine

The Common Interest

Twist• If Common Interest

exists – the answer is

NO, sharing does not

increase possibility of

information being shared with an adversary• If not, then the answer

is YES and work product

protection is waived

ND

As

Attorney-Client Privilege

NDA

Work Product Doctrine

Concl

usi

ons

re:

the D

oct

rine Given the doctrine in

other contexts, presumptions that the

attorney-client privilege

does not apply and that

the work product does

apply are misplaced.

Concl

usi

ons

re:

the D

oct

rine

Claim funders may share a common interest with commercial claim

holders and both the

attorney-client privilege

and work product doctrine should theoretically apply in

some (but not all) situations.

Quest

ion? But should they?

From a normative standpoint, should either doctrine protect

communications and

/or work with a third

party claim funder?

Answ

er

Yes, they shouldBoth doctrines should

protect communications and

work with third party

funders in certain situations for both normative and doctrinal

reasonsBut, arguably they won’t because . . .

Com

mon

Proble

ms

Although claim funding

is not necessarily barred

by state law (in states

where champerty and

maintenance have been

abolished), the issues

inherent in commercial

claim funding are ones

commonly used by the

bar to bar adoption of

initiatives that support

influence of non-lawyers

on lawyers

Com

mon

Proble

ms Independence of the

Lawyer under 5.4 (c) • Opponents argue that

lawyer’s independent

judgment and duty of

loyalty might become

subordinated to the third party funder

Com

mon

Proble

ms

Unauthorized Practice

of Law• Opponents argue that

eespite the fact that

claim funders are not

“practicing” law, given

the nature and scope of

their jobs they still may

actually giving legal advice and providing

something that could be

described as legal services.

Com

mon

Proble

ms

Public Policy (Brad Wendel’s “Ick” factor)• There exists “a sentiment

that there is something

fishy, even distasteful,

about ALF.” W. Bradley

Wendel• Courts make clear they

will invalidate agreements

with third-party funders

as unconscionable or

against public policy even

if state law allows them

Com

mon

Proble

ms Lawyers’ Monopoly

• Although arguments

against claim funding

may be legitimately motivated, they may also

be driven by a desire for

lawyers to maintain a

monopoly on legal services

Com

mon P

roble

ms:

C

oncl

usi

on

Even if a common interest exists, the common problems associated with claim

funding make any type of presumption

around protecting communications with

claim funders . . . A problem

Oth

er

Art

icle

s and

Prese

nta

tions

on

Cla

im F

undin

g

Prior work by Michele

DeStefano on claim funding:• Nonlawyers Influencing Lawyers: To

o Many Cooks in the Kit

chen or Stone Soup? 80 Fordham L. Rev. 279

1 (2012)• Third Party Claim Funde

rs: Too Many Cooks in th

e Kitchen Or Stone Soup

s