Five Common Misconceptions About Litigation Funding

1. If I, as an attorney, accept money from a litigation funding firm, I have an absolute obligation to repay the funder.

FALSE. Most commercial litigation funding arrangements are completely non-recourse and are not structured like traditional loans.

When a litigation funder provides funding for a case, they are providing capital up front in exchange for a stake in the outcome of the litigation. Further, that transaction is generally non-recourse, meaning that the only asset securing the investment is the litigation itself. These arrangements often function similar to a contingent fee, wherein the funding recipient (e.g., the attorney or plaintiff) is not obligated to repay the funder if no proceeds are recovered from the lawsuit. If the case reaches a positive outcome, then the funder is typically owed a portion of the settlement or of any damages awarded.

2. Litigation funding can’t help my clients because they need capital for business operations, not to cover attorney fees.

FALSE. Litigation funding can serve a variety of financing needs. While litigation funding often covers attorney’s fees, it can also be used to provide operating capital for business parties during litigation and to cover litigation costs beyond attorney fees. When seeking a third-party funding partner, be sure to identify how outside capital could best support your and your client’s goals during litigation.

3. Accepting money from a litigation funder will add a decision maker to the litigation.

FALSE. Litigation funding companies should not attempt to control the litigation. A litigation funder is a partner in litigation, but for practical and ethical reasons, the vast majority of funders prefer to remain passive partners with no direct involvement in the underlying lawsuit. While most funders will periodically communicate with counsel regarding case progress once an investment has been made, litigation strategy should remain within the purview of the attorney, and settlement decisions remain solely in the client’s hands.  In other words, partnering with a litigation funding firm should not interfere with the relationship between lawyers and clients. This approach is consistent with the ABA House of Delegates’ Resolution 111A, which provides that “funding agreements should be drafted to assure that: (a) the client retains control of the litigation (including, for example, decisions as to whether to settle or discontinue the litigation as opposed to proceeding to trial or verdict); and (b) that the lawyer retains independent professional judgment.” ABA Res. 111A (2020) at 11-12.

4. Litigation funding documents are going to be discoverable in court, adding complications to my case.

FALSE. Numerous courts have held that litigation funding documents are generally not discoverable. In fact, as reported in an August 2021 Westfleet Advisors review of current case law, U.S. courts did not allow for significant discovery in 43 of 52 cases analyzed. Several decisions throughout the country have either held that the existence of a litigation funding agreement is irrelevant to the claims and defenses between parties (and therefore not discoverable), or that funding-related documents and communications are protected under the work product doctrine. While court treatment of litigation funding differs from state to state, assuming that litigation funding documents are always discoverable would be in error.

5. Engaging a litigation funder waives attorney-client privilege.

USUALLY NOT. While litigation funders may review confidential case materials, they should not need to review attorney-client communications to accurately assess most matters. Furthermore, the attorney is allowed to disclose confidential information to third parties if the client gives “informed consent.” The client is free to tell the fund anything other than what the client and the attorney said to each other, which could waive the privilege. As a result, the client can discuss a great deal about the case, so long as they do not disclose privileged discussions they had with their lawyers.

For instance, the Northern District of Illinois has held as follows:

When counsel submits materials to secure funding for a litigation matter, that production does not substantially increase the chance that opposing counsel would obtain the information. Litigation funding communications are designed to be confidential. Otherwise, no counsel would ever memorialize on paper the relative merits and the chances of success of a piece of litigation and apply for litigation funding. Similarly, if litigation funding companies did not maintain confidentiality of documents provided by attorneys about their evaluation of the case, these companies would run out of clients fairly quickly. The Court holds that these materials are protected by the attorney work product doctrine.

Fulton v. Foley, No. 17-CV-8696, at *4 (N.D. Ill. Dec. 5, 2019) (citing Miller UK Ltd. v. Caterpillar, Inc., 17 F. Supp. 3d 711, 742 (N.D. Ill. 2014) (holding the opposite); Doe v. Society of Missionaries, No. 11-cv-02518, 2014 WL 1715376, at *4 (N.D. Ill. May 1, 2014)).

Similarly, in Cont'l Circuits LLC v. Intel Corp., 435 F. Supp. 3d 1014, 1021 (D. Ariz. 2020), the court held that “the [litigation funding] agreements … satisfy the ‘because of’ test and constitute work product.” In 2012, the Eastern District of Pennsylvania conclusively determined that communications with funders and funding agreement drafts were protected as work product and protected by the attorney-client privilege under the common interest exception. Devon IT, Inc. v. IBM Corp., 2012 WL 4748160, at *1 (E.D. Pa. Sept. 27, 2012). And over a decade ago, the Eastern District of Texas concluded that documents shared with potential funders were privileged. Mondis Tech., Ltd. v. LG Elecs., Inc., 2011 WL 1714304, at *2-3 (E.D. Tex. May 4, 2011). While these decisions rely on the work product doctrine, certain other states have found that the common interest doctrine preserves the attorney-client privilege when attorneys communicate with funders. See In re Int'l Oil Trading Co., 548 B.R. 825, 834 (Bankr. S.D. Fla. 2016) (“Florida Statutes § 90.502(c)(2) protects communications with those ‘to whom disclosure is in furtherance of the rendition of legal services to the client.’”).

Based on this case law, overall, while litigation funding does add some complexity to issues of privilege and discoverability, it is also a powerful tool in a law firm’s arsenal, whether it be to shore up a client that is fighting for its survival or allowing litigants full access to judicial determination of their disputes, despite a financially uneven playing field.

Dr. Maria-Vittoria "Giugi" Carminati, Esq., JSD, of Denver, Colorado, is vice president of business development at LexShares, which is based in New York, New York.

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