California’s Evolving Views on Disclosure of Litigation Funding

EXECUTIVE SUMMARY:

• Individual state regulation of litigation funding has drawn a spotlight in recent years, and few topics have sparked more debate than disclosure.
• California has followed the larger trend of preventing discovery of funding materials in court — even where some would argue the identity of a litigation funder must be revealed under certain local court rules.
• While defendants will continue to test the discoverability of litigation funding, the state’s affirmation of work-product protections has helped ensure that claimants have adequate access to key legal and financial resources.

As litigation finance becomes more prevalent in the United States, so also has the attention paid to its regulation. The U.S. currently lacks a federal regulatory scheme specific to litigation funding, including the market’s rapidly expanding commercial sector. Instead, regulation has come almost entirely at the state level, where a medley of case law, statutes, common law doctrines, and ethics rules has formed guidelines that can vary greatly among jurisdictions.

There also exists an assortment of federal case law developed in federal civil cases litigated in those states, where federal judges are called upon to apply those guidelines. Thus, individual state treatment of third-party funding agreements has drawn a spotlight.

Few related topics have sparked more impassioned opinions than disclosure of litigation funding. The debate reached new fervor this past June after New Jersey federal court approved a proposal to adopt Local Civil Rule 7.1.1, which requires litigants to disclose any non-recourse arrangements with outside financiers, including the funder’s identity and the nature of the agreement. In contrast, state and federal courts in other states have generally leaned in the opposite direction, rejecting attempts to discover litigation funding-related documents on relevance grounds or in recognition of work-product protections.

California, which is broadly permissive of litigation finance, has followed the larger trend of preventing discovery of funding materials—even when some might argue litigation funding must be revealed under certain local court rules, as addressed below. This article identifies how California courts have handled attempts to uncover litigation funding in court, as well as related issues, with the goal of preparing Golden State attorneys to counter defendants who seek to prolong litigation with irrelevant motion practice.

RELATED: Attorneys seeking more information about California’s treatment of litigation funding can request our full guide to relevant case law, statutes, and standing orders.

Financial Interest and the Work-Product Doctrine

Two recent patent cases highlight the tendencies of California courts to shield litigation funding agreements from discovery attempts. In MLC Intellectual Prop. v. Micron Tech., the defendant sought to identify any third party that was funding the litigation “to uncover possible bias issues,” both with respect to potential jurors and witnesses. The plaintiff countered that this information was both privileged and irrelevant.

The court concluded that defendant Micron was not entitled to discovery due to lack of relevance, adding that it could question potential jurors in camera regarding any potential conflicts of interest related to litigation funders or any non-party witnesses potentially involved in funding the case.

The court further observed that plaintiff MLC had complied with its local rules by disclosing persons and entities with a financial interest in the matter as outlined by 28 U.S.C. §455(d)(1), (3), and (4), which are designed to uncover potential biases and conflicts. (Under these code provisions, “financial interest” is defined as “ownership of a legal or equitable interest… or a relationship as director, adviser, or other active participant in the affairs of a party.”)

The court also found cases cited by the defense in support of discovery unpersuasive, standing merely for the unremarkable proposition that attorney fee and litigation funding agreements could be discoverable “when there was a specific, articulated reason to suspect bias or conflicts of interest.”

More recently, in Impact Engine v. Google, defendant Google moved to compel production of “[all] Documents Regarding any contracts or agreements between Plaintiff and any Third Party concerning (1) This Litigation and/or (2) any Asserted Patent or Related Patent.” The plaintiff asserted work product protection for the requested documents.

After reviewing a non-disclosure agreement and a litigation funding agreement, the court determined these documents could fairly be said to have been prepared “because of the prospect of litigation” and were therefore eligible for work product protection under Fed.R.Civ. P. Rule 26(b)(3).

The court further stated that disclosure “to a person with interest common to that of the attorney or the client,” such as a third-party litigation funder, “is not inconsistent with the intent to invoke the protection of the work product doctrine.” The doctrine, the court observed, is not waived simply by sharing work-product materials with another person or entity, as its aim is to protect against disclosures to potential adversaries. Plaintiff Impact Engine was thus not required to produce the requested documents.

Maximizing the Protection of Privileged Materials

Litigation funders typically have internal legal teams that examine key case documents and undertake confidential discussions with the transacting parties. The majority of this process focuses on non-privileged information, such as public docket entries, complaints, motion briefs, and unsealed hearing transcripts. Privileged attorney-client communications are generally not needed to assess most matters.

Even so, non-disclosure agreements have become standard procedure in the litigation funding industry due to the additional protection they afford. The California State Bar specifically recommends this practice in Formal Opinion No. 2020-204: “Taking steps to ensure that the funder will keep all information it receives confidential such as by entering into a confidentiality agreement and/or marking documents appropriately will decrease the risk that a court will find that work product is waived.”

In addition, California recognizes the common interest doctrine, which can enable parties to disclose and share privileged information under certain circumstances without waiving attorney-client privilege. This doctrine examines whether the client and third party are engaged in a “common enterprise,” and whether the information shared relates to the enterprise’s goal. Whether the doctrine can be used to avoid privilege-waiver for claimants seeking to share otherwise privileged attorney-client communications with a prospective funder, primarily in the context of due diligence, is a matter of honest and ongoing debate.

However, once funding has taken place, claimants, their counsel and the funder clearly have mutual financial concerns and their interests are more clearly aligned, making the characterization of a “common interest” among them less controversial. Hence, the sharing of attorney-client privileged communications without waiver is made more defensible.

Preserving confidentiality is important not only for avoiding privilege waiver, but also to ensure compliance with California Ethics Rule 1.6, which requires a client’s informed consent before a lawyer may share confidential information with a third party. Informed consent, according to the California Rules of Professional Conduct, means that the lawyer has “communicated and explained (i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences of the proposed course of conduct.”

In this context, an attorney should understand what information a litigation funder might need to accurately assess the case(s) in question, and what information (if any) might be discoverable in court. The client should be made aware of what is being disclosed to the funder and what risks may be encountered from this disclosure downstream in the litigation.

Litigation Funding Disclosure: An Ongoing Debate

The presence of a third-party funder should be irrelevant to a dispute’s underlying merits. Those in favor of disclosure argue that greater courtroom transparency would prevent third parties from influencing the affairs of claim owners and their lawyers. However, most litigation finance arrangements include language that explicitly revokes a funder’s right to control litigation strategy and settlement negotiations.

There are, additionally, many other controls already in place to prevent such abuses of the legal system. Despite this, federal courts in both the Central District of California (L.R. 7.1-1) and the Northern District of California (L.R. 3-15) do have local rules requiring disclosure of non-parties with a financial interest in the case at the inception of civil litigation.

Naturally, such disclosure requirements stand to benefit well-capitalized defendants, whose legal teams could more easily cast aspersions on a plaintiff’s motives or stall case progress with unnecessary motion practice. At a time when states like California are considering ways to enhance access to justice—such as law firm ownership reforms that could make affordable legal services more widely available—broad mandates similar to New Jersey’s would effectively handicap resource-deficient plaintiffs’ ability to obtain capital in affected jurisdictions to the benefit of well-resourced adversaries.

It is not surprising, therefore, that powerful interests—such as those represented by the U.S. Chamber of Commerce—continue to lobby for expanded disclosure provisions to address putative concerns that multiple states have already deemed unproblematic.

California is a bellwether for legal industry perceptions of litigation finance. What happens in California concerning the ongoing debate over disclosure is no exception. We anticipate this topic will remain a point of discussion across the United States—barring the emergence of federal policy on non-recourse litigation financing. While defendants continue to test the discoverability of funding agreements in California, the state’s repeated affirmation of work-product protections has helped ensure that claim owners have adequate access to the resources needed to seek fair dispute resolution.