Third-party financing of litigation is on the rise, and not just for plaintiffs. In-house counsel, under pressure to do more with less, are increasingly seeking outside funding for their litigation. The reasons are the same as for any financed litigation:

Anyone considering third-party financing must decide whether to disclose privileged information and, if so, how to avoid waiver. This is the client's decision because counsel may disclose confidential information only with the client's informed consent.

Voluntary disclosure of privileged information to third parties generally results in waiver of the privilege, potentially making the information discoverable. A litigation financing company may require disclosure under two circumstances:

Both circumstances may involve the disclosure of information otherwise protected by the privileges for:

A recent federal court decision reviews the various issues surrounding privilege and waiver in the context of third-party litigation funding. In Miller UK Ltd. v. Caterpillar, Inc., the plaintiff, a parts supplier for construction machines, brought an action against the defendant machine manufacturer for misappropriation of trade secrets (No. 10 C 3770, (N.D. Ill. Jan. 6, 2014)). During the course of the hotly contested litigation, the plaintiff met with several potential third-party funders and ultimately entered into a funding agreement with one. The defendant sought, inter alia, disclosure of the documents the plaintiff provided to the potential third-party funders. The plaintiff objected on the grounds that the documents were protected from disclosure based on the attorney-client privilege and the work product doctrine.

In a thorough analysis, the US District Court for the Northern District of Illinois found that the documents were not protected from disclosure by the attorney-client privilege because:

(, at *13; accord, Leader Techs., Inc. v. Facebook, Inc., 719 F. Supp. 2d 373, 376-77 (D. Del. 2010) (common interest privilege does not apply to disclosure to funder).)

Notably, at least one other court has found that the common interest privilege does apply to third-party funders (see Devon IT, Inc. v. IBM Corp., , at *1, n. 1 (E.D. Pa. Sept. 27, 2012)).

By contrast, the court in Miller found that some of the documents were still protected from disclosure under the work product doctrine. Central to the court's analysis was that:

(Miller, , at *16-18; accord, Mondis Tech., Ltd. v. LG Electrs., Inc., , at *3 (E.D. Tex. 2011).)

However, the plaintiff waived work product protection for documents produced to potential funders without a confidentiality agreement.

It is, of course, in the interest of both the claimant and the funder to avoid waiver of privileged information. This can be accomplished if the funder agrees to evaluate the claim with only publicly available, non-privileged information and information that will ultimately be disclosed in the litigation in any event. However, if privileged information must be disclosed, clients and counsel should keep in mind the following:

Third-party financing can be a helpful tool but those seeking funding should be aware of the potential risks.

For more on third-party litigation funding, see: