How Federal Courts Apply Common Interest Privilege to Litigation Funding, M&A Due Diligence, and Other Third-Party Scenarios
The concept of “privilege” is critically important in the United States legal system and litigation. Privileged documents and communications are protected and may not be discoverable by an adverse party. Generally, confidential communications between attorneys and clients concerning legal advice are privileged under the doctrine of attorney-client privilege. Fed. R. Evid. 502. And a party’s documents and notes-including those of the parties’ representatives and attorneys-made primarily in anticipation of litigation are privileged under the work product doctrine. Fed. R. Civ. P. 26(b)(3). Unlike attorney-client privilege, which focuses on the confidential communications provided by a client to an attorney, the work product doctrine focuses on tangible documents containing the thoughts and mental impressions of an attorney. To invoke work product privilege, documents must not have been created in the ordinary course of business-they must have been prepared primarily in anticipation of litigation.
When privileged communications are disclosed to third parties-non-parties to a litigation-confidentiality is usually breached and privilege is waived. Because privilege is waived when confidentiality is breached these communications could now be discoverable.
Common interest privilege, also known as the joint defense privilege, is an extension of attorney-client privilege that protects the compelled disclosure of communications between two or more parties and/or their respective counsel when the parties are allied in a common legal interest. It permits a client to disclose information to his or her attorney in the presence of joint parties and their counsel without waiving the attorney-client privilege. This extension of privilege was intended to prevent joint parties and their attorneys from disclosing confidential information learned through a joint defense. United States v. Hsia, 81 F. Supp. 2d 7, 16 (D.D.C. 2000). The party asserting the privilege generally must show that: (1) the communications were made in furtherance of a joint defense effort; (2) the statements were designed to further that effort; and (3) the privilege was not waived. In re Sealed Case, 308 U.S. App. D.C. 69, 29 F.3d 715, 719 n.5 (D.C. Cir. 1994).
The common interest privilege is also an extension of the work-product doctrine. See Power Mosfet Techs. v. Siemens AG, 206 F.R.D. 422, 424 (E.D. Tex. 2000). Generally, when an attorney discloses privileged information to a third party, both attorney-client and work-product protection are waived. See United States v. Pipkins, 528 F.2d 559, 563 (5th Cir. 1976). But common interest privilege extends the privileges to potentially protect those otherwise waived communications. Siemens AG, 206 F.R.D. at 424.
The historical roots of common interest privilege lie in criminal procedure against multiple co-defendants. Chahoon v. Commonwealth, 62 Va. 822 (1871). In civil litigation, the common interest privilege was created because civil co-defendants commonly have the same objectives. See In re LTV Sec. Litig., 89 F.R.D. 595, 604 (N.D. Tex. 1981). In the civil context, the common interest privilege protects both communications between co-defendants and their counsel in actual litigation as well as potential co-defendants and their counsel. Ferko v. NASCAR, 219 F.R.D. 396, 401 (E.D. Tex. 2003). It is the latter type of communication-those made between potential, but not actual, co-defendants-that raises many issues today.
Litigation funding occurs when a third party decides to fund a plaintiff to litigate against a defendant while retaining a financial stake in the litigation’s outcome. This is becoming increasingly popular in today’s legal climate. Because many companies and individuals cannot afford to finance costly litigation, potential litigation investors incentivize lawsuits by covering litigation fees while maintaining valuable upside potential for plaintiffs.
Of course, litigation funders must make calculated decisions about their investing strategies because they have a stake in the litigation. Therefore, plaintiffs will commonly share confidential and privileged information with the funders. The issue that often arises is whether sharing confidential attorney-client communications or work product with non-party litigation funders constitutes a breach of confidentiality and thus a waiver of privilege, or whether common interest privilege protects disclosure of such communications.
The district of Delaware recently addressed this issue in Acceleration Bay Llc v. Activision Blizzard, No. 16-453-RGA, 2018 U.S. Dist. LEXIS 21506 (D. Del. Feb. 9, 2018). There, Plaintiff negotiated a litigation financing agreement with Hamilton Capital and shared e-mails and documents related to the diligence for the litigation funding. Id. at *4. Plaintiff sought to exclude the communications between itself and Hamilton Capital on three grounds: (1) attorney work-product; (2) common legal interest privilege; and (3) lack of relevance. Id. Judge Andrews found each one of those grounds inapplicable and adopted the Special Master’s Order “requiring Plaintiff ‘to produce what it provided in writing to Hamilton Capital or its counsel at the time of Hamilton’s [sic] Capital’s due diligence.'” Id. at *10.
A. Work Product Doctrine
In Acceleration Bay, Judge Andrews found that the work product doctrine would not shield documents exchanged by Plaintiff and Hamilton Capital from discovery. Id. at *6. To be considered “work product” the primary purpose for the document’s creation must be to aid a possible future litigation. U.S. v. Rockwell Int’l, 897 F.2d 1255, 1266 (3d Cir. 1990). But here, the district court found that the primary purpose of the communications was to obtain funding to assert the patents-in-suit. Acceleration Bay at *5. Thus, the main objective of the communications was to receive a loan, not to aid a potential litigation. Id. at *6.
Furthermore, a document prepared for a nonparty is not deemed work product “even if the nonparty is closely related to litigation.” 6 James Wm. Moore et al., Moore’s Federal Practice § 26.70 (3d ed. 2015); see also In re Cal. Pub. Utils. Comm’n, 892 F.2d 778, 781 (9th Cir. 1989). And as the court found, because Hamilton Capital was a nonparty in the litigation, the communications exchanged between Hamilton Capital and the Plaintiff were not protected by the work product doctrine. Acceleration Bay at *6.
B. Attorney-Client Privilege
Attorney-client privilege protects information from discovery if the “5 C’s” are met: (1) the information was delivered Confidentially; (2) the information was delivered as a Communication; (3) the information was delivered by or to Counsel (an attorney); (4) the information was delivered by or to a Client; and (5) the information was delivered for the purpose of giving or receiving Counsel (legal assistance). Restatement (Third) of the Law Governing Lawyers § 68 (Am. Law. Inst. 2000). The confidentiality requirement requires that the privileged communication not be divulged to a third party (someone not counsel or client). Acceleration Bay at *7. Voluntary disclosure of information to a third party typically waives privilege.
1. Common Interest Privilege Exception to Strict Confidentiality
Common interest privilege may extend attorney-client privilege to cover communications between parties and nonparties under certain circumstances. It protects communications shared within a “proper community of interest” at the time the communications were made. In re Teleglobe Commc’ns Corp., 493 F.3d 345, 364 (3d Cir. 2007). To qualify as a “proper community of interest,” the interests between the parties must be identical (similar is not enough) and legal (not merely commercial in nature). Leader Techs., Inc. v. Facebook, Inc., 719 F. Supp. 2d 373, 376 (D. Del. 2010). Further, the disclosures must have been made with the purpose of “securing, advancing, or supplying legal representation.” See In re Regents of the Univ. of Cal, 101 F.3d at 1389 (quoting In re Grand Jury Subpoena Duces Tecum, 406 F. Supp. 381, 386 (S.D.N.Y. 1975)); see also In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120, 126 (3d Cir. 1986).
In Acceleration Bay, Plaintiff argued that litigation funding provides funds for the sake of securing, advancing, or supplying legal representation. Acceleration Bay at *8. Plaintiff also argued that a community of legal interest may exist between a patent owner and a litigation funder in the context of work product privilege. See id. (citing Carlyle Inv. Mgmt. L.L.C. v. Moonmouth Co. S.A., 2015 WL 778846, at *7 (Del. Ch. Feb. 24, 2015)). But because the Carlyle case dealt solely with the issue of work product, the court found that the Carlyle case was inapposite to attorney-client privilege. Acceleration Bay at *8.
The party asserting privilege bears the burden of proving that the privilege exists. Id. at *7. Judge Andrews found that the Plaintiffs failed to meet their burden of proof of establishing a common legal interest for two reasons: (1) the documents were provided before an agreement was reached between Hamilton Capital and the Plaintiff and (2) the communications were exchanged before a litigation was filed. Id. at *9. Thus, the critical feature missing from the Plaintiff’s argument was that they could not prove that Plaintiff and Hamilton Capital were allied in a common legal cause at the time the communications were made.
In Mondis Tech., Ltd. V. LG Elecs., Inc., the Eastern District of Texas reached a similar conclusion. No. 2:07-CV-565-TJW-CE, 2011 U.S. Dist. LEXIS 47807 (E.D. Tex. May 4, 2011). There, Mondis was a limited liability company with principal shareholder, Inpro, an IP holding company. Id. at *13. Inpro recruited litigation funders to pursue licensing and litigation over its patent holdings. Id. In doing so, Inpro disclosed confidential and privileged information to potential investors with non-disclosure agreements. Id.
Judge Ward ruled that documents prepared for the purpose of aiding potential future litigation were protected by the work product doctrine. Id. at *16. For example, documents disclosing Inpro’s litigation and licensing strategies containing revenue information were protected as work product. Id. Judge Ward further ruled that although these materials were disclosed to third parties, there was no waiver of work product privilege because the documents were provided subject to non-disclosure agreements. The court ultimately held that such disclosure “did not substantially increase the likelihood that an adversary would come into possession of the materials. Id. at *17.
For common interest privilege, however, the Eastern District of Texas held that the privilege must be narrowly construed. Citing a Delaware case, the court reasoned that the common interest doctrine only protects legal advice when the parties share a common legal enterprise and the legal advice related to that common legal enterprise. Id. at *19 (citing Rembrandt Techs., L.P. v. Harris Corp., No. 07C-09-059, 2009 Del. Super. LEXIS 46, 2009 WL 402332 (Del. Super., Feb. 12, 2009). When parties are negotiating their rights and relationships to one another, they would be adverse to each other and could not possibly have a common legal enterprise at that point. Id.; Rembrandt Techs., L.P. v. Harris Corp., 2009 Del. Super. LEXIS 46, [WL] at *7, n.73. Thus, both the District of Delaware and the Eastern District of Texas have held that when a party is negotiating a deal with a litigation funder-before a deal is reached-the parties do not have a common legal interest and, therefore, cannot invoke the common legal interest privilege.
At least one court, however, has recognized the common interest privilege in the context of litigation funding. Devon IT, Inc. v. IBM Corp., No. 10-2899, 2012 U.S. Dist. LEXIS 166749 (E.D. Pa. Sep. 27, 2012). In Devon IT, the Eastern District of Pennsylvania held that documents shared between a party and litigation funder under confidentiality, common interest, and non-disclosure agreements were still privileged under the common interest doctrine. Id. at *4. The court reasoned that under “these controlled conditions, there was no waiver of” attorney-client privilege. Id. at *6. The Order mentioned that “Common Interest Material” was specifically described in the parties’ Common Interest Agreement as “‘any Confidential Information that is the work product of qualified legal advisors and/or attorney work product, protected by the attorney-client privilege or any similar privilege in any jurisdiction.'” Id. Therefore, it is possible that a court will rule that common interest privilege applies in the context of litigation funding when a common interest agreement is made that clearly delineates the terms of the common legal interest.
Companies typically will perform due diligence-valuation of assets, growth potential, and intellectual property (“IP”)-for mergers and acquisitions (“M&A”), IP licensing, or various other deals. When negotiating deals during the due diligence period, companies will often share confidential information with non-counsel third parties.
In the recent Waymo LLC v. Uber Techs., Inc. case, the Northern District of California held that-even with a joint defense agreement-the common interest doctrine cannot be invoked without an actual common legal interest. 2017 WL 2694191, *8 (N.D. Cal. June 21, 2017). In Waymo, Uber, Otto, and Leandowski were in the process of negotiating the sale of Otto to Uber for millions of dollars. Id. During that process, the parties shared confidential information under the auspices of a joint defense agreement. Id. The joint defense agreement, however, was held invalid because parties that are negotiating an agreement are potentially adverse to each other and cannot be said to have a common legal interest in the matter. Id.
In view of Waymo, parties must be cautious when sharing privileged information during M&A negotiations. A common legal interest will typically only be found after a deal has been made and agreements have been executed.
Accountants and auditors may receive confidential information when analyzing company financial information. Scientific experts often receive confidential information when preparing expert reports for a litigation. And consultants may receive privileged information when assisting a company with any number of issues.
Under such circumstances, the work product doctrine applies to data contained in documents generated by attorneys or non-attorneys at an attorney’s direction if: (1) the documents were prepared because of reasonably anticipated litigation; and (2) the material was prepared because of the prospect of litigation. In re Gabapentin Patent Litig., 214 F.R.D. 178, 183 (D.N.J. 2003); see also Upjohn Co. v. United States, 449 U.S. 383, 400, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981). The document must not have been created merely in the regular course of business. Union Carbide Corp. v. Dow Chemical Co., 619 F. Supp. 1036, 1051 (D. Del. 1985); United States v. Rockwell Intern., 897 F.2d 1255, 1266 (3d Cir. 1990). Therefore, data generated at the behest of attorneys after they had been retained is likely protected by the work product doctrine so long as the data was generated in anticipation of litigation. In re Grand Jury (Impounded), 138 F.3d 978, 981 (3d Cir. 1998). But data generated before attorneys were retained, unless at the behest of in-house counsel, may not be protected under the work product doctrine.
Communications between a consultant (or other third-party) and a client may be protected by attorney-client privilege if the consultant is a “go-between” between an attorney and a client. Garrett v. Metropolitan Life Ins. Co.,. 1996 U.S. Dist. LEXIS 8054 (S.D.N.Y. June 11, 1996) (Bernikow, Mag. J.), adopted, 1996 U.S. Dist. LEXIS 14468 (S.D.N.Y. Oct. 2, 1996). It is vital, however, that the consultant-client communication be made with the express purpose of obtaining legal counsel from an attorney. In re G-I Holdings, Inc. 218 F.R.D. 428, 434 (D.N.J. 2003). Further, the consultant must be considered a “functional equivalent” of an employee of the client company. Viacom, Inc. v. Sumitomo Corp. (In re Copper Mkt. Antitrust Litig.), 200 F.R.D. 213, 218-20 (S.D.N.Y. 2001). The determination of a consultant as a “functional equivalent” to a company employee depends on whether the consultant acts for the corporation and possesses the information needed by attorneys in rendering legal advice. In re Grand Jury Subpoenas, 995 F. Supp. 332, 340 (E.D.N.Y. 1998). And the purpose of the consultant-client communication must be primarily for seeking legal advice-not for business purposes. In re Ford Motor Co., 110 F.3d 954, 965 (3d Cir. 1997); United States v. Rockwell, Int’l, 897 F.2d 1255, 1264 (3d Cir. 1990); Leonen v. Johns-Manville, 135 F.R.D. 94, 98 (D.N.J. 1990). Courts have generally been cautious in applying attorney-client privilege to communications between clients and outside consultants. See Occidental Chem. Corp. v. OHM Remediation Servs. Corp., 175 F.R.D. 431, 437 (W.D.N.Y. 1997); see also United States Postal Service v. Phelps Dodge Refining Corp., 852 F. Supp. 156, 159 (E.D.N.Y. 1994); Federal Trade Commission v. TRW, Inc., 202 U.S. App. D.C. 207, 628 F.2d 207, 212 (D.C.Cir. 1980)
It is possible that attorney-client privilege and attorney work product may apply to a wholly-owned subsidiary without legal counsel when the parent company has legal in-house counsel. See Teleglobe Communs. Corp. v. BCE, Inc. (In re Teleglobe Communs. Corp.), 493 F.3d 345, 370 (3d Cir. 2007). Courts generally look at a parent company and a wholly-owned subsidiary as a single client with respect to attorney-client privilege and attorney work product. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 772, 104 S. Ct. 2731, 81 L. Ed. 2d 628 (1984) (stating that parents and their wholly owned subsidiaries cannot constitute a “combination” or “conspiracy” of two or more persons under the Sherman Act).
Jurisdictions vary widely in their treatment of common interest privilege. In a jurisdiction that recognizes common interest privilege, parties should be aware of common pitfalls, most notably the failure to establish a common legal interest. For attorney-client privilege to extend to nonparties, parties should execute a written agreement at the time the communications are made to have a common legal interest in whatever information is exchanged. Though a written agreement is not required, it may be difficult to prove that an oral agreement was made and was binding. Further, the common interest agreement should clearly define the common legal interest.
Of course, at a minimum, non-disclosure agreements should be put in place to provide potential work product protection. Work product may be waived if documents become accessible to adverse parties. A non-disclosure agreement could prevent the waiver of attorney work product because it could help prove that potentially adverse parties would not have had access to work product that was disclosed during due diligence and negotiations.
Further, if an agreement cannot be reached between a nonparty and a party, litigation should be filed before any documents are provided to the nonparty. This would establish a foundation for a common legal interest to take hold that could then be proven and relied on for the common interest privilege extension.
Ultimately, the party attempting to assert privilege will need to show that the third party was allied with the party in a common legal cause at the time of the communications. In other words, the common legal cause cannot happen after the communications were made and the common legal cause cannot have expired when the communications were made. Therefore, to utilize the common interest privilege, it is prudent for parties to execute an agreement establishing the nature of the relationship, the common legal cause, and the litigation that may ensue. Further, though not always practical, it may be helpful for a party to initiate the litigation before exchanging communications with third parties.