By Grace M. Giesel*
The United States judicial system is in the midst of great and fundamental change with regard to the funding of litigation. Historically, parties financed litigation out of their own literal or figurative pockets or, perhaps, with the assistance of some sort of contingent fee representation. Third-party financing of litigation was frowned upon, if not specifically forbidden. But, now, third-party litigation funding entities have begun, with much more frequency and success, to provide funding for small matters such as individual personal injury claims as well as larger commercial litigation matters between businesses. The demand for this alternative litigation finance (“ALF”) clearly exists, and the supply of funding has developed despite historical obstacles. Doctrines such as champerty have faded somewhat from the legal landscape, and old fears of having litigation funded and controlled by evil actors equal to the worst villain in any Dickens novel have receded in light of the notion that everyone deserves access to justice regardless of bank account balance.
As historical obstacles to litigation funding have waned, a new reality has emerged in which ALF entities increase access to justice—at least for some. For others, funding from these entities allows litigants who have the means to fund litigation to shift risk. Litigation funding alters the relative power of players in the justice system; it provides access to the playing field and also ensures that the teams show up at the field with the same equipment.
In this new and quickly developing ALF reality, new utilitarian questions have emerged. Perhaps the most important of these is the effect the involvement of ALF entities has on the attorney-client privilege and the work-product doctrine. The desire to preserve privilege and work-product protection will likely mold the shape of the day-to-day operations of litigation finance entities and the ALF market in general.
A body of law has not yet developed dealing with the application of the attorney-client privilege or work-product doctrine to the involvement of ALF entities. Only one case has dealt substantively with the applicability of the attorney-client privilege in the litigation finance setting. Case law applying the work-product doctrine in the litigation finance setting likewise is scant. This Article attempts a complete consideration of the application of the work-product doctrine to the ALF situation, while leaving for a later date a consideration of the application of the attorney-client privilege.
ALF entities can be involved in a litigation matter in two ways that may call into question the work-product doctrine. First, the financing entity must have access to information in order to decide whether to initially invest in a particular matter. Second, if an ALF entity decides to invest, it may require updates on that matter as a way of monitoring the investment.
In either context, the ALF entity may require two types of disclosure. The entity may require the attorney and client team to supply it with materials already created in pursuit of the litigation matter. In addition, the ALF entity may require the creation of new materials critically evaluating the litigation matter. The entity may require such evaluative information for the investment decision and also after the entity becomes involved in the matter as an investor.
With regard to previously created materials protected by the work-product doctrine and shared with the ALF entity, the question that arises is whether the act of sharing waives the protection. With regard to evaluative material specifically created for the ALF entity, the initial question is whether the work-product doctrine applies at all. If the materials are protected, the question of whether sharing such information with the ALF entity waives the protection arises as well.
Parties and attorneys will be much less inclined to share materials with ALF entities if in so doing they destroy the protection afforded by the work-product doctrine. Similarly, an ALF entity has no desire to lower or completely destroy the value of a litigation matter it is considering for investment or in which the entity is already involved. If the materials available to ALF entities are also available to litigation adversaries, the value of many litigation matters would be reduced greatly.
In Part I, this Article presents an overview of the ALF phenomenon. Part II reviews the current status of the major historical obstacles to ALF. Part III outlines the history and parameters of the work-product doctrine. Part IV discusses the existing case law applying the work-product doctrine to the ALF context. Part V addresses the similarity of applying the work-product doctrine to situations involving ALF entities and to situations involving independent auditors. Part VI discusses courts’ treatment, especially in the independent auditor context, of the question of whether the work-product doctrine protects materials that evaluate litigation. Part VII discusses courts’ treatment of the question of whether the sharing, in the independent auditor context, of materials otherwise protected by the doctrine waives the protection.
This Article concludes that materials that evaluate litigation, even if created in the ALF setting, are likely protected by the work-product doctrine. The Article further concludes that materials likely do not lose protection when an attorney and client team shares them with an ALF entity. This is true, however, only if the ALF entity enters into a binding nondisclosure agreement with regard to any shared materials.
I. The Alternative Litigation Finance Phenomenon
The beginning of modern ALF took the form of relatively small lending businesses recognizing the need for litigation funding and seeking to answer that need. These entities loaned money to plaintiffs, usually individuals, in exchange for a share of the recovery—that is, if there was a recovery. This activity has been called “first-wave litigation funding.” While many of these businesses were probably completely reputable, some engaged in predatory practices and thus tarnished the general reputation of the entire ALF community. Today, hundreds of entities are in the business of making loans related to litigation.
In just a few years, the ALF market has expanded to include sophisticated litigation investing. In this “second-wave litigation funding,” funders include sophisticated entities such as banks, investment funds, and insurance companies, as well as specialized entities that are publicly traded. For example, Juridica and Burford, two of the many financing entities investing in litigation in the United States, are traded on the Alternative Investment Market (“AIM”) that is a part of the London Stock Exchange. Australia’s largest funder, IMF (Australia) Ltd., launched a U.S. subsidiary in 2011, and many other entities opened for business in recent years. These ALF entities provide funding to plaintiffs and defendants in a variety of settings. For example, the Burford Group, in its Annual Report issued in the spring of 2012, noted that it had committed $280 million in more than thirty-six investments. These investments include contract disputes and other general business matters, real estate matters, intellectual property matters, environmental disputes, and trade secret litigation. Burford reported a $15.9 million profit. The ALF industry is indeed enjoying much success.
II. The Historical Barriers and the Modern Environment
Long ago, people feared that the powerful among them would “buy up claims and, by means of their exalted and influential positions, overawe the courts, secure unjust and unmerited judgments, and oppress those against whom their anger might be directed.” The litigation often involved land, and, in exchange for funding the litigation, the wealthy and powerful party would obtain a share of the land. The poorer claimholder had little choice, while the wealthy and powerful party became wealthier and more powerful by the increase in land ownership.
To control such conduct, England created rules limiting a third party’s involvement in another’s litigation. In particular, rules were created to prohibit maintenance, champerty, and barratry. The Supreme Court, inIn re Primus, provided a very basic definition of each: “maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a continuing practice of maintenance or champerty.” These rules often took the form of criminal provisions, tort causes of action, or contract enforcement defenses.
Perhaps because the need for these rules has faded, courts have expressed displeasure with these ancient doctrines. For example, inGiambattista v. National Bank of Commerce of Seattle, the court noted, “In no state are these doctrines and the laws relating to them preserved with their original rigor.” Similarly, the Court of Appeals for the Ninth Circuit in Del Webb Communities, Inc. v. Partington has stated, “The consistent trend across the country is toward limiting, not expanding, champerty’s reach.” Many states no longer recognize tort causes of action or criminal prohibitions. Some states also have significantly curtailed recognizing the doctrines as a defense to contract enforcement. For example, in Osprey, Inc. v. Cabana Ltd. Partnership, the South Carolina Supreme Court refused to recognize champerty as a defense to enforcement of a contract, stating that a court can evaluate a suspect contract in light of other doctrines such as unconscionability, duress, and good faith. At least twenty-eight U.S. jurisdictions expressly allow champerty with varying degrees of limitation.
In addition to this general negative view of champerty, some decisions in recent years in situations specifically involving ALF show that at least some courts have not been receptive to champerty claims. For example, inOdell v. Legal Bucks, LLC, the North Carolina Court of Appeals rejected a claim that an ALF arrangement was champertous:[O]ur Courts have held for at least a century that an outsider’s involvement in a lawsuit does not constitute champerty or maintenance merely because the outsider provides financial assistance to a litigant and shares in the recovery. Rather, “a contract or agreement will not be held within the condemnation of the principle[s] . . . unless the interference is clearly officious and for the purpose of stirring up ‘strife and continuing litigation.’”
The court saw nothing champertous about the arrangement before it.
The ABA’s Commission on Ethics 20/20 addressed the ALF phenomenon in its Informational Report to the House of Delegates in early 2012. The Commission concluded that champerty is not an obstacle to ALF in many states. Specifically, the Commission noted that if a state allows champerty in some form, an arrangement would not likely be contrary to the champerty restrictions if the funder is not encouraging frivolous litigation, if the funder is not motivated by an improper motive also referred to as “malice champerty,” and if the funder does not involve itself with the conduct of the litigation such as exercising control over strategic decisions.
When measuring ALF arrangements against these limits, courts should not generally find such arrangements to be champertous. ALF entities certainly do not seek to create or further baseless claims. ALF business models require investment in strong claims with substantial merit. ALF entities have no malicious motive. Rather, they are motivated by a singular desire to maximize recovery on the investment. In addition, ALF entities are aware of the lines they cannot cross in terms of exercise of control over the litigation matter in which the entities invest. ALF arrangements, therefore, are not likely to encounter difficulty in many jurisdictions on the basis of champerty or related doctrines. This is especially so since some parts of society do not view litigation as evil but rather a means to vindicate rights and pursue social change.
Even so, the champerty doctrine is alive and well in many jurisdictions, so adverse judgments are possible. For example, in Johnson v. Wright, an ALF entity sought to enforce an arrangement in which the entity financed the litigation in exchange for a piece of any recovery. The court found the arrangement champertous. Such decisions create uncertain terrain for ALF arrangements.
Courts also have viewed ALF arrangements suspiciously in light of laws prohibiting usury. Modern laws prohibit excessive interest charges. Jurisdictions have a variety of statutes that outlaw a variety of interest rates for a variety of arrangements. The modern rationale for these statutes is the protection of debtors who have weak bargaining strength and little sophistication from stronger and more sophisticated creditors.
ALF arrangements often involve a relatively high interest rate, so challengers to ALF arrangements sometimes argue that such arrangements are usurious. Yet, usury laws generally apply only when the interest is charged for the use of the money and the borrower unconditionally promises to repay the principal and the interest. This is the classic loan situation. ALF arrangements usually do not involve an unconditional promise to repay the principal and interest. Rather, the typical ALF arrangement provides that the funder will be paid only if the litigation is successful. ALF arrangements, therefore, are a classic investment, not a loan.
A typical reception for a challenge to an ALF arrangement on the basis of usury is illustrated in Anglo-Dutch Petroleum International, Inc. v. Haskell. Anglo-Dutch entered into an ALF arrangement in order to pursue what it believed to be meritorious litigation but also to avoid bankruptcy. The finance group provided $560,000 and was to receive recompense and a return above that amount only if the litigation was successful. The Texas Court of Appeals stated that Anglo-Dutch had “no obligation to reimburse [the funding group] for the principal amount invested, much less pay [the funders] any return on their investment” and so “as a matter of law, the agreements could not be usurious.” Other courts have reached the same conclusion that ALF arrangements are not usurious.
Some courts have reached a contrary result. For example, the court inEcheverria v. Estate of Lindner concluded that the probable success for the claim in a strict liability labor law case was a “sure thing.” Thus, in the court’s view, there was no realistic possibility that the funder would not receive repayment. Finding the arrangement usurious, the court stated that “it is ludicrous to consider this transaction anything else but a loan unless the court was to consider it legalized gambling.” Similarly, the court in Lawsuit Financial, LLC v. Curry found a usurious arrangement when the funding arrangement was entered into after the jury had rendered its verdict in favor of the party seeking funding. Both of these cases presented out-of-the-ordinary facts that gave the respective courts reason to stretch to find usurious arrangements. While these sorts of results are possible, they are unlikely in a typical ALF situation.
C. Professional Responsibility Issues
Even if ALF arrangements are not champertous or usurious, they create professional responsibility dilemmas that hinder their use. Numerous ethics opinions have addressed various ethical issues raised as objections to ALF arrangements. Generally, the ethics opinions conclude that no professional responsibility issue makes these arrangements impossible,though the potential for problems argues for caution.
It is possible that an ALF entity could improperly interfere with the attorney’s exercise of judgment in representing the client. This could occur if the entity attempted to take control of the conduct of the litigation, including strategy. Several of the ABA’s Model Rules of Professional Conduct prohibit improper interference. Yet, ethics opinions do not forbid ALF entity involvement but rather warn lawyers to guard against such interference.
In addition, ethics opinions warn lawyers dealing with ALF entities to be wary of conflicts of interest that might arise from the tripartite relationship. These ethics opinions have stated that the Model Rules require lawyers to inform clients about engaging an ALF entity and the various issues surrounding the funder’s involvement, such as whether disclosure of information to the funder might waive privilege or work-product protection.
Also, ethics opinions caution lawyers not to disclose confidential client information but rather to abide by the lawyer’s duty of confidentiality. Model Rule 1.6 requires lawyers to protect “information relating to the representation” unless the client consents to disclosure or if one of the very few specific exceptions apply. Generally, in an ALF setting none of the specific disclosure exceptions apply, so a lawyer must obtain informed client consent for disclosures to funders at any stage of the relationship.
At this point in the life of ALF, the champerty doctrine is no longer a significant constraint in many jurisdictions. Usury laws are likewise not a likely regulator of ALF. Lawyer professional responsibility rules provide limits on the form of ALF arrangements but do not prohibit such arrangements. Thus, the question of the effect the presence of ALF entities has on the work-product doctrine looms large.
III. The Work-Product Doctrine
A. A Little History
The work-product doctrine was developed in response to an increase in civil discovery made possible by the new Federal Rules of Civil Procedure, which came into effect in the late 1930s. The expanded discovery framework of the new rules permitted attorneys to discover much of the opposition’s trial preparation because these rules permitted liberal use of depositions, interrogatories, and requests for production of documents. In 1947, the Supreme Court decided Hickman v. Taylor and thus established a federal common law work-product doctrine.
B. The Hickman Opinion
The Supreme Court, in Hickman v. Taylor, faced the question of the discoverability of interviews with witnesses to a tugboat accident that killed five crewmembers. The attorney for the tugboat owners interviewed witnesses. These interviews resulted in signed, written statements from some witnesses, notes of the attorney regarding interviews with other witnesses, and the attorney’s thoughts and impressions formed as a result of the interviews, but which had not been preserved in tangible form. In the resulting litigation, opposing counsel sought access to these materials. Though the materials were arguably within the parameters of allowable discovery provided for in the Federal Rules, the Supreme Court determined that the materials need not be produced. In so doing, the Court recognized a qualified immunity from discovery for the work product of attorneys. The Court stated that “all written materials obtained or prepared by an adversary’s counsel with an eye toward litigation are necessarily free from discovery in all cases,” absent a showing that a denial of production “would unduly prejudice” the plaintiff or cause “hardship or injustice.” With such a showing of necessity, discovery of work product in the form of signed written statements from witnesses might be appropriate. The Court indicated that statements of witnesses not yet memorialized in any way should receive additional protection from discovery since any production would, of necessity, be tangled with the attorney’s mental impressions. The Court stated, “[W]e do not believe that any showing of necessity can be made under the circumstances of this case so as to justify production.”
C. Rationale for the Doctrine
The Supreme Court’s policy basis for its creation of the work-product concept in Hickman was that attorneys should have an assurance of privacy so that they can investigate matters and prepare cases. The HickmanCourt stated:[I]t is essential that a lawyer work with a certain degree of privacy, free from unnecessary intrusion by opposing parties and their counsel. Proper preparation of a client’s case demands that he assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories and plan his strategy without undue and needless interference. That is the historical and the necessary way in which lawyers act within the framework of our system of jurisprudence to promote justice and to protect their clients’ interests. This work is reflected, of course, in the interviews, statements, memoranda, correspondence, briefs, mental impressions, personal beliefs, and countless other tangible and intangible ways-aptly though roughly-termed . . . as the “work product of the lawyer.” Were such materials open to opposing counsel on mere demand, much of what is now put down in writing would remain unwritten. An attorney’s thoughts, heretofore inviolate, would not be his own. Inefficiency, unfairness and sharp practices would inevitably develop in the giving of legal advice and in the preparation of cases for trial. The effect on the legal profession would be demoralizing. And the interests of the clients and the cause of justice would be poorly served.
Since the Hickman decision, courts and commentators have agreed that the goal of the doctrine is protecting the “privacy of preparation that is essential to the attorney’s adversary role.” The system is a competitive one; each side has the responsibility to develop a case, including investigating the matter, researching the law, and preparing the matter for presentation at trial. The working assumption is that “truth emerges from the adversary presentation of information by opposing sides, in which opposing lawyers competitively develop their own sources of factual and legal information.” The work-product doctrine eliminates an unfair shortcut to preparation for attorneys who would rather not do the work themselves. It also prevents the system from disincentivizing investigation and preparation by the other attorney. In United States v. American Telephone & Telegraph Co. (“AT&T”), the court captured this focus on encouraging investigation and preparation by attorneys on both sides of a matter:
The work product privilege does not exist to protect a confidential relationship, but rather to promote the adversary system by safe-guarding the fruits of an attorney’s trial preparations from the discovery attempts of the opponent. The purpose of the work product doctrine is to protect information against opposing parties, rather than against all others outside a particular confidential relationship, in order to encourage effective trial preparation.
With regard to the justifying rationale for protecting materials that reveal an attorney’s thoughts about a matter, the court in United States v. Adlman stated, “Special treatment for opinion work product is justified because, ‘[a]t its core, the work-product doctrine shelters the mental processes of the attorney, providing a privileged area within which he can analyze and prepare his client’s case.’”
D. The Modern Work-Product Doctrine
1. Parameters of the Doctrine
In 1970, the work-product doctrine became a part of the Federal Rules of Civil Procedure in Rule 26(b)(3). Today’s work-product doctrine is a product of Rule 26(b)(3) as well as the common law that has developed in the wake of Hickman.
The doctrine provides qualified protection for materials from disclosure in discovery and at trial. Even if a court determines that the work-product doctrine protects material, that material can be discovered upon a showing of “substantial need” and “undue hardship” in gaining the “substantial equivalent of the materials by other means.”
Federal Rule of Civil Procedure 26(b)(3) protects “documents and tangible things” that are “prepared in the anticipation of litigation or for trial.” Though litigation need not be in progress, it must be, as some courts state, “fairly foreseeable.” As one court has stated, “For a document to meet this standard, the lawyer must at least have had a subjective belief that litigation was a real possibility, and that belief must have been objectively reasonable.” Section 87 of the Restatement (Third) of the Law Governing Lawyers states that, to enjoy protection, the material must be prepared “for litigation then in progress or in reasonable anticipation of future litigation.” Courts have interpreted litigation to include, of course, judicial proceedings and also negotiations, governmental investigations, grand jury subpoenas, and arbitrations.
As for the causal relationship of the materials and the litigation—the “in the anticipation of” requirement—the vast majority of federal courts apply a “because of” test. A minority of federal courts apply a “primary motivating purpose” test.
With the “primary motivating purpose” test, the litigation must be the “primary motivating purpose” of the existence of the material in question. As the Court of Appeals for the Fifth Circuit stated in United States v. Davis, “[L]itigation need not necessarily be imminent . . . as long the primary motivating purpose behind the creation of the document was to aid in possible future litigation.”
Courts applying the “because of” test ask whether the materials “can fairly be said to have been prepared or obtained because of the prospect of litigation.” Some courts also consider whether the materials were created in the ordinary course of business. The courts are not uniform in the value that they give the ordinary course of business factor. Some courts apply work-product protection even if the materials would have been created in the ordinary course of business unless the materials would have been created “in essentially similar form irrespective of the litigation.”
For example, in United States v. Adlman, the court stated, “Where a document was created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation, it falls within Rule 26(b)(3).” The Adlman court clarified its stance by stating, “[T]he fact that a document’s purpose is business-related appears irrelevant to the question whether it should be protected under Rule 26(b)(3).” Similarly, the court in United States v. Deloitte LLP noted that “material generated in anticipation of litigation may also be used for ordinary business purposes without losing its protected status.” The Deloitte court clarified, “In short, a document can contain protected work-product material even though it serves multiple purposes, so long as the protected material was prepared because of the prospect of litigation.” Courts following this approach thus apply work-product protection if one of the motivations for the creation of the material is the anticipation of litigation.
Some courts use the ordinary business concept as a disqualifier of work-product protection. These courts take the stance that even if materials were created in part in the anticipation of litigation, those materials are not protected if they, in addition, were created in the ordinary course of business. This position has received criticism for adding an exception to the rule that is not contained in the rule’s own language.
Some courts state that they are applying the “because of” standard but do so in a more exacting manner. For example, in In re Grand Jury Subpoena, the district court applied the “because of” test and noted that the materials’ creation need not be “primarily” motivated by the possibility of litigation. The court continued by stating, however, that litigation must be an important motivating factor. Similarly, in United States v. Textron Inc., the Court of Appeals for the First Circuit seemed to create a modified “because of” test. The Textron court appeared to require that the materials be “prepared for use in possible litigation.” Requiring that the materials be prepared for use in litigation is a “much more exacting standard” than requiring that the materials be prepared “because of” litigation.
According to Rule 26(b)(3) of the Federal Rules of Civil Procedure, materials are protected if they are prepared by or for a party or a “representative” of a party. “Representative” includes an “attorney, consultant, surety, indemnitor, insurer, or agent.” Courts apply the doctrine even if a nonlawyer created the materials while working independently.
Courts have taken special care to protect opinion work product. Rule 26(b)(3)(B) states, “If the court orders discovery of [work product] materials, it must protect against disclosure of the mental impressions, conclusions, opinion, or legal theories of a party’s attorney or other representative concerning the litigation.” Some courts, therefore, have required a more substantial showing of need and hardship to overcome the work-product doctrine protection for this type of work product. Other courts may not require disclosure regardless of the showing of need.
Opinion and ordinary work product can be found in tangible or intangible form. Rule 26(b)(3) states that work-product protection applies to “documents and tangible things,” but courts recognize that the work-product doctrine also protects intangibles, such as “the memory of the attorney (or agents of the attorney or the client) as to oral statements by eyewitnesses that were not transcribed or recorded and the attorney’s ‘mental impressions’ and thoughts about the case and the underlying legal principles and issues.”
Sharing work product with third parties does not generally waive the doctrine’s protection because the doctrine does not, unlike the attorney-client privilege, demand confidentiality. The attorney-client privilege demands confidentiality because the privilege exists to encourage communications between attorney and client that would not occur absent confidentiality. If a party discloses a communication, otherwise privileged, to an outsider to the attorney-client relationship, then that party has indicated that confidentiality is not a motivator for that communication and so no privilege is necessary. Likewise, the attorney-client privilege does not apply in the first instance if an outsider to the attorney-client relationship is present when the communication occurs.
The rationale of the work-product doctrine is quite different; thus the standard for waiver is quite different as well. As the Court of Appeals for the First Circuit stated in United States v. Massachusetts Institute of Technology, “The attorney client privilege is designed to protect confidentiality, so that any disclosure outside the magic circle is inconsistent with the privilege; by contrast, work-product protection is provided against ‘adversaries,’ so only disclosing material in a way inconsistent with keeping it from an adversary waives work-product protection.”
Disclosure can waive work-product protection if the client or lawyer or a representative of either discloses the materials voluntarily to the adversary or discloses the materials in a way that “substantially increase[s] the opportunities for potential adversaries to obtain the information.” TheRestatement states that waiver occurs if the lawyer or client or a representative of either “discloses the material to third persons in circumstances in which there is a significant likelihood that an adversary or potential adversary in anticipated litigation will obtain it.”
In determining whether a disclosure constitutes a waiver, courts have taken a variety of paths. A common approach is for a court to ask whether the party disclosed the materials under circumstances “inconsistent with the maintenance of secrecy from the disclosing party’s adversary.” If the disclosure is “inconsistent with the maintenance of secrecy,” the disclosure waives work-product protection.
In United States v. Deloitte LLP, the court explained that this “‘maintenance of secrecy’ standard” requires that materials not be disclosed to any adversary or potential adversary or a conduit to an adversary. If “the disclosing party had a reasonable basis for believing that the recipient would keep the disclosed material confidential,” the Deloitte court stated that the recipient was not a conduit to an adversary.
The Deloitte court explained that such a reasonable expectation of confidentiality can be present in two situations. First, a reasonable expectation of confidentiality can be present when the disclosing party and receiving party share “common litigation interests.” The logical presumption is that parties who share “common litigation interests” are not likely to make disclosures to adversaries.
The Deloitte court continued that the second way a disclosing party might have a reasonable expectation of confidentiality is if the disclosing party and the receiving party have a relatively unqualified confidentiality agreement or a similar arrangement. While the situation before the Deloitte court did not present a confidentiality agreement, the court found that a reasonable expectation of confidentiality existed because the audited entity disclosed materials protected by the work-product doctrine to independent auditors who were ethically obligated under the Code of Professional Conduct of the American Institute of Certified Public Accountants “to refrain from disclosing client information.”
The court in Schanfield v. Sojitz Corp. undertook a similar analysis. InSchanfield, a party disclosed material protected by the work-product doctrine to employees of the adversary. The adversary had also employed the disclosing party. The court noted that “[i]t is simply common sense . . . that such material will reach others within the corporation.” The court found no common interest, defining common interest as a “demonstrated cooperation in formulating a common legal strategy.” In addition, the court observed that the party disclosed the materials to employees who were not bound by confidentiality agreements. While the disclosing party may have thought the employees would not disclose to the employer, the adversary, the court concluded that the disclosing party had not provided proof that he reasonably expected the materials to remain confidential.
The disclosing party in Schanfield also shared materials protected by the work-product doctrine with three family members. The court found no waiver from these disclosures, stating that the disclosures “did not significantly increase the likelihood that [the employer adversary] would obtain private information by sharing.” With regard to the relatives, the court found neither a common interest nor an actual confidentiality agreement. The court did not apply a formalistic analysis but rather looked to the ultimate question of whether the likelihood that the adversary would access the materials had been “significantly increase[d].” Evidently, the court concluded that the disclosure to relatives had not substantially increased the likelihood that the adversary would access the information. Disclosure to a relative was the equivalent to disclosing to someone who was bound by a confidentiality agreement.
Some courts, in determining whether a party’s disclosure has waived the work-product doctrine, go no further than the common interest analysis. This is perfectly logical; these courts have no need to go further in the analysis because once a court finds a common interest, the court concludes that there has been no waiver. As the Deloitte and Schanfield courts have recognized, however, lack of a common interest does not make the recipient of materials an adversary or one likely to pass materials to an adversary.
A problematic aspect of any focus on a common interest is that there is no useful definition of that term for purposes of the work-product doctrine. Just as the Schanfield court did, other courts dealing with the question of waiver of the work-product doctrine have looked to the definition of common interest as the concept has developed in attorney-client privilege jurisprudence. Unfortunately, courts have struggled with defining and applying the concept in determining waiver in the attorney-client privilege context, so its usefulness in the work-product context is questionable.
In the attorney-client privilege context, the courts are not in agreement about many aspects of the doctrine but especially do not agree as to what, exactly, constitutes a common interest. For example, some courts require “an identical legal interest with respect to the subject matter of a communication.” One court requires “a common legal interest, not merely a common commercial interest” and further defines that interest to be present “where ‘the parties have been, or may potentially become, co-parties to a litigation . . . or have formed a coordinated legal strategy.’” Another court requires only a common interest about a legal matter. As the court in Miller v. Holzman noted, “[I]t is impossible to conclude that the common law, as interpreted in this and other jurisdictions, provides a clear explanation of what a common interest is.”
The common-interest concept in work-product jurisprudence should simply be a shortcut to determining whether the disclosure “substantially increased the opportunities for potential adversaries to obtain the information,”or was “not inconsistent with maintaining secrecy against opponents,”or whether “the disclosing party had a reasonable basis for believing that the recipient” of the materials “would keep the disclosed material confidential.” Narrow definitions of common interest, developed by courts determining whether the attorney-client privilege applies to communications between parties and their separate attorneys, are of questionable usefulness.
IV. The Scant Case Law Regarding the Work-Product Doctrine and Alternative Litigation Finance
To date, only one reported court decision has addressed the application of the work-product doctrine to an ALF scenario. In Mondis Technology, Ltd. v. LG Electronics, Inc., after a group of potential investors agreed to keep any disclosed information confidential, a company provided the investors with slide presentations and other documents that disclosed litigation strategies and estimates of litigation costs and recoveries. The company sought to interest investors in the endeavor of the company and fund the company’s efforts to “license and litigate its various patent programs.” In later litigation involving a subsidiary of the company, the litigation adversary sought access to all information shared with the investors. The subsidiary claimed work-product protection and attorney-client privilege.
In finding that the work-product doctrine protected the shared materials, the district court stated: “[T]he documents were at a minimum created for possible future litigation. . . . All of the documents were prepared . . . with the intention of coordinating potential investors to aid in future possible litigation.” The Mondis court concluded that the materials were created “in anticipation of litigation” even though the court applied the more stringent minority test that “the primary motivating purpose” for the creation must be “‘to aid in possible future litigation.’” In finding that the disclosure of the documents did not waive that work-product protection, the court stated that the documents “were disclosed subject to nondisclosure agreements and thus did not substantially increase the likelihood that an adversary would come into possession of the materials.” Other courts facing the same question in a similar ALF context should reach similar results.
The issue of the application of the work-product doctrine to an ALF setting was also present in Bray & Gillespie Management LLC v. Lexington Insurance Co. In that case, Bray & Gillespie (“B&G”) shared materials with Juridica, an ALF entity, in an attempt to interest Juridica in investing in a litigation matter. Juridica entered into a confidentiality agreement with B&G but ultimately passed on the investment opportunity. The opposing party in the litigation sought disclosure of the materials shared with Juridica. The court overruled any instructions or objections based on the work-product doctrine because the party seeking the protection of the doctrine did not follow the court’s proper procedure for asserting protection by the doctrine. The opinion’s lack of substantive analysis means that the opinion is of little help in applying the work-product doctrine to the litigation finance context, though the facts of the case provide a real-life example of how the questions of work-product protection and waiver can arise with the involvement of ALF entities.
V. Lessons from Independent Auditor Cases
A. Why the Independent Auditor Cases Are Helpful
While case law dealing with the work-product doctrine in the ALF context is meager, a substantial body of case law dealing with the work-product doctrine in the independent auditor setting exists. The independent auditor cases provide an excellent basis for determining the proper application of the work-product doctrine to the ALF situation because similar issues arise with regard to application of the doctrine in each context. In both settings, the attorney and client team may be asked to create materials that evaluate a litigation matter. In addition, in both contexts the attorney and client team may be asked to share evaluative or other materials created for other reasons relating to a litigation matter. Such materials might be prepared by the party, by the party’s lawyer or other agent, or by the third party in the form of the auditor or the ALF entity. Additionally, in both contexts, one must determine whether the work-product doctrine protects such materials as an initial matter. In both contexts, one must determine whether sharing materials protected by the doctrine with the third-party auditor or ALF entity waives the protection. The courts’ treatment of these issues when the third party is an independent auditor is, therefore, extremely instructive of the treatment courts might give the same issues when the third party is an ALF entity.
B. What Is an Independent Auditor?
The law applicable to publicly traded companies requires that financial information relating to litigation and other actual or potential liabilities be reviewed by auditors who are completely independent of the audited companies. This information must then be reported to the Securities and Exchange Commission (“SEC”). A rule of the entity overseeing the audit process states that the auditing “public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit and professional engagement period.” In addition, the American Institute of Certified Public Accountants (“AICPA”) emphasizes the requirement of independence by stating that “a member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.”
In performing an audit in accord with all relevant standards and principles, an independent auditor must have access to information relating to current and potential liabilities that could have an impact on the company’s financial situation. For example, in the tax realm, Generally Accepted Accounting Principles mandate that a company record adequately account for liabilities in situations in which the company is espousing an uncertain tax position. The company must note questionable positions, set a liability prediction, and then record a tax reserve on the company’s financial statements based upon the liability prediction. The calculations, assumptions, and conclusions regarding the tax positions are usually contained in tax accrual workpapers and related documents. Such documents may be prepared by accountants and, perhaps, by attorneys in the company or external to the company and are shared with the auditor. Some materials may be prepared to further elucidate the tax positions in the course of the audit. These materials may be prepared by the company, its representatives, or the auditor.
Another type of information auditors must review relates to accounting for potential adversities in litigation of all sorts. Accounting standards require certain disclosures and statements of potential losses regarding pending or potential litigation. The auditor must review any evidence about the uncertainty of the occurrence of potential litigation-related loss or its amount. Auditors obtain this information from the company but also rely on attorneys representing the company to provide the appropriate factual and evaluative information about pending litigation along with as-yet unasserted, but probable, claims. In particular, the auditor asks attorneys representing the company to describe and evaluate pending or threatened litigation, the progress of the case to date, the likelihood of an unfavorable outcome, and to estimate, if possible, the amount or range of the potential loss.
This regulatory framework results in the independent auditor being in a similar situation to that of an ALF entity. An independent auditor is the recipient of evaluative and other materials that the work-product doctrine otherwise protects as well as, perhaps, materials specifically created in the audit. An ALF can be the recipient of evaluative and other materials that the work-product doctrine otherwise protects as well as, perhaps, materials specifically created in the ALF setting.
VI. Does the Work-Product Doctrine Protect Materials That Evaluate Litigation?
A. Materials Created by the Party or an Agent of the Party
In either the initial investment investigation stage or in the later monitoring stage, the ALF entity may require the attorney and client team to create materials that critically evaluate the matter and assess the risk. In addition, the funder may ask the party and attorney team to supply it with materials, created in another context, that evaluate the matter.
In the audit context, most courts in recent years have determined that the work-product doctrine protects materials that critically evaluate litigation whether or not the materials were prepared specifically for the audit process or, rather, were prepared in other pursuit of the litigation. A few courts have disagreed.
1. Evaluative Materials Prepared in the Audit Process or in Other Contexts Are or May Be Protected
The work-product doctrine and particularly Federal Rule of Civil Procedure 26(b)(3) protect materials prepared “in the anticipation of litigation.” Many courts addressing the issue have determined that evaluative materials prepared in the audit setting or other contexts are prepared, at least in part, because of the threat or reality of litigation and thus are protected by the work-product doctrine. Many courts have determined that the doctrine protects the materials even though they may have a business purpose in being a part of the SEC disclosure process.
For example, in United States v. Adlman, the Court of Appeals for the Second Circuit established that the work-product doctrine might apply to a study prepared for an attorney assessing the likely result of litigation. The attorney had the study done so a decision could be reached as to whether the company should complete the transaction that would cause the litigation; the study was not created as part of the audit process. The court determined that the work-product doctrine protected the study if it “was created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation.” The court remanded for application of this test.
Similarly, in Lawrence E. Jaffe Pension Plan v. Household International, Inc., the court determined that the doctrine protected letters summarizing threatened and pending litigation created in the audit process even though the letters were part of the company’s compliance with SEC regulations. The court reasoned that if there was no litigation and no threat of it, there would have been no need for the letters discussing such. Thus, the letters were prepared “‘because of’ pending or threatened litigation.”
In Tronitech, Inc. v. NCR Corp., the court held that the work-product doctrine protected an audit-response letter, prepared by counsel, which evaluated a litigation matter. The court stated:
An audit letter is not prepared in the ordinary course of business but rather arises only in the event of litigation. It is prepared because of the litigation, and it is comprised of the sum total of the attorney’s conclusions and legal theories concerning that litigation. Consequently, it should be protected by the work-product privilege.
In Vacco v. Harrah’s Operating Co., the materials in question were reports prepared by the company at the request of the auditors that discussed pending litigation. The court determined that the work-product doctrine protected the materials. Likewise, in Merrill Lynch & Co. v. Allegheny Energy, Inc., the company created two reports evaluating litigation in an internal investigation and shared the reports with the company’s independent auditor. The court found that the documents were, without doubt, protected by the work-product doctrine.
In Frank Betz Associates, Inc. v. Jim Walter Homes, Inc., the court found that the doctrine protected materials containing litigation reserve amounts. The court quoted language from other cases stating that the reserve amount reflected an attorney’s professional opinion and noted testimony to the effect that the reserve was created in the anticipation of litigation.
Even when applying the minority “primary motivating purpose” test, as opposed to the more lenient “because of” test, courts find evaluative materials protected by the work-product doctrine. The court in Southern Scrap Material Co. v. Fleming determined that the doctrine protected audit response letters prepared by an attorney and provided to an independent auditor. The documents were prepared because of litigation and not in the ordinary course of business and reflected the attorney’s “mental impressions, opinions, and litigation strategy.” InIn re Pfizer Inc. Securities Litigation, the court applied the “primary motivating purpose” test and concluded “that the primary motivating purpose behind the communications concerning individual case reserves was preparation for litigation.”
The district court in In re Raytheon Securities Litigation did not go so far as to state that the work-product doctrine protects all materials prepared by counsel for use in the audit and shared with the independent auditor. The court carved out a set of materials that would not enjoy the protection of the doctrine. The court stated that the work-product doctrine does not protect information in audit-opinion letters and other documents prepared by counsel if the information “must be disclosed in the public financial statements of the company being audited.” In the Raytheonmatter, the court requested that the materials be produced for an in camera review so that the court could determine whether they were the kind of materials that would be, eventually, disclosed in public financial statements and thus not deserving of the protection of the doctrine.
2. Evaluative Materials Are Not Protected
Not all courts agree that the work-product doctrine protects materials that critically evaluate existing or potential litigation. All of these cases are suspect, however, because they do not apply, in the traditional manner, the majority “because of” test for determining when material is prepared “in the anticipation of litigation” and therefore is protected by the doctrine.
Perhaps the most significant denial of work-product protection is United States v. Textron Inc. In Textron, the Court of Appeals for the First Circuit, en banc, refused to find that the work-product doctrine applied to tax accrual work papers prepared by Textron’s employees and others and shared with auditors. These work papers dealt with the accounting of reserves for contingent tax liabilities. The Internal Revenue Service (“IRS”) sought these documents as well as documents prepared by Textron’s independent auditor relating to the same matters. All of the documents had the “immediate purpose . . . to establish and support the tax reserve figures for the audited financial statements.” The court determined that the work-product doctrine did not protect these materials because they were not documents that were prepared “in the anticipation of litigation.” For the doctrine to protect the materials, the court required that the materials be prepared for use in litigation, not simply “in the anticipation of litigation” as determined by the “because of” test. Noting that the doctrine does not protect materials prepared “in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes,” the court surmised that “[a] set of tax reserve figures, calculated for purposes of accurately stating a company’s financial figures, has in ordinary parlance only that purpose: to support a financial statement and the independent audit of it.” Thus, the court denied that the work-product doctrine protected the materials.
Other cases in which courts have denied application of the work-product doctrine hail from the 1980s, and the courts clearly did not apply the “because of” test. For example, in Independent Petrochemical Corp. v. Aetna Casualty & Surety Co., the question before the court was whether the work-product doctrine applied to letters from the attorney for the company to the company’s independent auditor. The court held that the letters were not in anticipation of litigation but rather were “prepared to assist [the accountants] in the performance of regular accounting work done by such accounting firms.” The court continued by noting that “[t]he motivating purpose behind the creation of the document is thus of critical importance.” These letters were for “accounting-business purposes and not for litigation purposes.” The court’s analysis makes clear that the court is willing to apply the work-product doctrine only if litigation is the primary motivating purpose.
Likewise, in In re Diasonics Securities Litigation, the court evaluated the application of the work-product doctrine to materials, some of which assessed litigation as part of an independent audit. The court refused protection because “the documents were generated for the business purpose of creating financial statements which would satisfy the requirements of the federal securities laws and not to assist in litigation.”
In United States v. Gulf Oil Corp., the court applied the “primary motivating purpose” test and determined that the work-product doctrine did not protect materials discussing and evaluating litigation prepared by or for the auditors. The court took the view that the materials were not created to assist in litigation; rather they were created so the auditor could “prepare financial reports which would satisfy the requirements of the federal securities laws.” The court stated, “[W]e hold that these documents do not constitute attorney work product because they were created primarily for the business purpose of compiling financial statements which would satisfy the requirements of the federal securities laws.”
Similarly, in United States v. El Paso Co., the Court of Appeals for the Fifth Circuit refused to apply the work-product doctrine to tax accrual work papers. Adopting the “primary motivating purpose” test, the court concluded that the “primary motivating purpose” of the tax pool analysis is to “anticipate, for financial reporting purposes, what the impact of litigation might be on the company’s tax liability.” In the court’s view, El Paso created the tax pool analysis “with an eye on its business needs, not on its legal ones.” Thus, the court concluded, “the tax pool analysis does not contemplate litigation in the sense required to bring it within the work-product doctrine.”
B. Materials Created by the Litigation Finance Entity
An ALF entity might create materials itself that speak to the litigation and its benefits and burdens. A funder might do this as part of a study of a potential investment or in monitoring an existing investment. Because these materials likely reflect information from the attorney and client team and may include an attorney’s thoughts and impressions about litigation theory and strategy, these materials might be a fertile source of information for an adversary if such materials enjoy no work-product protection.
The work-product doctrine appears not to protect materials prepared by the ALF entity unless the entity is a representative of the party. Crafting an argument that the ALF entity is a representative of the party would be a difficult task indeed. Thus, materials prepared by a litigation funder would appear to have no work-product protection.
The doctrine, however, protects a lawyer’s mental impressions. It seems illogical that work-product protection would be withheld from this type of information, the very type of information the doctrine is designed to protect, simply because the creator of the tangible material containing the information is not a representative of the party.
A few courts have addressed the question of whether the work-product doctrine applies to documents created by an independent auditor. InUnited States v. Deloitte LLP, Deloitte, the independent auditor of Dow Chemical Company, prepared a document summarizing a meeting in which the possibility of litigation and the accounting reserve requirements for such litigation were discussed. The government claimed that the memorandum created by the auditor could not enjoy work-product protection because the auditor created it and the auditor was not a representative of the company. The government also claimed that the memorandum could not enjoy work-product protection because the auditor created it as part of the audit process, and thus the auditor did not create it “in the anticipation of litigation.”
The court acknowledged that, if the auditor was not a representative of the company, the protection of Rule 26(b)(3) did not apply. Yet, the court did not see the auditor’s possible lack of representative status as determinative of the applicability of the work-product doctrine. The court reasoned that, because the work-product doctrine also protects an attorney’s mental impressions, if the auditor’s memo contained the “thoughts and opinions of counsel developed in anticipation of litigation,” the memo could be protected work product.
In response to the argument that the auditor prepared the memo in the course of the audit and not “in the anticipation of litigation,” the court treated the document as it would all other materials prepared by a party or a party’s counsel. The court applied the majority “because of” test and noted that “the question is whether [the document] records information prepared by Dow or its representatives because of the prospect of litigation.” The court focused not solely on the function of the document, which might be to facilitate an audit, but also on the content of the document. A document might be used for ordinary business purposes and yet also be protected by the work-product doctrine. The court remanded for a determination of whether the document might contain material not protected along with the protected information.
The Supreme Court, in United States v. Arthur Young & Co., also evaluated auditor-created materials. The IRS sought access to a company’s tax accrual work papers dealing with contingent tax liabilities prepared by the company’s independent auditor. The Court held that no independent work-product protection existed for independent auditors and grounded this position in the public role of auditors:
By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to investing public. This ‘public watchdog’ function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. To insulate from disclosure a certified public accountant’s interpretations of the client’s financial statements would be to ignore the significance of the accountant’s role as a disinterested analyst charged with public obligations.
While the Court in this opinion made clear that no auditor work-product privilege exists, it did not address the issue of whether a document prepared by an auditor that contains an attorney’s thoughts and opinions about potential litigation may enjoy general work-product protection.
C. Implications for Alternative Litigation Finance
Analysis of this body of case law relating to auditors suggests that courts are likely to conclude that the work-product doctrine protects evaluative materials. This is true even if those materials are created in the ALF setting and even if the funder creates the materials.
The only court opinion addressing the question of whether the work-product doctrine protects materials created in the ALF context has concluded that the doctrine protects such materials. In Mondis Technology, Ltd. v. LG Electronics, Inc., the district court concluded that the work-product doctrine applied, as an initial matter, to materials created for and shared with potential investors who would potentially fund litigation because “those documents were at a minimum created for possible future litigation.”
Most courts facing the issue of whether the work-product doctrine protects the materials will apply the majority “because of” test to determine whether the materials were created “in the anticipation of litigation” and are therefore worthy of protection. Those courts likely will follow the lead of Mondis and the many independent auditor cases of recent years(cases decided in a very similar context) and find that the doctrine protects materials created by the attorney and client team that evaluate existing or future litigation. The “because of” test does not require that litigation be the only motivating reason for the materials’ creation; it must be a cause—not the only cause and not the most important cause. Courts applying the “because of” test will likely conclude that the materials “can fairly be said to have been prepared or obtained because of the prospect of litigation.” Without doubt, these materials were “created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation.”
In the audit setting, courts have found that materials were created “in the anticipation of litigation” even though they were also created to comply with audit procedures mandated by the SEC. Likewise, courts will likely find materials created in the ALF setting to be created “in the anticipation of litigation” even though they were also created to obtain funding or to continue to cooperate with the ALF entity who has already invested in the matter. Indeed, the preparation of the materials in the ALF setting has an even tighter nexus to the litigation than is true in the audit setting. In the audit setting, the audit and all the materials required for it occur because an SEC regulatory framework requires it. In the ALF setting, the materials are created so that the litigation can progress. The causal connection exists and is close.
While courts like the court in In re Raytheon Securities Litigation may be concerned that work-product protection not extend to information that must be disclosed as part of a company’s public securities disclosure obligation, such courts will not have a similar concern in the ALF context. Any disclosure made by the attorney and client team in an ALF setting is not a part of any regulatory scheme such as the securities laws. An ALF entity or an attorney and client team has no disclosure obligation akin to that imposed on entities by securities laws.
Some courts, such as those in the Independent Petrochemical, Gulf Oil, andEl Paso cases, have not applied the doctrine in the analogous situation of independent auditors. Courts dealing with the question of application of the work-product doctrine in the ALF setting are not likely to find these opinions precedential because, in these cases, the courts did not use the majority “because of” test for whether the materials were created “in the anticipation of litigation.” In contrast, these courts required litigation to be the “primary motivating purpose” for the creation of the materials. As theMondis case illustrates, however, even a court applying the “primary motivating purpose” test can find that materials created in the ALF context are materials created primarily because of litigation since those documents would not be created absent litigation.
Similarly, courts evaluating the application of the work-product doctrine to the ALF setting will not likely follow the approach of the court in In reDiasonics Securities Litigation. That court appeared to use a test that does not allow the work-product doctrine to apply if a motivation for the creation of the material was an ordinary course of business motivation. Even if a court were inclined to follow the approach of Diasonics, such a court might well determine that materials created in an ALF setting were not created in the ordinary course of business since the funding motive is integrally tied to the underlying litigation or threat of it.
The court in Textron also applied a test that has not been a part of the mainstream of work-product doctrine, a test requiring that the materials be “prepared for use in possible litigation.” Thus, it is unlikely courts for which Textron is not precedential will follow it. Even for courts that follow it, a claim of work-product protection for materials created in an ALF setting would be more doubtful but would not necessarily fail. The Textron court stated that the doctrine should not apply to materials prepared “in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for nonlitigation purposes.” For materials specifically prepared for the ALF entity, there is an argument that the materials are prepared for nonlitigation purposes because the materials are for funding, not instrumental pursuit of the claim or defense, and certainly not “for use” in litigation. Of course, there is a strong argument that the materials, though on a micro level, for funding, are, in a macro sense, in pursuit of the claim or defense that requires the financing.
The fact that materials might be created by ALF entities may not be a bar to work-product protection. These materials can reflect the mental impressions, thoughts, and opinions of the lawyer for the party whose litigation matter the funder is evaluating. While an ALF entity has its own powers of evaluation, the funder must base its evaluation upon materials conveyed by the lawyer and client team. As the Deloitte opinion suggests, work-product protection may be available for portions of the materials relating to the lawyer’s impressions. The Arthur Young opinion does not contradict this application of the doctrine.
VII. Does Disclosure to Alternative Litigation Finance Entities Waive Work-Product Doctrine Protection?
In both the audit setting and in the ALF setting, the lawyer and client team shares materials with a third party to the litigation, the auditor or the ALF entity. If a court determines that the work-product doctrine applies to materials in the first instance, the next issue that must be addressed is whether sharing the materials with the auditor or the ALF entity waives the work-product protection already enjoyed by the materials. The courts’ analysis of the waiver question in independent auditor cases focuses on the policy behind the doctrine: protecting the adversary process and system. Consistent with this policy, courts generally find no waiver if disclosure does not increase the likelihood that the materials will find their way to an adversary. Similar analysis and similar results should occur in the ALF setting.
A. Disclosure to an Auditor Does Not Waive Protection
Most courts that have dealt with the issue have found that independent auditors are not adversaries of the companies the auditors audit in the work-product doctrine sense of that term. The courts also have held that disclosure to auditors does not otherwise increase the likelihood that adversaries will have access to the materials disclosed. The courts recognize that the auditors are, in fact, independent. The courts additionally note that the job of the auditor is to critically analyze the financial information regarding the company and to insure that an accurate picture of the financial state of the company is reported to the public. The courts further recognize that the auditor has a professional obligation to the company to keep information disclosed to the auditor confidential. The courts thus recognize that the auditor and the company may not have universally unified interests, but that fact does not mean that disclosure to auditors increases the likelihood of adversary access. Thus, waiver does not result from disclosure to auditors.
An example of recent treatment of the waiver issue in the audit context isUnited States v. Deloitte LLP, in which the Dow Chemical Company disclosed materials to its independent auditor that related to a tax dispute with the government. Dow disclosed these materials, materials protected by the work-product doctrine, to the auditor so the auditor could “review the adequacy of Dow’s contingency reserves for” certain transactions.
In addressing the waiver issue, the Deloitte court stated that waiver occurs if the disclosure is “inconsistent with the maintenance of secrecy from the disclosing party’s adversary.” According to the court, waiver can occur through disclosure to an adversary or to a “conduit to an adversary.” The Deloitte court concluded that the auditor was not the adversary or potential adversary of the company because Deloitte could not “be Dow’s adversary in the sort of litigation the Dow Documents address.”
In addition, the court concluded that the auditor was not a “conduit to Dow’s adversaries.” The Deloitte court looked to “whether the disclosing party had a reasonable basis for believing that the recipient would keep the disclosed material confidential.” Such a belief, said the Deloitte court, can be present if the discloser and the recipient share “common litigation interests.” The court added that such a belief can also originate in “a confidentiality agreement or similar arrangement.” The court was of the opinion that disclosure of work-product protected materials to the auditor was consistent with the “maintenance of secrecy” because Dow had a reasonable basis for believing that the auditor would keep the disclosed material confidential. This reasonable basis was grounded in the fact that the auditor had an ethical and professional obligation to keep material revealed in an audit confidential.
Many other courts have agreed that a disclosure to an independent auditor is not a waiver. For example, in Merrill Lynch & Co. v. Allegheny Energy, Inc., the court determined that two reports created by the company as part of an internal investigation were protected by the work-product doctrine absent disclosure and remained protected even though the reports were shared with the company’s auditor. The court recognized that waiver does not occur “unless disclosure is inconsistent with maintaining secrecy from possible adversaries.” Such a disclosure would occur “only if the disclosure ‘substantially increases the opportunity for potential adversaries to obtain the information.’” Recognizing that auditors must maintain independence from the entity being audited, the court acknowledged that some might consider this independence as adversarial. The court refused to so conclude, stating:[A]ny tension between an auditor and a corporation that arises from an auditor’s need to scrutinize and investigate a corporation’s records and book-keeping practices simply is not the equivalent of an adversarial relationship contemplated by the work product doctrine. A business and its auditor can and should be aligned insofar as they both seek to prevent, detect, and root out corporate fraud. Indeed, this is precisely the type of limited alliance that courts should encourage.
The Merrill Lynch court noted that the auditor had “an ethical and professional obligation to maintain materials received from its client confidential, unless disclosure was required by law or accounting standards.” The court concluded that there could be no required disclosure other than a general statement by the auditor that a proper audit was impossible because of “internal control deficiencies.” Thus, the auditor was neither an adversary nor a conduit to an adversary, and disclosure to the auditor did not waive the work-product protection.
In Lawrence E. Jaffe Pension Plan v. Household International, Inc.,the district court acknowledged that waiver can occur with disclosure to third parties “in a manner which substantially increases the opportunity for potential adversaries to obtain the information,” but the court refused to find that disclosure to an auditor was such a disclosure. The Jaffe court stated that “the fact that an independent auditor must remain independent from the company it audits does not establish that the auditor also has an adversarial relationship with the client as contemplated by the work product doctrine.” In the court’s view, “[d]isclosing documents to an auditor does not substantially increase the opportunity for potential adversaries to obtain the information.”
Likewise, in Regions Financial Corp. v. United States, the court decided that the auditor was neither a potential adversary nor a conduit to an adversary for purposes of waiver, and it based this conclusion on the fact that the auditor was bound by a confidentiality agreement. The court noted, “[P]erhaps most importantly, a confidentiality agreement protected any documents [the company] gave to [the auditor], an agreement that assured that [the auditor] could not give the documents to another party.”
In Gutter v. E.I. DuPont de Nemours & Co., the court determined that disclosure of materials to an independent auditor does not waive the work-product protection because “there is an expectation that confidentiality of such information will be maintained by the recipient.” The court also stated: “Transmittal of documents to a company’s outside auditors does not waive the work product privilege because such a disclosure ‘cannot be said to have posed a substantial danger at the time that the document would be disclosed to plaintiffs.’”
In In re Pfizer Inc. Securities Litigation, the court refused to find a waiver of work-product protection for materials shared with an independent auditor. The court stated that waiver occurs “only if disclosure ‘substantially increases the opportunity for potential adversaries to obtain the information.’” In the situation at hand, the court noted that the company and the auditor “obviously shared common interests in the information.” The court concluded that the auditor was “not reasonably viewed as a conduit to a potential adversary.” Other courts have reached similar results in the audit context.
B. Disclosure to an Auditor May or May Not Waive Protection
The court in In re Raytheon Securities Litigation was more tentative. The court began its waiver analysis with the familiar touchstone that a disclosure not “inconsistent with maintaining secrecy against opponents” does not act as a waiver. Rather, a waiver occurs if a disclosure “substantially increase[s] the opportunities for potential adversaries to obtain the information.” The court then noted that no evidence suggested that materials disclosed to an auditor “are likely to be turned over to the company’s adversaries except to the extent that the securities laws and/or accounting standards mandate public disclosure.” Because the record lacked sufficient evidence to determine what an auditor might be expected to disclose, the court ordered further evidentiary proceedings to make these determinations. Thus, the court indicated that disclosure of materials to an auditor waives the protection of the doctrine if public disclosure is to follow but does not waive the protection of the doctrine if further disclosure is not required.
C. Disclosure to an Auditor Waives Protection
In contrast, a few courts have found that disclosure of materials to an auditor waives work-product protection. The most recent of these isMedinol, Ltd. v. Boston Scientific Corp. In Medinol, the company shared minutes of a special litigation committee meeting with the independent auditor. The court stated that sharing materials with entities that share an interest with the company does not waive the work-product protection. The Medinol court continued: “However, where the third party to whom the disclosure is made is not allied in interest with the disclosing party or does not have litigation objectives in common, the protection of the doctrine will be waived.” Because, in the court’s view, by definition, independent auditors “must not share common interests with the company they audit,” disclosure to auditors waives work-product protection. The court stated that “the sharing by Boston Scientific’s lawyers of selected aspects of their work product, although perhaps not substantially increasing the risk that such work product would reach potential adversaries . . . did not serve any litigation interest . . . or any other policy underlying the work product doctrine.” The court thus created a novel requirement that all disclosures are waivers unless the disclosures “serve the privacy interests that the work product doctrine was intended to protect.” The Medinol court’s position is in stark contrast to the virtually universal position of other courts that disclosures are not waivers unless the disclosures harm the purpose of the doctrine by making access by an adversary more likely. Because the company and the auditor inMedinol “did not share ‘common interests’ in litigation,” and because, in the court’s view, disclosures to the auditor “did not therefore serve the privacy interests that the work product doctrine was intended to protect,” the court determined that disclosure to the auditor waived work-product protection. Since the Medinol decision, several courts have specifically considered it and have declined to find that disclosure to auditors waives the work-product doctrine.
An earlier case had reached a similar result as that in the Medinol case. In In re Diasonics Securities Litigation, the company disclosed materials to its auditor that had been prepared regarding an acquisition and that the court acknowledged may have been protected absent the disclosure. The court then found that disclosure of the documents to the auditor waived any possible work-product protection. The court stated that “[w]hile disclosure to one with a common interest under a guarantee of confidentiality does not necessarily waive the protection, . . . the relationship between public accountant and client is at odds with such a guarantee because the public accountant has responsibilities to creditors, stockholders, and the investing public which transcend the relationship with the client.”
D. Implications for Alternative Litigation Finance
In deciding whether disclosure of materials protected by the work-product doctrine to an ALF entity waives that protection, one must begin where courts evaluating disclosures in the independent auditor setting begin: with the question of whether the disclosure is “inconsistent with the maintenance of secrecy from the disclosing party’s adversary.” As many courts have explained, waiver occurs if a disclosure “substantially increase[s] the opportunities for potential adversaries to obtain the information.” The court in United States v. Deloitte LLP posed an analysis that asks whether the party to whom the protected materials are disclosed is an adversary or a conduit to an adversary. In answering this query, theDeloitte court focused the analysis on “whether the disclosing party had a reasonable basis for believing that the recipient would keep the disclosed material confidential.” A reasonable basis might exist with a shared common interest between the discloser and the recipient, or it might exist if the recipient had an obligation or other reason to keep the materials disclosed confidential.
Applying this analysis in the ALF setting should result in a finding that the ALF entity is not an adversary and is not a conduit to an adversary. Thus, a court should find no waiver of protection if the ALF entity is bound by a confidentiality agreement. Absent such an agreement, a finding of waiver is possible.
If the attorney and client team discloses work-product protected materials to assist the ALF entity in the decision whether to invest in the matter, the possibility of a finding of waiver is at its highest. At this point in the relationship, the ALF entity has no particular affinity for the litigation adversary, so there is no obvious motivation for the potential funder to share the information with the adversary. Yet, the ALF entity has very little affinity for the attorney and client team at this juncture either; it may walk away from the team without investing in the matter.
As courts do not view auditors as adversaries of the sharing company, likewise, courts are not likely to view ALF entities to be adversaries for purposes of the work-product doctrine. Yet, at the initial investment investigation stage of the entity’s involvement, a court may not find a legally sufficient common interest, just as courts sometimes do not recognize a sufficient common interest between auditors and the audited company. If the ALF entity decides to pass on the investment opportunity, there is no solid basis for a reasonable belief on behalf of the attorney and client team that the disclosed material will not find its way to an adversary. A court might find that disclosure to the ALF entity waives work-product protection absent some other basis for a reasonable belief in confidentiality on the part of the ALF entity.
A reasonable expectation of confidentiality can be created, however, as theDeloitte court noted, by “a confidentiality agreement or similar arrangement.” If the ALF entity enters into a binding and unqualified agreement not to disclose the materials shared with the entity, the attorney and client team likely has a reasonable expectation that the ALF entity will not disclose the materials. The entity is not an adversary and by contract has made clear it is not a conduit to an adversary. Thus, there is no waiver of the work-product doctrine. Because confidentiality is essential for work-product protection to exist, and because work-product protection is important for the ALF market to thrive, ALF entities should have no objection to binding themselves to a duty of confidentiality in the initial evaluation stage.
In the second scenario of disclosure, a lawyer and client team may disclose protected materials to an ALF entity as part of a status reporting obligation after the entity has decided to invest in the matter. In analyzing whether such a disclosure increases the likelihood that the materials will find their way to the hands of an adversary, it is not likely that a court would find the entity to be an adversary or a conduit to an adversary. Because the ALF entity maximizes investment value if the litigation matter ends in success for the attorney and client team, courts may find that the entity and the attorney and client team share a common interest such that no waiver of work-product privilege occurs with disclosure to the ALF entity. At the very least, the shared interest eliminates any conclusion that the funder is an adversary.
Courts may have concern, however, that the ALF entity might be a conduit to an adversary. While the entity’s and the discloser’s interests are more aligned than if the entity had not yet decided to invest, because the standards of commonality some courts apply are stringent, some courts might fall short of recognizing that the entity has a legally sufficient common interest with the attorney and client team such that the entity is not a conduit to an adversary. Framing the issue as the Deloitte court did, the attorney and client team may not have a “reasonable basis for believing that the recipient would keep the disclosed material confidential.”
Once again, an unconditional and binding agreement in which the ALF entity agrees to treat all disclosed materials confidentially can provide a reasonable basis for a belief that the entity will not further disseminate the material but will keep the material confidential. Thus, a court can conclude that a disclosure to an ALF entity as part of the entity’s monitoring role does not waive the work-product protection.
These conclusions are supported by the only published case in which a court has dealt substantively with the question of whether a disclosure to an ALF source waives work-product protection for the shared materials. The court in Mondis Technology, Ltd. v. LG Electronics, Inc. opined that sharing materials with potential investors who had entered into nondisclosure agreements “did not substantially increase the likelihood that an adversary would come into possession of the materials.” Thus, the court refused to find a waiver of the work-product doctrine.
In addition, courts have repeatedly concluded that auditors are not adversaries or conduits to adversaries, though the auditors’ interests and the interests of the company may not be identical. Repeatedly, courts have determined that disclosures to auditors do not increase the likelihood that the materials will come into the hands of adversaries. Several courts have placed weight on the fact that auditors have an obligation of confidentiality that exists as the result of a nondisclosure agreement or that exists in the professional code that regulates the conduct of auditors.
Even if a court were inclined to look to the Medinol opinion for guidance, as other courts have not done, the court may not find a waiver. In theMedinol court’s view, to avoid waiver, the disclosure must “serve any litigation interest, or any other policy underlying the work product doctrine.” Even with this analysis, a court might find that disclosure to an ALF entity furthers the litigation interest of success on the underlying claim such that the court might not find a waiver. Because the Medinol court indicated that even a disclosure that does not substantially increase the risk of disclosure to adversaries might constitute a waiver, the existence of a confidentiality agreement would be irrelevant except, perchance, as evidence of common interest.
As the ALF market develops, the question of the effect of the presence of ALF entities in litigation on the protection of the work-product doctrine looms as a significant issue. This Article concludes that the involvement of ALF entities should not affect work-product protection. Materials evaluating litigation and created in the context of ALF should enjoy (and courts will likely conclude that they enjoy) the protections of the work-product doctrine, even if an ALF entity creates those materials. Second, sharing protected materials with ALF entities should not waive that protection if ALF entities enter into binding nondisclosure agreements with regard to any shared materials.