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LITIGATION FINANCING: A FOCUS ON THE LAWYER’S DUTY OF CONFIDENTIALITY

By Rachelle Cohen

Rachelle Cohen is a partner at Kehr, Schiff, Crane & Cohen LLP in Los Angeles, California and is a member of the LACBA Professional Responsibility and Ethics Committee and the California Lawyers Association Ethics Committee. The views expressed are her own.

The legal profession faces pressure to change, in part because technology and other disruptors are challenging the profession’s current framework.[i]  One disruptor is litigation financing, meaning for this article, third party financing of litigation, with the amount financed to be repaid out of the client’s recovery, if any.[ii]  Litigation financing is viewed by some as a way to level the playing field in litigation and to provide access to justice.[iii]  However, California’s current regulatory framework and lawyers’ ethical duties raise some stumbling blocks, including the lawyer’s obligation to exercise independent professional judgment on behalf of the client.[iv]  One concern is that lawyers whose clients use litigation financing must be mindful to comply with the duty of confidentiality and to advise clients about the potential impact to the attorney-client privilege and work product doctrine protection.

It is possible a litigation financing company might not seek information about the case and instead rely on publicly available information, the credit of the client, or the judgment and perceived quality of the lawyer handling the case.[v]  However, litigation financing companies often seek information about the case to evaluate whether to finance initially or increase the financing or to monitor its investment.[vi]  The financing company might seek information in the lawyer’s files, including communications between the lawyer and client or materials that the lawyer has prepared as part of the case, and it might ask the lawyer to prepare an assessment of the case.[vii] 

In California, a lawyer generally has a duty to preserve a client’s secrets.[viii]  This duty applies to all information a client shares with a lawyer or that a lawyer learns through representing the client.[ix]  Before sharing any information about the case with a litigation finance company, the lawyer must obtain the informed consent of the client.[x]  Although the client is likely to consent, the attorney must inform the client of the material risks of disclosing the information to the litigation financing company.  At least one material risk is that the disclosure to the litigation finance company will cause a waiver of the attorney-client privilege and the work product doctrine.[xi] 

Under the attorney-client privilege, the client, who is the holder of the privilege, has the right to refuse to disclose the client’s confidential communications with the lawyer and to prevent the lawyer from disclosing those communications.[xii]  In addition, a lawyer’s impressions of a case generally are not discoverable because of the work product doctrine.[xiii]  The disclosure to a third party of privileged communications or work product will waive these protections.[xiv]  However, privileged communications or work product may be shared without waiving those protections when reasonably necessary for the pursuit of the purposes of the representation for which the lawyer was hired.[xv]  This has been interpreted to permit disclosure to a third party who is an agent or assistant and will help to advance the client's interests.[xvi]  It also applies to the sharing of information where there is a “common interest”, or a shared interest in the litigation.[xvii] 

To avoid waiver, the litigation financing companies either must be shown to facilitate communications between lawyer and client or to have a “common interest” with the client.[xviii]  As to whether a client and litigation financing company have a “common interest”, for work product protection, the attorney would need to show that the disclosure was reasonably necessary for accomplishing the purpose for which the attorney was consulted and, for the attorney-client privilege, the client would need to show that the client and the litigation financing company had a common interest in securing legal advice related to the same matter.[xix]  These determinations would depend on the nature of the relationship between the client, lawyer, and litigation financing company, but for purposes of getting the client’s informed consent to disclosure under CRPC rule 1.6, the lawyer should advise that the waiver of the attorney-client privilege and work product doctrine is a material risk.   

Litigation financing is a relatively new and novel method to provide funding for litigation or to a client for personal costs.  Your client might be eager to move forward with litigation financing, but you should carefully consider how to comply with your ethical duties, including the duty of confidentiality.



[i] Legal Market Landscape Report dated July 2018 by Professor William D. Henderson, commissioned by the State Bar of California, page 1.  Avaiable at http://board.calbar.ca.gov/docs/agendaItem/Public/agendaitem1000022382.pdf (as of September 6, 2019). 

[ii] Id. at page 10.  For a fuller description of types of litigation financing arrangements, see American Bar Association Commission on Ethics 20/20 White Paper on Alternative Litigation Finance, February 2012.

[iii] See Grace M. Giesel, Alternative Litigation Finance and the Work-Product Doctrine, 47 Wake Forest L. Rev. 1083, 1084 (Winter 2012); N.Y. City Bar Ass’n. Formal Opn. 2018-5 (July 30, 2018).

[iv] For a sample of some of the types of ethical issues that might arise, see ABA Formal Opn. 484 (November 27, 2018), N.Y. City Bar Ass’n. Formal Opn. 2018-5 (Add Date), N.Y. City Bar Ass’n. Formal Opn. 2011-2 (June 1, 2011), Ky. Bar Ass’n Ethics Comm., Formal Op. E-432 (2011), N.Y. State Bar Ethics Opn. 769 (11/4/2003).   

[v] See Litigation Financing: A Real or Phantom Menace to Lawyer Professional Responsibility?, 27 Geo. J. Legal Ethics 191, 199 (Spring, 2014); American Bar Association Commission on Ethics 20/20 White Paper on Alternative Litigation Finance, February 2012, page 33.

[vi] See American Bar Association Commission on Ethics 20/20 White Paper on Alternative Litigation Finance, February 2012, page 32.

[vii] See Grace M. Giesel, Alternative Litigation Finance and the Work-Product Doctrine, 47 Wake Forest L. Rev. 1083, 1086 (Winter 2012).

[viii] California Rules of Professional Conduct (CRPC), rule 1.6(a); Cal. Bus. & Prof. Code § 6068(e).

[ix] See Comment [2] to CRPC rule 1.6 (“The principle of lawyer-client confidentiality applies to information a lawyer acquires by virtue of the representation, whatever its source, and encompasses matters communicated in confidence by the client, and therefore protected by the lawyer-client privilege, matters protected by the work product doctrine, and matters protected under ethical standards of confidentiality, all as established in law, rule and policy.” (citation omitted)).  The ethical standard of confidentiality applies to all information obtained as a result of the lawyer-client relationship, the disclosure of which likely would be harmful or embarrassing to the client or that the client has directed the lawyer to not disclose.  See Cal. State Bar Formal Ops. 2016-195 and 2004-165 and L. A. County Bar Assoc. Formal Ops. 456 (August 21, 1989) and 529 (August 23, 2017).

[x] See CRPC rule 1.0.1(e) for definition of “informed consent”. 

[xi] Another risk is that the litigation financing company will disclose the information; however, that risk could be mitigated by having the company agree to a contractual non-disclosure obligation. 

[xii] Cal. Evid. Code §954.

[xiii] Cal Code Civ Proc Sec. 2018.030.

[xiv] Cal. Evid. Code §912(a); Meza v. H. Muehlstein & Co., Inc., 176 Cal. App. 4th 969, 981 (2009) (waiver of work product doctrine).

[xv] California Evidence Code Section 912(d); Roush v. Seagate Technology, LLC, 150 Cal. App. 4th 210 (2007) (where court applied same waiver principles to attorney work product as to the attorney-client privilege).

[xvi] See Citizens for Ceres v. Superior Court, 217 Cal. App. 4th 889, 915 (2013).

[xvii] OXY Resources California LLC v. Superior Court, 115 Cal. App. 4th 874, 891 (2004).

[xviii] See Behunin v. Superior Court, 9 Cal. App. 5th 833 (2017) (disclosure to public relations firm waived the attorney-client privilege); Anderson v. Seaworld Parks & Entm’t, Inc., 329 F.R.D. 628 (2019 ND Cal) (applying California law and finding that disclosure to public relations firm waives the attorney-client privilege).

[xix] Meza v. H. Muehlstein & Co., Inc., 176 Cal. App. 4th 969, 981 (2009).