Originally published with Bloomberg Law.
Imagine a large company with a breach of contract claim against a small supplier. The company’s outside counsel discusses the merits with the company’s general counsel and chief financial officer to evaluate whether the case is strong enough, and the damages large enough, for the company to spend $5 million in legal fees to pursue the claim.
Those conversations will almost certainly be protected by the attorney-client privilege.
Now flip the script and imagine it’s the small supplier with the breach of contract claim against the larger company. The supplier has five employees, no general counsel, no CFO, and no treasury with $5 million to fund legal fees. So the supplier and its counsel approach the equivalent of an external CFO—a litigation funder—to see whether the case is strong enough, and the damages large enough, for the company and funder to spend $5 million in legal fees to pursue the claim.
Are those conversations protected by the attorney-client privilege?
This article argues that the attorney-client privilege should protect a company’s conversations with external litigation funders about the pursuit of a legal claim no less than its conversations with internal executives performing the same functions. Two related articles argue the agency exception and common interest exception to the attorney-client privilege similarly ought to protect conversations with litigation funders.
Start with the basics: the attorney-client privilege generally protects communications between a lawyer and client for the purpose of obtaining or providing legal advice. Corporate executives thus may generally obtain legal advice about the prosecution or defense of a claim without concern that those conversations will be disclosed to an opposing party. The privilege usually protects both the client’s statements to lawyers about the facts of the case and the lawyer’s legal advice to their client. See, e.g., FTC v. Boehringer Ingelheim Pharms., Inc., 892 F.3d 1264, 1267 (D.C. Cir. 2018).
This does not mean that any conversation between a lawyer and executive is necessarily privileged. For example, if a CEO asks a lawyer for purely business advice on whether to pursue a merger or launch a new product, that conversation is not privileged simply because one party to the conversation happened to graduate from law school and pass a bar exam.
But when a communication has dual purposes—that is, it has both legal and business purposes—the conversations are protected by the attorney-client privilege, so long as the “primary” or “predominant” purpose of the communication is to give or receive legal advice.
Applying this test, courts generally extend the attorney-client privilege to conversations among lawyers and business executives about whether and how to pursue or resolve a case. For example, one leading decision by the D.C. Circuit Court of Appeals extended the attorney-client privilege to communications that “had a legal purpose: to help the company ensure compliance with the antitrust laws and negotiate a lawful settlement,” even though those conversations also had an analogous “business purpose: to help the company negotiate a settlement on favorable financial terms.” The court held the conversations protected because “providing legal advice was one of the significant purposes of the communications at issue.”
Many other decisions are to the same effect. The Ninth Circuit has explained that “[a] client is entitled to hire a lawyer, and have his secrets kept, for legal advice regarding the client’s business affairs.” United States v. Chen, 99 F.3d 1495, 1501-02 (9th Cir. 1996).
Other federal courts have similarly explained that “if an attorney gives a client legal advice on a business decision, that communication is protected by the privilege”—Staley v. Gilead Scis., Inc., 2021 (N.D. Cal. July 16, 2021)—and this is so even if the communications have “some business function in a non-privileged sense,” so long as “the dominant purpose of the communication is to facilitate the rendition of legal services to the client”—Eutectic Corp. v. Metco, Inc., 61 F.R.D. 35, 39 (E.D.N.Y. 1973).
In short, the attorney-client privilege will typically protect conversations between counsel and in-house corporate executives about whether and how to pursue and settle a case.
Meanwhile, if the company approached a law firm and asked the law firm to finance the case by taking the matter in exchange for a full contingency agreement, the conversations between the claimant and law firm would undoubtedly qualify for attorney-client privilege.
If these premises are true, then it is hard to see why the law should treat any differently conversations between counsel and external litigation funders about whether and how to pursue a case. Particularly for companies that do not have the capital to self-finance, and that cannot recruit a law firm to litigate their case for a contingent fee, litigation funders operate essentially as external CFOs, evaluating whether a case warrants a financial investment by both the funder and claimholder.
One potential response is that the external litigation funder is conversing with the client and its counsel to further the funder’s own financial interest, not that of the client. But that is the wrong perspective. What matters is that the client is having those discussions to evaluate the strength and strategy of its case—and the client, after all, will need to make its own investment of time and money into the litigation.
Another objection may rest on the formal distinction between conversations with internal employees and external consultants—but courts have already rejected this distinction, holding that conversations with external consultants should be protected no less than those with internal employees.
For example, the federal district court for the District of Columbia has held that the status of two individuals as “consultants” rather than “paid employees” is irrelevant to the attorney-client privilege analysis. In that case, the defendants argued that the presence of two unpaid consultants at strategy sessions with counsel waived the attorney-client privilege, but the district court disagreed.
The court emphasized that if the two consultants were “paid employees of the [entity], the defendants would have no argument to make,” and it concluded that “[t]here is nothing in the ‘reason and experience’ used in the interpretation of a common law privilege …that suggests that extending the privilege to a paid employee but not a consultant is reasonable.” Trustees of Elec. Workers Loc. No. 26 Pension Tr. Fund v. Tr. Fund Advisors, Inc., 266 F.R.D. 1, 7–8 (D.D.C. 2010).
This logic applies with at least as much force to litigation funders. Litigation funders perform functions similar to that of a CFO or an external consultant for claimholders that are not well-capitalized and cannot self-fund their litigations, and funders frequently become “integral members of the team assigned to deal with issues [that are] completely intertwined with [the company’s] litigation and legal strategies.” F.T.C. v. GlaxoSmithKline, 294 F.3d 141, 148 (D.C. Cir. 2002).
The attorney-client privilege should extend to conversations with funders, lest the scope of that privilege depend on whether a party happens to be a leanly staffed startup or a sprawling, well-capitalized incumbent.
The post The Attorney-Client Privilege and the Litigation Funder as “External CFO” first appeared on Validity Finance.