Bolsters Strong Trend Against Disclosure; Best Practices for Preserving Confidentiality
Bolsters Strong Trend Against Disclosure; Best Practices for Preserving Confidentiality
Bolsters Strong Trend Against Disclosure; Best Practices for Preserving Confidentiality of Communications with a Funder
A recent decision out of the District of Massachusetts adds one more court to the list denying discovery into litigation funding documents. The case, Neural Magic v. Facebook, involves claims for trade secret misappropriation brought by a start-up, Neural Magic, against social-media giant Facebook (now Meta). Facebook sought discovery of documents regarding Neural Magic’s “litigation funding arrangements.” The court denied Facebook’s request in its entirety.1
As a threshold matter, the court determined that the requested documents were largely “irrelevant,” including as to the identity of the funder and other potential funders and when the funding commenced. The court noted the “plethora of authority” provided by Neural Magic that funding documents are irrelevant and thus not discoverable pursuant to Rule of Civil Procedure 26(b)(1).
Next, to the extent some of the requested documents may have been relevant to Neural Magic’s damages, the court still denied discovery. The court concluded that the relevance of this subset of documents was “not proportional to the needs of the case” for purposes of Rule 26(b)(1). This ruling stemmed, at least in part, from the “substantial amount of related discovery produced to date” in the case on the subject of damages. Given the documents already available to Facebook regarding Neural Magic’s damages, there simply was no need for discovery of funding-related documents related to that issue.
Finally, the court noted that privilege issues may also preclude production of funding-related documents, but the court declined to reach this issue because it had already denied discovery on the basis of relevance and proportionality.
The Neural Magic court’s decision adds to a large and growing body of case law denying discovery into litigation funding documents. Most all courts deny requests for funding-related materials as (i) irrelevant to any parties’ claims or defenses in the lawsuit, and (ii) as protected Work Product.
A recent White Paper published by Westfleet Advisors surveyed relevant case law nationwide and confirmed the clear trend that confidential information shared with funders is not subject to disclosure, provided certain conditions are met.[ii] Courts look to the existence of a signed NDA, the type of information requested, and the funder’s role in the litigation. Key findings include:
The strong trend against disclosure of confidential information is encouraging and well reasoned. Responsible funders are passive financial partners and do not control the litigation. The terms on which a party finances its operations – including legal costs – has no relevance to the issues in the overwhelming majority of lawsuits. And, so long as confidentiality is protected pursuant to a NDA, information prepared in anticipation of litigation can be shared with the funder so that they can underwrite the risk and value of the litigation’s outcome, without risk of waiver.
Nevertheless, prudence necessitates that confidentiality can never be taken for granted. That is why lawyers, clients, and funders should follow best practices to help ensure that communications with funders are not discoverable by an opposing party.
Statera’s investment process is designed to guard against disclosure of confidential information at every procedural step. We follow industry best practices and our flat organizational structure and streamlined decision-making process minimize the volume of material that is shared during diligence. In addition, our investment documents are concise, non-controversial, and clearly state that Statera has no control over the litigation or settlement. Statera also explicitly instructs parties with whom we engage not to send any material that is protected solely by attorney-client privilege. While some jurisdictions have considered application of the common interest exception to avoid privilege waiver, there remains risk in that approach and caution should be exercised.
At Statera, our business is founded on strong and lasting client relationships. Through our focus on protecting clients’ interests, we create an opportunity for those relationships to flourish and for our clients to achieve ultimate success in their legal matter.
Law360 featured Statera’s expert analysis on how lawyers, clients, and funders can preserve the confidentiality of funding-related documents in litigation. The article analyzes recent decisions denying discovery requests of funding-related documents and discusses best practices for preserving confidentiality. Read the full article by selecting the link below.
Law360 – 4 Ways To Preserve Confidentiality Of Litigation Funding Docs