By Nate Raymond  

For alternative litigation funders like Burford Group and Juridica Capital Management, attorney-client privilege has been a lingering problem.

Litigation funders don't act as attorneys, yet they typically engage in discussions with lawyers for the parties whose claims they're backing. Are those talks protected by privilege? And what about work product shared with outside funders? Does it lose protection because the financiers aren't acting as attorneys? District courts from Delaware to Texas have reached different conclusions on the issue. Some judges have compelled disclosures, while others have ruled the privilege holds. Some bar groups, including the New York City Bar Association, have urged caution to litigants discussing privileged issues with outside funders, even as they've given a green light to litigation finance.

A little-noticed court decision late last month in a case against International Business Machine Corp is giving the litigation finance industry a boost in its arguments that funders' communications with clients are protected from disclosure. The decision by U.S. District Judge Joel Slomsky in Philadelphia marked one of the first times a judge has ruled that discussions with third-party litigation funders are covered by the work-product doctrine, the same principle that has long allowed defendants to discuss cases confidentially with their insurers.

Burford CEO Christopher Bogart hailed the decision in an interview with us on Wednesday, noting that continued uncertainty about privilege has affected the ability of his $300 million fund to invest in cases. "It's one of the first questions I get asked by lawyers when I meet with them, which is, 'What can I tell you when I meet with you without the opponent claiming waiver,'" he said.

The ruling came in a suit filed in 2010 by the Pennsylvania computer company Devon IT, which accused IBM of a $12 million fraud. According to Devon, IBM was supposed to use the money to develop a Blade server or computer workstation, but, instead, IBM employees allegedly misused the $12 million to inflate earnings. IBM denied the allegations.

Burford stepped into the case in March 2011, around the time Slomsky allowed the case to move on past a motion to dismiss. That wasn't the beginning of Burford's involvement, however. According to an affidavit by Burford managing director Aviva Will, the funder had been in discussions with Devon for a year before the suit was even filed. Burford and Devon had entered a confidentiality agreement in March 2010 to protect their communications. Devon's lawyer at the time said in an affidavit that he also shared a draft complaint, legal memoranda and his personal opinions about the progress of the case with Burford.

IBM's lawyers at Jones Day said in a brief that they only found out about Devon's third-party backing in January 2012. They immediately subpoenaed Burford, seeking details of its financial arrangements with Devon and the funder's communications with Devon and its lawyers. IBM sadeclinedid it needed the documents because (among other things) Pennsylvania still recognizes champerty and maintenance, the old common law rules prohibiting the sale of a lawsuit.

Devon and Burford moved to quash the subpoena, claiming their communications are privileged. Slomsky agreed. In a ruling on Sept. 27, the judge said that since Burford and Devon share a "common interest" in the outcome of the case and had entered into the confidentiality agreement, their communications were protected. "Given these controlled conditions, there was no waiver of the attorney-client privilege or the work product doctrine," Slomsky wrote.

The underlying suit was settled Oct. 5, according to the docket. Devon counsel Mark Hansen of Kellogg, Huber, Hansen, Todd, Evans & Figel declined to discuss the settlement, as did Burford's Bogart.

Regardless of Devon's recovery, the privilege ruling adds to what has been a slowly developing debate in the judiciary about the reach of privilege to communications between clients and funders. An oft-cited 2010 decision by now retired U.S. district judge Joseph Farnan in Wilmington, Delaware, affirmed a magistrate's finding in Leader Technologies' suit against Facebook that privilege doesn't extend to the funders. In contrast, now retired U.S. district judge T. John Ward in Marshall, Texas, declined in 2011 to compel production of documents provided to investors in a Mondis Technology case against LG Electronics.

IBM counsel Glen Nager of Jones Day declined comment, and IBM representatives did not respond to requests for comment. As an aside, IBM general counsel Robert Weber is scheduled to speak on a panel about litigation finance at an event later this month. The event is sponsored by the U.S. Chamber of Commerce, a frequent critic of third-party litigation funding.

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