One of the biggest open questions in litigation finance is the degree to which funding documents and related communications are discoverable in funded litigation.  As of last week, the industry had received helpful guidance from trial courts, from legislatures, and from bar associations.  Now, following Judge Bibas’ September 27, 2024 opinion in Design With Friends Inc. v. Target, we have authority from a federal court of appeals judge, albeit one sitting in a trial court by designation in the District of Delaware.  That authority continues to underscore three key points: (1) pre-suit diligence into a claim is protected by the work-product doctrine; (2) even if it were not protected, such documents are not relevant to the facts and circumstances of the funded litigation itself; and (3) any contrary position would significantly impede the policy underlying the work-product doctrine, which aims to create open and collaborative discussion amongst legal professionals in pursuing or defending claims. 

The Lawsuit

In 2021, Design with Friends sued Target in the District of Delaware, accusing the retailor of infringing its copyright and breaching a contract. The plaintiffs sought financial backing for the lawsuit from Validity Finance, which conducted due diligence before agreeing to fund the case. This process included signing nondisclosure agreements and reviewing sensitive documents provided by Design with Friends’ legal counsel. These documents contained detailed legal analyses, strategic plans, and damage assessments, all of which were crucial to Validity’s decision to fund the litigation.  Target sought these documents in discovery and Validity moved to quash. 

The Court’s Ruling on Work Product

The court began its analysis by noting that the work-product doctrine has a three-part definition: (1) documents and tangible or intangible things (2) prepared in anticipation of litigation (3) by or for a party or its representatives, including lawyers, consultants, and agents.  The first prong was uncontested, and the court’s analysis of the remainder strongly suggests a desire to keep funding documents protected.

For example, in addressing the “prepared in anticipation of litigation” prong, the court explained: 

whatever work product’s precise scope, it includes these documents. They are confidential documents created by lawyers to evaluate the strengths, weaknesses, and strategy of an impending lawsuit. While those documents informed an investment decision, they did so by evaluating whether a lawsuit had merit and what damages it might recover. That is legal analysis done for a legal purpose.

See Design with Friends, Inc, et al., v. Target Corp., No. 1:21-CV-01376-SB, 2024 WL 4333114, at *2 (D. Del. Sept. 27, 2024) (emphasis added).

And it was equally unequivocal in its finding relating to the final element, finding that Validity was clearly Design’s “representative” for purposes of work-product protection: 

The final question is whether Validity created these documents as Design’s representative. … A “representative” includes a “consultant … or agent.” So, the work-product doctrine protects the work of the caravan of consultants, accountants, and experts who follow modern litigants to trial. That includes Validity: it not only funded Design’s lawsuit but also consulted on the suit’s strategy and progress. ¹

The Court’s Ruling on Relevance

One of the more telling passages in the opinion is the following, in which Judge Bibas acknowledges that a litigation funder’s analysis is “hardly relevant” to the underlying dispute: 

When it comes to details about Validity, any negligible value is outweighed by the burden on a nonparty. Target already knows that Validity is funding the suit and that it does not need to approve a settlement. Further minutiae about Validity are hardly relevant to whether Target infringed a copyright or breached a contract years before Validity entered the picture.

The Court’s Interpretation of Policy

Importantly, the court specifically noted that a contrary ruling allowing for burdensome discovery would discourage open and honest discussion among clients, their lawyers, and third-party consultants:

Work-product doctrine is “intensely practical …, grounded in the realities of litigation in our adversary system.” In litigation finance, one of those realities is that financiers need to evaluate the strength of a case before agreeing to fund it. These internal discussions leave a revealing trail of mental impressions, legal theories, and strategic notes—all created as confidential internal documents or sent under nondisclosure agreements, and so written with vulnerable candor. If the work-product doctrine did not protect these records, then plaintiffs who got litigation finance would need to expose these confidential attorney impressions to their opponents. That would chill lawyers from discussing a pending case frankly. The work-product doctrine was created to prevent that result. ²

In other words, denying the motion to quash would directly and forcefully contradict the very purpose of the work-product doctrine and lay the groundwork for future systemic issues.

* * *

At Certum, we read this opinion as further underscoring the intuitive notion that the facts and circumstances of a dispute are what is relevant in discovery—not the legal opinion and valuations of lawyers who are retained, often years after the disputed conduct, to underwrite a litigation for purposes of possible investment. 

¹Id. at *3 (emphasis).

²Id. (emphasis).