Wednesday, February 5, 2014

Trade Secrets, Litigation Funding, and the Fall of Champtery

The rise of third-party litigation funding presents a quandary of legal, ethical, and economic issues, which commentators have tried to sort through for many years. With the importance of trade secrets to many businesses, it's no surprise that this facet of intellectual property litigation has drawn the interest of litigation financiers.

Yet, despite this reality, very few courts have had the opportunity to examine the legal issues that come into play when a third-party funds a trade secrets plaintiff. One of the more high-profile Chicago-area trade secrets cases, however, deals with this new paradigm. The case is Miller UK v. Caterpillar, Inc. - now several years old. It is a typical business-to-business trade secret case, which features a dispute arising from the fracturing of a long-term business relationship when Caterpillar allegedly began offering a product derived from Miller's confidential information. Most non-employment trade secrets cases feature some variation on this fact pattern.

It turns out Miller had concerns about its capability - financially, that is - to litigate against Caterpillar. And, as everyone knows, trade secrets litigation ain't cheap.

Enter the funding company. Caterpillar cried foul. And a discovery dispute arose, raising significant issues that likely will arise time and again. Are discovery disputes interesting? Not really, but this one worked its way in to the Wall Street Journal a few weeks ago.

The dispute presented two significant legal questions that I feel are important to address (many others seemed secondary and aren't worth commenting on).

First, do litigation funding agreements violate laws against champtery? Those ancient statutes generally bar third-parties from stirring up lawsuits by helping others to promote litigation in an officious manner.

The Miller court answered that question with an emphatic "no." In a lengthy opinion by Magistrate Jeffrey Cole (somewhat renowned for his lengthy, well-cited opinions), the court held that Caterpillar couldn't obtain the litigation funding agreements between Miller and its litigation sugar-daddy because they weren't relevant. In particular, those documents couldn't help Caterpillar establish any sort of defense or counterclaim, since the champtery statutes did not apply to litigation funding arrangements.

Second, the attorney-client privilege does not protect documents that the trade secrets plaintiff and its counsel share with the actual or potential funders. Since the privilege does not extend to business arrangements, a plaintiff cannot cloak communications with the privilege even if they somehow relate to the litigation process.

Importantly, this does not preclude a trade secrets plaintiff from precluding disclosure of information under the work-product privilege, which may offer greater protection. Disclosure of mental impressions, internal memos and the like to a third-party does not destroy the privilege, and in Miller's case it at least was able to show that it took some steps to guard against disclosure of its counsel's case memos even though potential funders received them.

Magistrate Judge Cole's opinion is embedded below.

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