The Little Engine That Could – Discovery of Litigation Funding Denied

In Design With Friends, Inc. v. Target Corporation, 2024 WL 433114 (D. Del. Sept. 27, 2024), the court rejected defendant’s effort to discover documents sent by plaintiff to a litigation funder that permitted the lender to evaluate the value of plaintiff’s claims.

The Little Engine That Could | Barnes & Noble® (barnesandnoble.com) is a children’s story by Watty Piper about “the little engine that, despite her size, triumphantly pulls a train full of wonderful things to the children waiting on the other side of a mountain.”

In Design With Friends, Inc. v. Target Corporation, 2024 WL 433114 (D. Del. Sept. 27, 2024), “Design with Friends is a small company with a big claim. It is suing Target for copyright infringement and breach of contract.”

Design sought and obtained litigation financing from Validity Finance. The court explained: “Design had the claim, Validity had the cash, and each saw a mutually beneficial deal.”

It added:  “Here, Target seeks reams of documents from Validity Finance about its funding of this lawsuit.”  Id. at *1.

After Design approached Validity Finance:

Validity needed to assure itself that this was a claim worth backing, so it signed nondisclosure agreements with Design. Next, Design’s lawyers sent over a trove of confidential documents containing the facts that the lawyers considered most important, as well judgments about “the merits of [Design’s] proposed claims, [Design’s] planned litigation strategy, predictions about Target’s … litigation strategy, and counsel’s estimates of expected damages.”

The court explained: “Those assessments left a trail of information about what Design’s claim was worth. And they were the judgments of lawyers with insider knowledge, conferring candidly behind the shield of a nondisclosure agreement.”

Not surprisingly, “Target wanted to get its hands on them.”  Id.  It served a subpoena on Validity Finance, which then moved to quash it, arguing privilege and disproportionate burden.  That motion was granted.

First, the court held that Validity Finance’s valuations and Design’s communications about the suit were protected work product.  Id. at *1.

Were the financing documents prepared for legal analysis in anticipation of litigation or for a business decision, i.e., investment?  The Design court wrote that these documents “straddle the line between legal and business purposes.” The former is protected work product; the latter is not.

However, the Design court held that the documents “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.”  Id. at *2.  In short:  “The work-product doctrine exists to protect lawyers’ research into and candid discussions about their claims.…  That means records like these.”  Id.

That analysis and decision applied to both documents created before and after Validity Finance agreed to fund Design’s lawsuit.  “It would make no sense to protect only those documents created after the parties formally sign a financing agreement.”  Id. at *3.

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.

Id. at *3.

Second, the Design court held that Validity Finance had not waived its protection by an allegedly defective privilege log.  It wrote: “True, Validity’s log claimed privileges and protections over categories of information instead of identifying specific documents. But the log existed…. It was timely…. And it covered the documents here…. So Validity did not waive its protection.”  Id. at *3; see How Much Detail is Enough in a Privilege Log? (Apr. 9, 2024); Privilege Logs:  New Techniques to Achieve Proportionality – The “Certification Log” (Mar. 4, 2024); Categorical Privilege Log Presented Interpretive Issues (Nov. 17, 2021); and, Categorical Privilege Logs: Don’t Shoot a Mouse with an Elephant Gun (Mar. 25, 2021).

Third, the court wrote “[t]hat leaves Target’s request for documents about the relationship between Design and Validity and discovery about Validity itself. I deny each remaining request because each would impose a burden disproportionate to their value.”  Id.

Fed.R.Civ.P. 45(d)(1) states that: “A party or attorney responsible for issuing and serving a subpoena must take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena. The court for the district where compliance is required must enforce this duty….”  While Rule 45 was not cited, the principle was applied.

Target sought documents from Validity Finance that Target already had.  The court did not allow Target to burden non-party Validity Finance for them. Id.

Additionally: “As for information about Validity’s relationship with Design, Target seeks this from the wrong source.  If Validity has information about this relationship, then Design presumably does too. Target should have sought this information from Design before demanding it from a nonparty.”  Id.

The Design court concluded: “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….  This slight relevance does not justify intrusive inquiries into the internal operations of a nonparty. So I grant Validity’s request to quash these requests as well.”  Id. at *3-4.

In sum: “Discovery requests can reach only so far.”  Id. at *1.  Target’s Rule 45 requests went too far.