Both inside and outside the United States, litigation financing has become an increasingly important part of the litigation environment. But litigation financing remains controversial, at least in certain quarters, and questions continue to be asked about whether or not it is proper or even appropriate. In a recent decision in a Delaware lawsuit between Charge Injection Technologies and DuPont, DuPont challenged CIT’s arrangement for financing its participation in the litigation, arguing that the financing agreement violated Delaware’s prohibition against “champerty and maintenance.” In a March 9, 2016 decision (here), Delaware Superior Court Judge Jan R. Jurden rejected the challenge. Judge Jurden’s opinion supports the view that, at least under Delaware, an appropriately structured litigation funding agreement will not be found improper.
While parties and observers undoubtedly will still seek to challenge litigation funding in general and in the context of specific cases, this ruling and related developments suggest that Delaware’s courts will where appropriate condone litigation funding.
In December 2007, CIT filed suit against DuPont, alleging that DuPont wrongfully used and disclosed CIT’s proprietary and confidential technology. In 2008, CIT, which lacked adequate resources for costly and protracted litigation with DuPont, sought litigation financing. In 2010, CIT ultimately had discussions with Burford Capital Ltd., a U.K. company that provides litigation financing. At that juncture, Burford decided not to fund the litigation. However, in 2012, CIT’s CEO reached out again to Burford. In June 2012, Burford and CIT entered a financing agreement in which a unit of Burford provided financing in exchange for a percentage of any future proceeds of the litigation and obtained a security interest in CIT’s lawsuit against DuPont as collateral. DuPont moved to dismimss CIT’s lawsuit on the grounds that the financing agreement violates Delaware’s law prohibiting against champerty and maintenance.
As summarized by one online source, “champerty and maintenance” are common law doctrines aimed at preventing frivolous litigation. Champerty is the process whereby one person bargains with a party to a lawsuit to obtain a share in the proceeds of the suit. Maintenance is the support or promotion of another person’s suit initiated by intermeddling for personal gain.
The March 9 Opinion
In her March 9, 2016 opinion, Judge Jurden denied DuPont’s motion to dismiss, holding that financing agreement did not violated the doctrines of champerty and maintenance.
In ruling that the agreement was not champertous, she rejected DuPont’s argument that the agreement was improper because it provides Burford with de facto control of the litigation. She noted that CIT remains the bona fide owner of the claims and that Burford itself has no right to bring the action, and there was no assignment of the claim to Burford. Moreover, CIT did not, as the doctrine of champerty would prohibit, bargain with Burford to enforce claims that CIT was not disposed to prosecute.
DuPont also argues that Burford’s involvement represented maintenance, because it involves Burford’s “officious intermeddling” in the suit. DuPont said that Burford is an officious intermeddler, because Buford has no “bona fide interest” in the litigation, and that providing financing Buford has impermissibly taken control of the lawsuit.
Judge Jurden rejected these arguments, saying that Burford is not an officious intermeddler, as this is not a case where Burford “stirred up” litigation, is controlling or forcing CIT to pursue litigation, or is controlling the litigation for purposes of continuing a frivolous or unwanted lawsuit.
In reaching this conclusion, Judge Jurden noted a number of features of the financing agreement which she cited in support of her view that the financing arrangement does not constitute maintenance. The agreement, she said, was freely negotiated; the agreement does not give Burford any right either to direct, control, or settle CIT’s claims against DuPont; the financing can be used for litigation expenses as well as other business expenses. Judge Jurden noted that CIT’s CEO had testified that CIT continues to control the litigation and he remains the decision maker with respect to the litigation.
Judge Jurden’s March 9 opinion in the CIT case follows the February 24, 2015 Delaware Chancery Court opinion in the Carlyle Investment Management LLC v. Moomouth Company, S.A. (here), in which the Chancery Court held that communications exchanges between a claimant and a litigation funding firm are subject to protection from discovery by the work product doctrine.
As discussed in a March 21, 2016 memo from the Reed Smith law firm (here), with these two decisions, “Delaware courts have formally condoned the use of litigation financing and made clear that communications relating to litigation financing can be protected from discovery.”
The CIT decision also provides some guidance about how litigation financing arrangements should be structured in order to increase the likelihood that the agreements will not be found improper. The features, as the law firm memo notes, include ensuring that: the financing agreement should not assign ownership of the claims to the financier; the financier should not have any rights to direct or control the litigation; and the plaintiff should retain unfettered right to settle the litigation at any time for any amount.
It is probably important to note that Judge Jurden did not say that every challenge to litigation funding arrangements will be rejected. There is certainly enough room in the CIT decision for any litigant to try to challenge litigation funding arrangements that lack the features of agreement between CIT and Burford that preserved CIT’s control of the agreement. Obviously, as a decision of a Delaware trial court, Judge Jurden’s decision will have only persuasive not precedential effect, even just in Delaware. At a minimum, the decision does demonstrate that Delaware’s courts are not hostile to the very idea of litigation finance.
Just the same, it seems likely that litigation funding will continue to attract critics. In a March 26, 2014 guest post on this blog entitled “The Real and Ugly Facts of Litigation Funding” (here), Lisa Rickard, the President of the U.S. Chamber of Commerce’s Institute for Legal Reform, said “Litigation funding is a sophisticated scheme for gambling on litigation.” She said further that the growth of litigation funding will lead to “more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption.”
The reference in the preceding paragraph refers to the Chevron case in Ecuador, in which Burford was involved. As discussed in a March 18, 2015 Bloomberg article entitled “Hedge Fund Betting on Lawsuits is Spreading” (here), Paul M. Barrett, discussing the rise of the litigation-funding in the U.S., notes that while Burford Capital has “helped move litigation funding into the corporate-litigation mainstream,” its funding ventures include its “most notorious – and least successful investment” relating to a class action oil pollution lawsuit against Chevron in Ecuador.
Barrett notes that Burford invested $4 million in the Ecuador case in 2010. The plaintiffs, a group of Ecuadorians, won a $19 billion judgment in Ecuador against Chevron, but the oil company then “turned the tables” and persuaded a U.S. judge that the Ecuadorian suit involved coercion, bribery and fabricated evidence. By then, Burford had sold off its interest in the lawsuit and accused the plaintiffs’ attorney of deceit. As Barrett puts it in his article, the Ecuadorian episode “constituted a black eye for Burford” that continues to provide “ammunition for critics of litigation finance.”
These kinds of criticisms and events ensure that questions will continue to be raised and the litigants may seek to challenge litigation funding. There undoubtedly will be more cases in which litigants seek to raise the kinds of attacks on litigation funding that were raised here. However, the outcome of DuPont’s motion here suggest that properly structured litigation funding arrangements may withstand judicial scrutiny.
How We Can All Be Sure Litigation Is Now a Part of the Litigation Environment: While I suspect the debate about litigation funding will continue, one thing is sure, and that is that litigation funding is here to stay. If you have any doubts, take a look at the March 23, 2016 press release from Burford Capital, LLC (here). Burford’s share are listed on the London Stock Exchange, so its financial results are public. As the press release shows, its financial results are also quite impressive. For its 2015 fiscal year, which ended on December 31, 2015, Burford reported record profits of $103 million (representing an increase of 26% over the prior year).
The firm also reported that its current investment portfolio stands at $627 million, across 54 litigation investments. As a result of “persistent high demand” to invest in the firm, Burford received a record new investment commitments during 2015 of $206 million, which represents an increase of 35% over 2014.
In other words, litigation funding is highly profitable and is attracting impressive amounts of investment capital. Whether you like it or not, litigation funding is now a part of the litigation environment.