Delaware Superior Court Permits Use of Litigation Finance
The Delaware Superior Court recently denied a motion to dismiss an action based on a claim that the litigation financing used by the plaintiff constituted unlawful champerty and maintenance. The March 9, 2016, decision in Charge Injection Technologies, Inc. (“CIT”) v. E.I. DuPont de NeMours & Company (“DuPont”), confirms that the use of litigation finance is permissible in Delaware under certain circumstances.
The Evolving Market for Litigation Finance
Litigation finance is a transaction in which a litigation claim is used as collateral to obtain financing. The loan is typically non-recourse and made by a passive lender. The market for litigation funding is evolving. Litigation funding began in Australia in 2000 and was brought to the United Kingdom in 2005.1 In 2006, the concept was first seen in the United States when Credit Suisse Securities (USA) LLC formed a litigation risk strategies unit. Following Credit Suisse, a few more funders began to focus on the United States litigation market.2 The number of commercial litigation funders in the U.S. is still limited to a handful but, the number and size of the fundings are growing.3
The Recent Case
CIT sued DuPont in 2007, alleging that DuPont wrongfully used and disclosed CIT’s proprietary and confidential technology. In 2012, CIT entered into a financing agreement with Burford Capital Ltd., a United Kingdom company that provides litigation finance (“Burford”). DuPont moved to dismiss the case alleging that the financing agreement violated Delaware’s prohibition against champerty and maintenance. The Superior Court denied the motion.
Champerty and Maintenance
The common law doctrines of champerty and maintenance originated in medieval England. Under Delaware law today, champerty is a type of maintenance defined as “an agreement between the owner of a claim and a volunteer that the volunteer may take the claim and collect it, dividing the proceeds with the owner, if they prevail; the champertor to carry on the suit at his own expense.” Maintenance is defined as “an officious intermeddling in a suit which in no way belongs to the intermeddler by maintaining or assisting either party to the action, with money or otherwise, to prosecute or defend it.” The justification for these doctrines is to prevent disinterested third parties from stirring-up or encouraging fraudulent and frivolous lawsuits.
DuPont argued that the financing agreement CIT entered into with Burford was champertous because it provides Burford, a disinterested third party, with “de facto control” over the litigation. Further, DuPont argued that Burford was an intermeddler because it has no bona fide interest in the litigation and by providing financing it is impermissibly prosecuting the lawsuit.
The Superior Court’s Decision
The Court was not persuaded by DuPont’s arguments. It decided that the financing agreement was not champertous because CIT did not assign its claims to a third party and remained the bona fide owner of the claims. Burford was not given the right to maintain the action on its own or any control over the claim. CIT retained the right to settle the claim at any time for any amount. The Court ruled that Burford did not engage in maintenance because it was not an intermeddler, did not stir up litigation, and was not controlling or forcing CIT to pursue the litigation for the purpose of continuing a frivolous or unwanted lawsuit. The court also considered that the financing agreement allows the proceeds to be used for business expenses as well as the litigation. For these reasons, CIT’s use of third party financing to pursue the litigation did not violate Delaware law.
The Superior Court did note that absent a Delaware Supreme Court holding that the doctrines of champerty and maintenance are dead, it will continue to recognize them in appropriate circumstances. However, this case did not invoke the doctrines because of the structure of the financing agreement. CIT’s principal asset remained its rights in its patented technology, which CIT alleged DuPont wrongfully used. New York Commercial Division courts have ruled similarly, making it unlikely to find litigation financing champertous in these circumstances.4
Court decisions declining to apply the doctrines of champerty and maintenance to litigation finance are allowing the market for such financing to continue growing. The market now includes financing large pools of cases in addition to single lawsuits, and the offering of financing not only to the litigating entities but to the lawyer or law firms handling the matters as well.5
1) Julie Triedman, Arms Race: Law Firms and the Litigation Funding Boom, The American Lawyer, (Dec. 30, 2015).
4) George Bundy Smith and Thomas J. Hall, The Narrow Application of the Champerty Doctrine, New York Law Journal, (Oct. 19, 2012).
5) Julie Triedman, Burford Boasts Big Year, Invests $100M in Law Firm Portfolio, The American Lawyer, (March 23, 2016).