Litigation funding is the financing of litigation by a nonparty. Nonparty lenders charge interest on the advances of cash to fund litigation and the loans typically are nonrecourse. The loans are secured by the claim itself. Said another way, the collateral for the loan is the potential proceeds from the litigation.
There are three varieties of litigation funding. Litigation funders will advance funds to actual plaintiffs. This can be done in both personal injury and in commercial settings. In the personal injury setting the funds are typically advanced as a percentage of the potential recovery and the plaintiff is incentivized to participate in the litigation to receive the balance of the potential recovery in the case. In commercial cases the funds can be used to fund the litigation and pay attorneys’ fees or can be used to fund the continuing operation of the business. A third category of litigation funding is lending money to law firms that have taken matters on a contingency fee basis to provide capital to litigate and operate their firm.
The US Chamber of Commerce is vigorously opposed to litigation funding. Lisa Rickard, president of the US Chamber of Commerce’s Institute for Legal Reform claims that “litigation financing is a sophisticated scheme for gambling on litigation.” She claims that third-party funding leads to “more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash hungry funders and in some cases even corruption.”
See http://www.instituteforlegalreform.com/resource/the-real-and-ugly-facts-of-litigation- funding
Proponents of litigation funding of course contend that litigation funding levels the playing field and allows litigants with less economic leverage to participate in litigation and vindicate their rights in meritorious claims. But for litigation funding, many meritorious claims could not be pursued.
The first obvious question is whether litigation funding contracts are ethical. The antiquated doctrine of maintenance and champerty could be viewed as a prohibition on third-party litigation funding. Champerty is “an agreement to divide litigation proceeds between the owner of the litigated claim a party unrelated to the lawsuit who supports or helps enforce the claim.” Maintenance involves “assistance to you in prosecuting or defending a lawsuit [is] given to litigate by someone who has no bona fide interest in the case.” See http://www.minnesotalawreview.org/wp- content/uploads/2012/03/Steinitz_PDF.pdf
These historical prohibitions on third-party lending have been raised by litigants. A 2016 Delaware decision specifically addressed whether a litigation funding agreement constituted “maintenance and champerty.” Charge Injection Technologies, Inc. v. DuPont, Cause Number N07C – 12 – 134 – JRJ, Superior Court of Delaware directly addressed this issue. Charge Injection Technologies (“CIT”) sued DuPont alleging that DuPont unlawfully used CIT’s proprietary and confidential technology.
To avoid “war by attrition,” CIT entered into a litigation financing agreement to continue its litigation with Dupont. DuPont moved to dismiss on the basis that the financing agreement violated Delaware’s prohibition against “champerty and maintenance.” The litigation financing agreement involved financing by third-party litigation funder in exchange for a percentage of any future proceeds of litigation. The third-party funder also obtained a security interest in CIT’s claim as collateral.
CIT maintained that the litigation funding agreement was not champerty because CIT did not assign its claim to the third-party funder. The Delaware court rejected DuPont’s claims because CIT demonstrated that it was “the bona fide owner of the claims this litigation and [the lender] has no right to maintain the action.” Id. at 9. The court also noted that under the financing agreement the funds could be used for “litigation expenses as well as other business expenses” and the agreement specifically provided that the lender did not have any rights as to the “direction, control, settlement or other conduct litigation … and CIT retains the unfettered right to settle the litigation at any time for any amount.” Id. at 12-13 For these reasons, the Delaware court denied DuPont’s motion to dismiss on champerty and maintenance grounds.
The CIT case reflects the trend of allowing third-party litigation funding to occur. While there have been efforts to regulate third- party funding, it remains a largely unregulated industry in the United States and appears to be expanding. Third-party litigation funding allows businesses, law firms and individual plaintiffs the ability to withstand “trench warfare” from more powerful and well-funded litigants.
If you have questions about litigation funding, email or call me.