Delaware Recognizes Distinction Between Litigation Finance and Champerty

Delaware, though relatively small in size and population, exercises great influence on our commercial legal system.  Many companies are formed in Delaware, Delaware law is often selected to govern commercial agreements, and Delaware courts are viewed as sophisticated and efficient forums.  So it is only fitting that Delaware courts are responsible for two cases in the last year that reflect the growing utilization of commercial litigation finance.

Last week, the Delaware Superior Court held that a litigation finance arrangement does not run afoul of the medieval doctrines prohibiting champerty and maintenance.  These laws, which were originated by medieval kings who were annoyed by vexatious litigation of feudal lords, are still recognized in Delaware though their application has been very much limited.

In 2007, Charge Injection Technologies (“CIT”) sued DuPont alleging that DuPont wrongfully used and disclosed CIT’s technology.   CIT obtained litigation financing in 2012 after years of being worn down by what it called DuPont’s “war of attrition against litigation adversaries.”   The litigation finance agreement – not unlike the typical structure used by litigation financiers like Lake Whillans – provided that the financier would extend capital to CIT in exchange for a percentage of any future proceeds of the litigation and granted the financier a security interest in CIT’s claim as collateral.

After learning of this arrangement, DuPont moved to dismiss CIT’s claims on the basis that the financed suit violated maintenance and champerty.   In 2014, the Court deferred decision on whether the suit violated these doctrines and allowed DuPont to take discovery on the nature of the funder’s involvement in the case.

After discovery of CIT and the funder, the Court held that CIT’s utilization of a financing arrangement did not constitute champerty or maintenance relying on the following facts:

• CIT had not assigned its claims to the funder and thus the real party in interest was prosecuting the suit; prior cases that had dismissed on the grounds of champerty involved assignments of the claims themselves.
• The financier did not have the express or de facto right to direct, control or settle the claims; CIT was fully vested with control of the case but for certain limits on changing counsel and was in fact exercising that control.
• The financier had not stirred up or incited litigation for the purpose of continuing a frivolous or unwanted lawsuit; CIT itself was motivated to bring the suit, but lacked the resources to do so on its own.

Judge Jurden’s opinion– though the first in Delaware to squarely address champerty and maintenance in the context of modern litigation finance arrangements – is consistent with the trend in Delaware (and elsewhere) towards protecting litigants who utilize litigation finance from any disadvantage as a result.

In February of 2015, in Carlyle Investment Management LLC et al. v. Monmouth Company S.A., et al., Vice-Chancellor Parsons of the Court of Chancery considered whether a litigation financing arrangement and related correspondence were discoverable or protected by the work product doctrine.   The litigation financing arrangement pertained to a separate suit proceeding in Guernsey, in which the Delaware plaintiffs were defendants.  The Delaware plaintiffs alleged that the litigation finance arrangement violated the terms of a release between the parties to the Delaware litigation.   The counterparty to the financing arrangement (the plaintiff in the Guernsey litigation) intervened in Delaware and sought a protective order to prevent disclosure of these documents based on work product protection.

The Court entered the protective order reasoning that the decision of any funder to finance a case is necessarily based on the merits of the case, and therefore discussions and even the key terms of agreement with a funder contain the “lawyer’s mental impressions, theories and strategies about the case, which were only prepared ‘because of’ the litigation.”  The Court explained that “no persuasive reason has been advanced … why litigants should lose work product protection simply because they lack the financial means to press their claims on their own dime.”   The Court also noted the trend of other courts, including the Miller v. Caterpillar decision discussed here, to hold the same.

These opinions emphasize the obvious: the concerns of medieval kings should not constrain modern day companies from being able to use litigation finance to obtain justice.