Litigation Finance and State Law — What Should Counsel Know?

Marla Decker

At Lake Whillans, we frequently field questions about the legal issues surrounding litigation finance.  One question that frequently comes up is whether legal doctrines such as champerty and maintenance impede litigation finance arrangements.  For the most part, the doctrines of champerty and maintenance do not impede litigation finance arrangements.  But the answer will depend significantly on the jurisdiction that you are in, and  one step during the process of raising litigation finance includes diligence into the applicable law on these issues. 

At the outset, it is worth noting that there is a clear trend among courts across the United States—especially in those forums with a concentration of commercial cases—towards removing obstacles to commercial litigation finance and clarifying that properly structured funding arrangements do not violate state law.  In this article, we discuss the law in four prominent jurisdictions: New York, California, Illinois, and Delaware. 

New York

New York has taken a statutory approach to defining the contours of investments in claims.  What is left of the champerty doctrine is codified in Section 489 of New York’s Judiciary Law, which bars “buy[ing] or tak[ing] an assignment of . . . a bond, promissory notes, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon.”  N.Y. Jud. Law § 489(1).  Importantly, the statute contains a safe harbor provision that exempts transactions “having an aggregate purchase price of at least five hundred thousand dollars.”  Id. § 489(2).  Litigation funders such as Lake Whillans generally make investments in excess of that amount, so the safe harbor would apply to most claim assignments that attract litigation funding.

In any event, most litigation funding arrangements do not involve the assignment of a claim at all; rather, the more typical approach is for the claimholder to retain the claim, with the claimholder (or law firm) selling an interest in the potential future proceeds of the claim (or contingency fee earned).  Such a transaction would thus appear to not implicate § 489 at all, and New York courts have repeatedly upheld the validity of funding agreements in the face of challenges.  See, e.g., Hamilton Capital VII, LLC, I v. Khorrami, LLP, 2015 N.Y. Slip Op. 51199(U) (Sup. Ct. N.Y. County Aug. 17, 2015) (funder entitled to portion of law firm’s gross revenues); Lawsuit Funding, LLC v. Lessoff, 2013 WL 6409971 (Sup. Ct. N.Y. County Dec. 4, 2013) (enforcing law firm portfolio deal).

A recent case that will give the New York Court of Appeals the opportunity to opine on one aspect of litigation funding is Fast Trak Investment v. Sax, which relates to New York’s usury laws.  As a general matter, courts applying New York law have found that a traditional litigation finance arrangement— where there exists uncertainty as to whether and when the funder will recover its investment—is not a loan and thereby exempt from usury laws. Fast Trak involves an portfolio funding agreement between a funder and counsel, with the unusual twist that while both claimholder and counsel agreed to pay the funder a portion of proceeds from the funded case, the funder was also entitled to a portion of the fees counsel earned in separate cases not financed by the funder, in the event the primary case did not yield a specified minimum return. In this context, the Ninth Circuit has certified to the New York Court of Appeals the question of: “Whether a litigation financing agreement may qualify as a ‘loan’ or a ‘cover for usury’ where the obligation of repayment arises not only upon and from the client’s recovery of proceeds from such litigation but also upon and from the attorney’s fees the client’s lawyer may recover in unrelated litigation?”   The upcoming Court of Appeals decision could have implications for the structuring of portfolio funding arrangements generally, but it could well also be limited to its unique facts.


California practitioners need not worry about champerty—California law has never prohibited champerty or maintenance.  See In re Cohen’s Estate (1944) 66 Cal.App.2d 450 [152 P.2d 485].  The risk that a funding agreement could be held to violate California law is thus comparatively low.

However, counsel should take care to investigate the possibility of required disclosures in connection with a funding agreement. The federal district court for the Northern District of California has a standing order requiring “[i]n any proposed class, collective, or representative action” the disclosure of “any person or entity that is funding the prosecution of any claim or counterclaim.”  However, courts in that district have rejected efforts to force discovery in connection with litigation funding, and there is no obligation to produce the underlying funding agreement.  MLC Intellectual Property, LLC v. Micron Technology, Inc., No. 14-cv-03657-SI, 2019 WL 118595, *1-2 (N.D. Cal. Jan. 7, 2019).  And attempts to discover further information have also failed: in Impact Engine v. Google, that court denied a discovery request for materials related to a funding agreement, ruling that the materials were protected by the work product doctrine. Case No. 3:19-cv-01301, Dkt. No. 129 (S. D. Cal. Jul. 17, 2019).  (For a broader canvassing of cases involving litigation finance discovery questions, see our compilation).

While California is an outlier in its disclosure rule, recently, the District of New Jersey has proposed a local rule broader than California’s that would require the disclosure of litigation finance arrangements for all cases.  Discovery into the terms or other details related to funding would be permitted only upon a showing of “good cause” by the opposing party that the funder is controlling the litigation, a conflict of interest exists, or class interests are not being protected or promoted.  If adopted, New Jersey would be the only other district besides the Northern District of California to address litigation funding disclosure by rule.  Other efforts to require disclosure have not gotten past the proposal stage, in part because rule makers have not been convinced of their necessity.


Illinois has also been an important source of decisions enabling the practice of litigation finance.  The seminal case is Miller v. Caterpillar, which entailed breach of contract and trade secret misappropriation claims brought under the Illinois Trade Secret Act. 17 F. Supp. 3d 711 (N.D. Ill. 2014).  The case was notable in part because it was one of the first instances of a party in U.S. litigation openly relying on funding.  The arrangement was typical: the funder provided the smaller plaintiff company, Miller, with capital to pay for the legal fees and costs of the litigation in exchange for a share of any proceeds that Miller obtained.  Defendant Caterpillar argued that the funding arrangement violated the Illinois statutory ban on maintenance, which dated back more than a century.  The Miller court rejected that interpretation, noting that the maintenance statute prohibited “officious intermeddling” and holding that Miller’s use of litigation funding could not be so characterized.

In addition, the court denied Caterpillar’s request for discovery in relation to communications between Miller and the funders.  It held that Miller had a reasonable expectation of confidentiality because the work product shared with the funders was provided subject to a non-disclosure agreement.  Therefore, work product protection was not waived.  The opinion has been persuasive authority in a number of other cases across various jurisdictions that also hold that work product protection applies to communications with funders.


Consistent with the national trend, the Delaware Superior Court in 2016 rejected the argument that litigation funding constitutes champerty and maintenance despite the presence of common law applying those doctrines in the state.  In Charge Injection Technologies v. DuPont, funded plaintiff CIT alleged that DuPont had wrongfully used and disclosed CIT’s technology.  DuPont contended that, while CIT had not assigned its claim, it was no longer the “real party in interest” and the agreement was champertous because the funder had “de facto  control over the litigation.”  The court explained that the “historical justification for prohibiting any form of champerty or maintenance was to prevent disinterested third-parties from stirring up or encouraging fraudulent or frivolous lawsuits.”  Thus, the Court’s focus was on whether CIT itself was inclined to bring the claim and whether the funder was controlling the litigation.  The court found that the funding agreement—which was freely negotiated—did not give the funder any right to direct, control or settle the claims, and further that CIT did not agree with the funder to enforce claims that it was not itself disposed to prosecute.  Thus, the funding arrangement did not constitute champerty or maintenance.

Delaware practitioners should also note a recent federal court decision confirming that materials shared with litigation funders are shielded from discovery by the work product doctrine.  ELM 3DS Innovations LLC v. Samsung Elecs. Co., Case No. 14-1430-LPS, Dkt. No. 372 (D. Del. Nov. 19, 2020).

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State law in relation to litigation funding continues to evolve, and counsel should try to keep abreast of new decisions.  But the trend is clear: funding is becoming a standard part of the litigation landscape in every major U.S. forum, and a properly structured funding agreement is highly likely to withstand judicial scrutiny.  For more questions on the litigation funding legal landscape, please feel free to contact Lake Whillans to learn more.

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The best way for companies and their counsel to determine if litigation finance is an attractive option is to discuss it with us.