Executive Summary The Delaware Superior Court issued a recent decision providing the following guidance to parties regarding how to properly structure litigation finance agreements in order to avoid claims of champerty and maintenance: (i) the agreement should not assign ownership of the claims to the financier; (ii) the financier should not have any rights to direct or control the litigation; and (iii) the plaintiff should retain the unfettered right to settle the litigation at any time and for any amount. The Superior Court’s decision follows an earlier decision from the Delaware Court of Chancery, in which the Court of Chancery protected from discovery litigation financing communications through application of the work product doctrine.
In Charge Injection Technologies, Inc. v. E.I. DuPont de Nemours & Company, the Delaware Superior Court disagreed with arguments that a litigation financing agreement violates Delaware’s prohibition against champerty and maintenance.1 Champerty and maintenance are ancient common law doctrines, historically justified “to prevent disinterested third-parties from stirring up or encouraging fraudulent and frivolous lawsuits,” which originated in Medieval England in response to the practice of feudal lords and other wealthy individuals financing other individuals’ legal claims. The March 9, 2016 decision serves as a welcomed acknowledgement from the Delaware judiciary that properly structured third-party litigation financing is permissible.
Charge Injection Technologies, Inc. (“CIT”) brought suit against DuPont nine years ago, alleging that DuPont wrongfully used and disclosed CIT’s proprietary and confidential technology. After filing suit, however, “CIT quickly found that it lacked adequate resources to pursue long, drawn-out litigation against DuPont.”2 In an attempt to level the playing field, CIT sought third-party financing to help cover the costs of the litigation and other business expenses. CIT ultimately entered into an agreement with Burford Capital Ltd. (“Burford”), pursuant to which Burford provided financing to CIT in exchange for receiving a percentage of any proceeds from the litigation against DuPont.
DuPont moved to dismiss CIT’s lawsuit by asserting that the agreement between CIT and Burford violates Delaware’s prohibition against maintenance and champerty. DuPont argued that the agreement between CIT and Burford was champertous because Burford, a disinterested third party, had de facto control over the litigation.3 The court disagreed with DuPont’s argument, because “[t]he record before the Court demonstrate[d] that CIT is the bona fide owner of the claims in th[e] litigation, and Burford has no right to maintain th[e] action.”4 The court emphasized that the agreement between CIT and Burford expressly provides that Burford lacks “any rights as to the direction, control, settlement, or other conduct” of the litigation and, accordingly, the court found that CIT did not bargain away control of the litigation.5
The court likewise disagreed with DuPont’s maintenance argument – that “Burford is an officious intermeddler because Burford has ‘no bona fide interest’ in the litigation, and by providing financing, Burford is impermissibly prosecuting the lawsuit.”6 The court held that Burford was not an officious intermeddler and, therefore, its agreement with CIT did not constitute maintenance, emphasizing that Burford did not “stir up” litigation, control or force CIT to pursue litigation, or otherwise control the litigation for the purpose of continuing a frivolous or unwanted suit.
The Superior Court’s decision in Charge Injection Technologies follows a February 24, 2015 decision from the Delaware Court of Chancery, Carlyle Investment Management L.L.C. v. Moonmouth Company S.A.,7 in which the Court of Chancery held that communications exchanged between a litigation funder and a claimant, and/or the claimant’s attorney, are subject to protection from discovery by the work product doctrine. The Court of Chancery reasoned that “[a]llowing work product protection for documents and communications relating to third-party funding places those parties that require outside funding on the same footing as those who do not and maintains a level playing field among adversaries in litigation,” explaining that “even though claim funding is the business of financing lawsuits…those documents simultaneously also are litigation documents and work product protection is appropriate.”8
The following guidance can be gleaned from the courts’ decisions in Charge Injection Technologies and Carlyle Investment Management:
- 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
- The plaintiff should retain an unfettered right to settle the litigation at any time for any amount
- Communications relating to litigation financing can be shielded from discovery by the work product doctrine
Accordingly, with these 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.
- C.A. No. N07C-12-134-JRJ (Del. Super. Ct. March 9, 2016).
- Id. at 12 n.53.
- Id. at 7.
- Id. at 9.
- Id. at 10.
- C.A. No. 7841-VCP (Del. Ch. Feb. 24, 2015).
- Id. at 23.
Client Alert 2016-080