“Litigation finance” is when a legal claim is used as collateral to obtain financing. In other words, a third party provides a cash advance to a litigant in exchange for a percentage of the judgment or settlement award. If the litigant loses, the third party lender receives nothing and loses their investment. In a recent case in Delaware, a party moved to dismiss a claim on grounds that it was funded by a litigation financer, and that the arrangement constituted unlawful champerty and maintenance. The Delaware Superior Court denied the motion, allowing the claim to move forward and confirming that the use of litigation finance is permissible in Delaware under certain circumstances.
Litigation funding initially began in Australia in 2000, and made its way to the United Kingdom in 2005. In 2006, Credit Suisse Securities (USA) LLC formed a “litigation risk strategies unit,” bringing litigation finance to the United States. Subsequently, several other funders have begun lending money to litigants in the United States, and the numbers of lenders continue to grow.
Under Delaware law, champerty and maintenance are unlawful. “Champerty” is defined as an illegal agreement between a claimholder and a “volunteer” who funds the claim, that the volunteer can collect on the claim (or part of it), if it is successful. “Maintenance” is defined as intermeddling in a lawsuit whereby the intermeddler has no standing, yet they maintain the lawsuit, financially or otherwise. Champerty and maintenance are illegal in Delaware to prevent third parties from encouraging fraudulent or meritless lawsuits.
In this matter, Charge Injection Technologies, Inc. (CIT) sued DuPont in 2007, alleging that DuPont stole proprietary secrets. CIT then entered into a financing agreement with a British financing company, Burford Capital Ltd. to finance the litigation. DuPont moved to dismiss on grounds that the agreement violated Delaware’s prohibition against champerty and maintenance.
The Superior Court, however, found that the financing arrangement was not champertous because CIT remained the sole owner of the claim—Burford was not given the right to maintain any control over the claim. For example, CIT retained the right to settle at any time and for any amount. Further, the Court ruled that Burford was not coercing CIT to pursue a frivolous or unwanted lawsuit. The Court also was persuaded by the fact that the financing agreement allowed the proceeds to be used not only to fund the litigation, but also to cover business expenses. For all of these reasons, the Court found that the arrangement between CIT and Burford was lawful.
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