Champerty and Litigation Finance – Risks from an Old Doctrine
A recent Pennsylvania case raises questions about whether the venerable common law doctrine of champerty could place restrictions on litigation financing agreements. In WFIC, LLC v. Donald Labarre, Jr., No. 1985 EDA 2015, 2016 WL 4769436 (Pa. Sup. Ct. Sept. 13, 2016), an appeals court upheld a trial court ruling invalidating certain aspects of a litigation financing arrangement because they violated the prohibition on champerty. Although the case’s broad implications are not entirely clear, it does serve as a reminder that the novel aspects of litigation financing can run afoul of some age-old legal rules.
The Labarre case arose from a dispute between a manufacturer and a company that supplied machinery used in the manufacturer’s business. The manufacturer alleged that its supplier provided defective equipment and that this defective equipment destroyed the manufacturer’s business and propelled it into bankruptcy. Because the manufacturer could not afford to fund its litigation against the supplier, it entered into contingent fee agreement with its lawyers and obtained litigation financing to cover other litigation costs. Eventually, the manufacturer prevailed at trial, but recovered only about $14 million when it had expected to win more than $100 million. This recovery was not enough to cover the interests of all of those who had bankrolled the litigation, and one of attorneys who had a contingent fee agreement asserted a claim, alleging that the distribution of the litigation proceeds contravened the agreement for litigation financing and attorneys’ fees and constituted unjust enrichment.
This claim was rejected by the trial court and on appeal because the attorney lacked standing to assert an unjust enrichment claim against the other parties who received distributions of the litigation proceeds. But he court’s reasoning also turned on an application of the doctrine of champerty, which is the unlawful maintenance of a suit in consideration of some bargain to have a part of the thing in dispute or some profit out of the litigation. The appeals court ruled that the contingent fee agreement was unenforceable because “[a]n agreement by a stranger to defray the expenses of a suit in which he has no interest or to give substantial support and aid thereto in consideration of a share of the recovery or the proceeds thereof is condemned by the courts as champertous.” Interestingly, however, the court did not invalidate the agreement by which the litigation funders had been compensated.
In reaching this conclusion, the appeals court reiterated that, under Pennsylvania law, champerty is a defense to the enforcement of a contract. In order to establish a prima facie case of champerty, a party must establish the following three elements: (1) the party involved must be one who has no legitimate interest in the suit; (2) the party must expend its own money in prosecuting the suit; and (3) the party must be entitled by the bargain to share in the proceeds of the suit.
In the broadest terms, this could apply to any kind of agreement to finance litigation. But the fact that the litigation financing agreement as a whole was not invalidated indicates that, at least in Pennsylvania, champerty will not provide a total ban on litigation financing – even though it’s not entirely clear how far the limits go. Nevertheless, it does raise a warning that the parties participating in litigation financing to be careful to include choice-of-law provisions in their agreements and to make sure that the law of the state supplying the governing law is friendly to litigation financing.
Works Cited
WFIC, LLC v. Donald Labarre, Jr., No. 1985 EDA 2015, 2016 WL 4769436 (Pa. Sup. Ct. Sept. 13, 2016)
