Tag Archives: partial contingency fees

Canadian Court Concludes That Litigation Financing Is a Private Matter

In a recent post, we discussed a Canadian case in which a plaintiff class and its litigation funder sought court approval for a particular kind of financing agreement that would fund attorneys’ fees and litigation expenses during the pendency of the case.  In a similar case, involving a single plaintiff rather than a class, another Canadian court has declined to approve a parallel agreement, but this ruling is not a defeat for litigation funding.  To the contrary, because the court ruled that funding agreements were a private matter not subject to court approval, the decision is ultimately a favorable one for litigation funding in Canada.

In Seedlings Life Science Ventures, LLC v. Pfizer Canada Inc., Seedlings asserted a claim for patent infringement. Like many commercial entities in intellectual property cases, Seedlings entered into a litigation funding agreement with a litigation finance company. Under the agreement, financing company would provide funding for Seedlings’ legal fees and other litigation costs in return for a share of the recovery in the case.  The agreement expressly provided that the financing company could terminate the agreement and stop funding the case if it was no longer satisfied that the case was commercially or legally viable.  In the event of termination, the financing company would take retain a right to a reduced share of the recovery.

The financing company and Seedlings asked the court for a declaration that the agreement did not render the action an abuse of process or demean the administration of justice,.  The motion also asked the court to declare that Pfizer could not interfere with Seedlings reliance on third-party funding.  Before this motion, a Canadian federal court had never considered the validity and enforceability of a litigation funding agreement in the context of private commercial litigation.  Those courts had only ruled on litigation funding agreements in the context of class actions.

The court dismissed the motion on the ground that it lacked the jurisdiction to make such a declaration.  According to the court’s analysis, because the litigation financing agreement was i independent from the underlying patent action, it was not within the statutorily defined jurisdiction of the federal court. For similar reasons, the Court also concluded that Pfizer had no right to challenge the validity of the litigation funding agreement because it did not affect or determine the validity of the rights asserted by Seedlings.

While Seedlings and the financing company did not obtain exactly the kind of endorsement they hoped for, they did get a favorable result.  As a result of the court’s ruling, there is now precedent that prohibits a litigant from challenging its opponent’s litigation financing agreement. In addition, the Seedlings Court’s ruling makes it clear that litigation financing agreements are completely independent of the substance of a litigation matter and, therefore, that bringing a case with the help of a litigation funder cannot be an abuse of process.

Topics: litigation finance, legal reform, third-party funding, litigation costs, alternative litigation finance, class actions, Canadian law, contingency fees, partial contingency fees

 

Works Cited:

Bennett Jones, LLP, Funding Arrangements in Private Litigation Are Private Matters—Not to Be Scrutinized by the Federal Court or the Defendant, JD Supra (Sept. 25, 2017) available at http://www.jdsupra.com/legalnews/funding-arrangements-in-private-45489/

A Canadian Innovation in Class Action Funding

One of the principal benefits of litigation funding is it facilitates a more just and efficient allocation of the risk associated with lawsuits.  In return for a share of the recovery in a case, a deep-pocketed investor can assume some of that risk by advancing funds to the litigant, thereby making it easier for the litigant and the attorney to pursue the claim.

In a recent Canadian class action, a litigation funder has proposed a novel financing arrangement that would provide a new way for litigation funders to more effectively – and fairly – allocate risk.  In Canada, as in the United States, common funding practice in class actions is premised on the idea that the attorneys would work on a full contingency basis, collecting their fee only at the conclusion of the litigation.  The problem with this practice is that it requires the law firm to assume a very substantial portion of the risk of loss in the case.  Of course, assuming such a risk can be a difficult business decision in itself. Moreover, deciding to take a class action on a full contingency basis also has collateral effects for the firm’s practice.  It limits the firm’s ability to take on other risky cases, and it diverts financial resources that could be used to litigate other cases for plaintiffs who have valuable claims but not a lot of cash on hand.

A litigation funder in Canada wants to take a different approach to funding class actions. In Houle v. St Jude Medical Inc, which arises from the marketing of allegedly deficient defibrillators, the third-party funder asked the court to approve a funding arrangement under which the funder would pay for a portion of the attorneys’ fees, so the law firm operates on a partial contingency fee.   In addition, the funder promised to pay all the disbursements for the class, rather than a capped amount, as well as any court-ordered costs. This approach would allow the allocation of risk from both the attorney and the plaintiff class to the funder, whereas the typical funding arrangement only permits the plaintiff to shift risk to the investor.

There is another novel aspect of the funding arrangement in Houle. The funder proposed a clause in the funding agreement that would permit the funder to terminate the funding arrangement on ten days’ notice, if certain events occurred.  These events would include breaches by the plaintiffs or the withdrawal of class counsel. Moreover, the clause would permit the funder to terminate if it ceases to be convinced of the merits of the case or the commercial viability of its investment. In the event of such termination, the funder would be entitled to a greatly diminished share of the recovery.  The clause also provides that the funder can only exercise its termination rights on a reasonable basis.

The parties are waiting on a decision from the court about whether to approve the arrangement.  But the arrangement has obvious advantages.  It fairly allocates risk among all of the parties with an economic interest in the claim.  It facilitates the law firm’s ability to manage the financial burden of the class action and to carry on its representation of other clients.  It provides the funder with the option of withdrawing from the case if it turns out to lack merit, thus reducing the chance that the provision of funding will allow an unmeritorious case to continue.

In short, this arrangement shows how well litigation funding can work.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, alternative litigation finance, class actions, Canadian law, contingency fees, partial contingency fees