Creating New Law: A Trilogy of Litigation Funding Cases
In recent weeks, the Federal Court of Canada and the Ontario Superior Court have given valuable guidance on litigation funding arrangements in Canada. As set out in more detail below, the key points arising from the trilogy of decisions are:
- Litigation privilege attaches to a litigation funding agreement (LFA) (Seedlings I).
- LFAs need not be approved by a court, outside of the class action context. Defendants have no valid interest in challenging a plaintiff’s funding arrangements (Seedlings II).
- Litigation funders can receive information from the defendant’s discovery without requiring a waiver of the implied undertaking rule (Seedlings II).
- Bentham’s novel hybrid LFA in a class action context—where class counsel are paid some hourly fees by a litigation funder in addition to a partial contingency fee at the conclusion of the case—meaningfully contributes to access to justice for class members (Houle).
Links to the 3 cases—Seedlings Life Sciences Ventures LLC v. Pfizer Canada Inc., Fed. Ct. Docket T-608-17, Order (17 July 2017) [“Seedlings I”]; Ibid., Order and Reasons (12 September 2017, 2017 FC 826) [“Seedlings II”]; and Houle v. St. Jude Medical Inc., 2017 ONSC 5129 (29 August 2017) [“Houle”]—may be found here.
Seedlings I has been appealed by the defendant. Houle is being appealed by the plaintiff, in order to clarify aspects of a litigation funder’s rights to terminate an LFA and receive pre-approval of reasonable returns for its investment.
The underlying litigation in Seedlings involves the enforcement of the plaintiff’s patent against an international pharmaceutical company. Seedlings needed financial help moving its litigation forward. Enter litigation funding. Bentham agreed to pay Seedlings’ legal fees and disbursements on a non-recourse basis. If the case is unsuccessful, Seedlings loses nothing, and Bentham will pay any court-ordered costs. If the case is successful, Seedlings, its counsel and Bentham will each receive a return.
Seedlings I and Seedlings II relate to a motion that Seedlings and Bentham brought, on notice to the defendant, for approval of their LFA by the Federal Court (the “Approval Motion”).
LFAs are Privileged
Prior to the Approval Motion, the defendant Pfizer was provided with a redacted version of the LFA (the Court had an unredacted version). The defendant filed a motion for an unredacted copy. In Seedlings I, Case Management Judge Tabib dismissed Pfizer’s motion, with costs.
She found that litigation privilege attaches to the LFA, as it “was prepared and created for the sole purpose of the present litigation” [p. 2]. It was proper for portions relating to details of Bentham’s funding commitment and timing variables to be withheld from the defendant. Otherwise, Pfizer would get “a tactical advantage in how the litigation would be prosecuted or settled … [information that is] the very essence of what the litigation privilege is designed to protect” [p. 4].
LFAs do not Require Approval
The Approval Motion was dismissed, without costs, on the basis that the Federal Court did not have jurisdiction to grant such a remedy or make such a determination .
Case Management Judge Tabib reasoned that, unlike in class actions where courts must help protect vulnerable class members, “the legal, procedural and policy imperatives … of submitting LFAs to prior court approval … do not exist in the context of private litigation. There is no legal or logical basis to extend the requirement of pre-approval outside of class proceedings” .
The Court specifically noted that “the manner in which Seedlings chooses to fund a litigation it has every right to bring is of no concern to the Court or to the Defendant. … The Defendant has no legitimate interest in enquiring into the reasonability, legality or validity of Seedlings’ [funding] arrangements … because they do not affect or determine the validity of the rights asserted by Seedlings in this action” [22-23]. Indeed, by opposing the LFA as “aggressively” as it did, the Court held that “Pfizer’s conduct was not at all helpful to the determination of the issues before the Court … [and its] conduct should not be recompensed with an award of costs” .
Litigation Funders are Bound by the Implied Undertaking Rule
In the Approval Motion ruling, Case Management Judge Tabib found that the LFA need not be approved in order for Bentham to be bound by the implied undertaking rule. That is, a third-party funder is entitled to receive information from the discovery of a defendant, as any related third party would be (e.g. the plaintiff’s “experts, potential witnesses, consultants or others whose advice is relevant to the carriage of the litigation”), without special approval from the court. Such disclosure by a plaintiff to the funder is “neither improper nor alien, collateral or ulterior to the litigation”—as long as the funder agrees to abide by the implied undertaking rule [32-33].
Houle is the next stage in the evolution of Canadian jurisprudence relating to the third-party litigation funding in class actions. Previous cases considered litigation funding for disbursements and adverse costs orders only—now, the Ontario Superior Court has provided guidance on litigation funding for a portion of lawyers’ fees as the case progresses.
Hybrid LFAs are a Positive Development in Class Action Cases
Justice Perell commented that “the novelty of the hybrid retainer that combines a partial contingency fee with a fee-for-services retainer strikes me as a positive factor. … This approach which partially protects the financial and human capital of class counsel may expand the roster of firms prepared to assume the risks of class action litigation” .
The Court then set out a six-part test for assessing an LFA: (a) can a court scrutinize the LFA ; (b) is third-party funding necessary in the case ; (c) will the funder make a meaningful contribution to access to justice or behaviour modification ; (d) will the funder be overcompensated for its risks in the case ; (e) is the lawyer-client relationship protected from interference ; and (f) is the LFA illegal for grounds other than champerty and maintenance ?
The Court concluded that the LFA met all criteria except for (d) and (e).
In regards to (d), overcompensation, Justice Perell concluded that the appropriate level of compensation for Bentham can be determined only at the end of the litigation . In other words, Bentham cannot know if it is entitled to its full contractual rate of return for its investment in the litigation until after the case is over. The Court was willing to pre-approve only a 10% return, by analogy to the Class Proceedings Fund’s rate of return.
In regards to (e), interference, Justice Perell expressed concern that Bentham’s termination rights under the LFA might interfere with the plaintiffs’ litigation autonomy . Specifically, the Court held that Bentham should have no right to terminate the LFA if it reasonably considers that the case is no longer meritorious or commercially viable, and should be able to terminate the LFA in other specific circumstances only upon court approval .
Bentham has reviewed the decision carefully and is pleased that the Court recognizes creative funding approaches, such as hybrid LFAs, to be a positive development for access to justice. However, in order to receive additional clarity regarding the factors relevant to litigation funders—and in particular (d) and (e) of the criteria, above guidance from an appellate court is being sought.
Bentham is excited to be at the forefront of Canada’s litigation funding industry and to be part of creating new jurisprudence on the issue. While it is sailing in unchartered and sometimes bumpy waters, Bentham is confident it is leading the way towards greater certainty for litigation funding in Canada.