Canada: Funding Arrangements In Private Litigation Are Private Matters - Not To Be Scrutinized By The Federal Court Or The Defendant

Equip: IP Litigation Case of the Week

The cost of litigation can be a non-starter for an intellectual property owner with a strong infringement case. Litigation funding enterprises can help where the cost of litigation means the difference between proceeding and not proceeding.

Historically, the prohibitions on maintenance (meddling of a disinterested party to encourage a lawsuit) and champerty (maintenance and sharing in the award) prevented third parties from funding litigation.

In a recent decision, the Federal Court considered for the first time whether it had jurisdiction to enquire into the validity and applicability of a private litigation funding agreement. The Court concluded that the way private litigants fund litigation is not its concern nor is it the concern of the defendant.

Case

Seedlings Life Science Ventures, LLC v Pfizer Canada Inc., 2017 FC 826

IP Type

Patents

Summary

Seedlings Life Science Ventures, LLC sued Pfizer Canada Inc. for patent infringement. To fund its litigation, Seedlings entered into a litigation funding agreement with Bentham IMF Capital Limited, a non-party and a professional litigation funding enterprise. Under the agreement, Bentham would fund Seedlings' legal fees and disbursements in the action and each of Seedlings and Bentham would be entitled to financial returns from a successful outcome of the action whether by judgment or settlement. Seedlings would control the litigation but Bentham could terminate the agreement if it was no longer satisfied as to the merits or commercial viability of the action. Bentham would have access to all documents produced in the litigation. The agreement was conditional upon court approval and provided that if the Court did not approve its terms, Bentham could declare the agreement null and void.

Accordingly, Seedlings and Bentham sought court approval of the litigation funding agreement, requesting a declaration that the agreement did not render the action an abuse of process or demean the administration of justice, and that Pfizer had no right to object to Seedlings pursuing the litigation under the agreement. Pfizer opposed.

The Federal Court dismissed the motion because it lacked the jurisdiction to grant the relief.

Parties seek prior court approval of litigation funding arrangements primarily to protect the funding party from losing its investment if the funding agreement is subsequently found invalid and unenforceable as champertous. The Federal Court has examined litigation funding in the context of class action proceedings, the governing rules of which provide the Federal Court with oversight of agreements respecting solicitors' fees and disbursements. Before Seedlings, the Federal Court had never considered the validity and enforceability of a litigation funding agreement in the context of private commercial litigation.

In Seedlings, the Federal Court considered whether it had jurisdiction to make determinations on the litigation funding agreement, as a Court of statutory as opposed to general jurisdiction. The answer was no: the litigation funding agreement was incidental to but distinct and independent from the underlying patent action and thus fell outside the jurisdiction of the Federal Court.

The Court considered whether Seedlings' obligation to share documents and information obtained through discovery with Bentham gave rise to Federal Court jurisdiction to consider the agreement. The Court concluded it did not because there was no legal rule prohibiting Seedlings from sharing with Bentham discovery documents or information.

The Court also concluded that Pfizer had no right to enquire into the validity of the litigation funding agreement because it did not affect or determine the validity of the rights asserted by Seedlings in the action.

Following this decision, private litigants and litigation funding enterprises who request court approval of funding arrangements should bring the matter before a court of the appropriate province, rather than the Federal Court. Parties entering into these arrangements should find in this decision some comfort that the nature of the funding arrangement is beyond the reach of the defendant and cannot ground a claim that a meritorious action is an abuse of process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.