Revisiting Champerty and Patent Enforcement Agreements

cham‧per‧ty [cham'-per-tee]
noun Law.

a sharing in the proceeds of litigation by one who agrees with either the plaintiff or defendant to help promote it or carry it on.

[Origin: 1300-50; ME champartie, equiv. to champart (<>camp1) + part share, see part) + -ie -y3]

It's not something that comes up often in patent litigation, but it can warrant a second look by litigators in the increasingly common world of patent litigation financing. The common law doctrine of champerty was developed centuries ago to prohibit contractual or other arrangements designed to "foment litigation." Essentially, champerty covered agreements between "a stranger to a lawsuit and a litigant by which the stranger pursues the litigant's claim as consideration for receiving part of judgment proceeds."

Champerty originally stemmed from medieval concept of a legal or equitable "chose in action," where assignees of an action were not allowed to sue in their own name. Since the 1900's, champerty was recognized less and less frequently, until many states either narrowed the doctrine to the point of irrelevancy, or abolished it altogether (California, New Jersey, Massachusetts are such examples). For other states, however, the extent to which courts apply champerty is in flux, although the trend of avoiding champerty persists.

Last week, this little gem was passed around Greg Aharonian's newsletter, which prompted cries of "champerty" from some of the readers:

Dear Friend,

A pawn-sized U.S. tech company is about to deal one of the Earth's biggest automakers a checkmate of "Bobby Fischer" proportions in federal court...

And the anticipated settlement - whether awarded in front of a jury or in an out-of-court action - could well go down in history as the largest ever handed down in a patent infringement case. I wouldn't be surprised if it topped several billion dollars in total monies changing hands before it's all said and done.

And should it win (it looks all but guaranteed, as you'll see in a minute), this off-the-radar electro-tech innovator will instantly rise to king-sized status within its market segment . . .

[I]magine how much an international hybrid car leader would pay to settle a valid patent claim that's suddenly standing between it and billions in profit.

Then imagine how much you'll get paid if you're holding more than a few shares of this company's stock when it happens. But you'll have to hurry. . .

I expect massive gains of at least 2,000% on the heels of a hush-hush out-of-court settlement between this industry king and the pawn who corners it - and SOON.

For those that may be familiar with the case, this letter refers to the lawsuit which Solomon filed against Toyota, alleging that hybrid technology in the Toyota Prius and Toyota Highlander gasoline-electric hybrids infringes on Solomon's US Patent 5,067,932. In this case, Oliver Street Finance, LLC, has agreed to pay all legal fees and expenses in exchange for a portion of any recovery Solomon receives in the litigation equal to the greater of 40% of the recovery or the actual amount of legal fees and expenses.

In states where champerty is recognized, the application of the doctrine is generally limited to agreements that have as their "sole or primary purpose" the prosecution of litigation. If the instigation of litigation is not the sole purpose of the agreement (i.e., litigation coupled with "licensing development" pursuant to an assignment), it should not be champertous.

One state that recognizes champerty, albeit in a very limited sense, is New York (see New York Judiciary Law § 489). New York is one of the very few jurisdictions that has found specific IP agreements champertous in the recent past:

Refac Int'l, Ltd. v. Lotus Dev. Corp. 131 F.R.D. 56 (S.D.N.Y. 1990) - found assignment champertous where a five-percent interest in the patent was contracted in exchange for Refac's obligation to sue at least two alleged infringers within one month. The patent was subsequently invalidated for inequitable conduct by the Federal Circuit, but no opinion was given on appeal with regard to the agreement itself.

American Optical Co. v. Curtiss, 56 F.R.D. 26 (S.D.N.Y. 1971) - the assignment of certain IP that was expressly conditioned on the assignee bringing suit was champertous, and therefore void.

However, in cases where the financier took some (minimal) care in ensuring that the agreement wasn't solely based on litigation alone, the courts have found the agreements non-champertous.

Litigation financing is becoming more common and is definitely a controversial practice in the eyes of many defendants (one author recently described it as the "Wild West of Finance"). On the plaintiff's side, it is seen as a means to protect the rights of "the little guy" that would otherwise be unable to enforce protectable interests.

Some have even questioned whether lawsuits should be freed from champerty altogether, where a form of venture capitalism would exists, allowing investors to back all forms of litigation:

[D]o we want to allow strangers to invest in lawsuits at all? The distinction drawn between our current system of contingency fee arrangements and [financing companies] is fetishistic - it's a distinction without a difference. So, too, is the supposed distinction between supporting an appeal and supporting a lawsuit from its moment of conception. If we think that it is good that plaintiffs have access to cash-and we should, given the realities of the modern legal world-then our rules should not discriminate when it comes to who can accept money, and when it can be accepted.

Second, do we want to allow lawsuits to be assigned? I think the courts that permit "soft," limited forms of champerty have to ask themselves why they won't go hardcore. Why not allow [financing companies] not only to fund the lawsuit, but also to own all its proceeds and to control its lawyers and whether it settles? If [plaintiffs] would rather be passive observers to the suit (retaining, perhaps, a stake large enough to insure that they will bother to show up in court and testify even if they live beyond the court's subpoena power), then why not allow [the financing company] to pay them for transferring their control to her? In the case of many smaller suits, it is possible that the lawyering and settling might be much better after such a transfer, than it would be if the original plaintiffs remained in control.