Seedlings Life Science Ventures LLC v Pfizer Canada Inc2017 FC 826

The practice of parties receiving funding for litigation via third-party funding agreements has ramped up in recent years. As this case demonstrates, the procedural boundaries of such practices are not well known, particularly in regard to whether judicial approval for third-party funding agreements is required.

In this case, Seedlings Life Science Ventures, LLC (“Seedlings”) made financial arrangements with Bentham IMF Capital Limited (“Bentham”) for Bentham to fund its patent infringement suit against Pfizer Canada Inc. (“Pfizer”). [2] Mindful of the common-law doctrine of champerty and maintenance, which allows courts to render unenforceable litigation funding agreements in certain circumstances, Seedlings and Bentham voluntarily filed a motion at the Federal Court (“FC”) seeking approval of their litigation funding agreement (“LFA”). [4] This is the first time that a third-party litigation funding issue appeared before the FC in the private commercial context.

The FC declined to approve (or disapprove) of the LFA in these circumstances because it lacked jurisdiction. [7] First, it held that approval of an LFA is a contractual matter, which is distinct and independent from the underlying patent dispute, and therefore if any approval were required, the matter would fall within provincial jurisdiction. [6] Second, the FC noted that litigation funding contracts require FC approval only when the matter, which substantively falls within federal jurisdiction, is incidental to class proceedings. [15] Outside the class action context, funding contracts do not need to be reviewed by the FC to be enforceable. [16]

Background & the LFA

Bentham is an Australian professional litigation funding enterprise that has recently entered the Canadian market. [2] Seedlings sued Pfizer for patent infringement, and entered into the LFA with Bentham such that Bentham would fund the litigation in exchange for a share of the proceeds. [3] The LFA also provides that the plaintiff Seedlings would remain in control of the litigation, while the funder Bentham may terminate the contract if it considers the claims no longer meritorious or have commercial viability. [3] In addition, Bentham would have access to all documents produced in the litigation, subject to the implied undertaking rule. [3] Importantly, the LFA stipulates that Bentham could declare the agreement null and void if the FC did not approve it. [3] Seedlings and Bentham therefore voluntarily brought the LFA to court for approval. [3]

Analysis

To determine whether the FC has jurisdiction to grant approval, the judge considered how approval of the LFA would be useful and whether it is necessary to approve the LFA for those reasons. [5]

1. FC found no jurisdiction under the doctrine of champerty and maintenance

The primary purpose to obtain court approval for a third-party litigation funding agreement is to protect the funder from the financial consequences of an unenforceable contract. [8] This happens when the agreement is found to be an abuse of process under the doctrine of champerty and maintenance, where the funder assists the plaintiff in litigation with an improper motive to profit from a meritless claim. [9] Seedlings and Bentham argue that the FC has jurisdiction over this issue, given that it has jurisdiction to control its own process and to protect it from abuse. [17]

The FC rejected this argument and clarified that although the doctrine of champerty is relevant to the extent that the courts have power to render champertous agreements unenforceable, and thereby prohibiting the funder from getting a share of the proceeds after litigation, [18] it does not confer courts the discretion to approve or disapprove of funding arrangements as a pre-condition before litigation. [18]

On the other hand, in the context of class actions, judicial approval of third-party funding agreements is required, for cases under both federal and provincial jurisdiction. [13] However, the FC explained that the purpose of this requirement is not solely to target champertous agreements. [14] Prior vetting also ensures the protection of the interests of vulnerable class members against unreasonable terms. The FC refused to extend this requirement outside the class action. [14]

The FC added that access to justice is not at issue in this case. [27] The moving parties chose to make their agreement contingent upon FC approval themselves, but there is no such procedural requirement, and they are free to seek approval from the appropriate provincial court. [27-28]

2. The Defendant is not entitled to enquire into the LFA

The FC reassured the moving parties that Pfizer has no legitimate interest in enquiring into the terms of the LFA because the contract is independent from the rights asserted in the underlying patent infringement action. [23]

Notwithstanding, it is possible for a party to raise a defence pointing to a champertous agreement when a plaintiff assigns a bare right of action to the funding party, who brings suit and recovers under those improperly assigned rights. [21] This scenario does not apply to Seedlings’ case.

3. Third-party funder is entitled to receive information from discovery without court approval

Lastly, prior approval of the LFA was partly sought to ensure that Seedlings could share information in the litigation with Bentham. The FC found prior approval to be unnecessary because a third-party funder is bound by the implied undertaking rule the same way a plaintiff is. [33] The FC explained that Bentham is entitled to receive information from the discovery like any related third-party would be, such as experts and consultants whose advice is relevant to the litigation, and such disclosure by a plaintiff is “neither improper nor alien, collateral or ulterior to the litigation.” [32-33]

For these reasons, the FC found no “legal or logical basis to extend the requirement of pre-approval outside of class proceedings” [16] and concluded that approval and determination of the enforceability of the LFA is “neither necessary nor ancillary to the present litigation.” [7]

Commentary

The litigation funding industry is on the rise, and this case demonstrates a need for the law to catch up. This case provides some guidance in the context of private commercial litigation, where the FC rejected jurisdiction to pre-approve a litigation funding contract outside the realm of class proceedings. Parties seeking approval of funding contracts should instead bring the application to the appropriate provincial court. Such approval has been granted in at least one high profile pharmaceutical case involving a single plaintiff in Ontario.

As the litigation funding industry becomes more established in Canada, one wonders whether judicial approval of litigation funding agreements will be made mandatory as a pre-condition to any litigation in the future. As of now, parties can choose to seek approval from the appropriate provincial court, to provide comfort to the funder, although this procedure is not required.