Legal Definitions - champerty

Champerty refers to a specific type of agreement where an outside party, who has no direct connection or genuine interest in a legal dispute, provides financial or other material support to someone involved in a lawsuit. In return for this support, the outside party agrees to receive a portion of any money or assets that the litigant might win from the case. The crucial characteristic of champerty is that the outsider's payment is entirely dependent on the lawsuit's successful outcome; if the litigant loses, the outsider receives nothing. This arrangement is distinct from a typical loan because there's no obligation for the litigant to repay if the case fails, and it's also different from simply transferring ownership of a legal claim.

Here are some examples to illustrate champerty:

• Example 1: Small Business Owner and Investment Firm

  A small business owner believes a larger competitor unlawfully copied their product design, causing significant financial harm. The business owner has a strong case but lacks the substantial funds needed to pursue complex intellectual property litigation against a well-resourced opponent. An investment firm, specializing in litigation finance, offers to cover all legal fees, court costs, and expert witness expenses. In exchange, the firm stipulates that if the business owner wins the lawsuit or reaches a settlement, they will receive 30% of the total recovery. If the business owner loses, the investment firm bears all the costs and receives no return.

  How this illustrates champerty: The investment firm is a third party with no prior involvement in the business or the dispute. They are providing financial support for the litigation. Their compensation (30% of the recovery) is entirely contingent on the lawsuit's successful outcome, demonstrating the core principle of champerty.

• Example 2: Injured Individual and Litigation Funding Company

  A person suffers a severe injury due to a faulty medical device and needs extensive, ongoing medical treatment, but they are unable to work and their savings are depleted. They have filed a personal injury lawsuit against the device manufacturer. A litigation funding company offers them an immediate cash advance to cover their living expenses and medical bills while their lawsuit progresses. The agreement states that if the lawsuit is successful, the funding company will be repaid the advanced amount plus a significant percentage of the final settlement or court award. However, if the lawsuit fails, the injured individual owes nothing to the funding company.

  How this illustrates champerty: The litigation funding company is an unrelated third party providing financial assistance to the plaintiff. Their repayment and profit are entirely dependent on the plaintiff winning the case. They have no interest in the case other than the potential financial return tied to its success.

• Example 3: Independent Inventor and Venture Capitalist

  An independent inventor believes a large technology company infringed on their patented software, but they cannot afford the high costs associated with patent infringement litigation, which can run into millions of dollars. A venture capitalist, seeing the potential for a large payout if the patent is upheld, agrees to fund all legal expenses, including attorney fees, expert testimony, and court filing fees. In return, the venture capitalist demands a substantial percentage of any damages awarded if the inventor wins the lawsuit. If the inventor loses, the venture capitalist absorbs all the costs and receives no return on their investment.

  How this illustrates champerty: The venture capitalist is an unrelated third party providing financial backing for the lawsuit. Their compensation is a direct share of the lawsuit's proceeds, and this payment is entirely dependent on the inventor winning the case, highlighting the speculative nature of the investment typical of champerty.