Champerty

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A relationship arises when third parties unrelated to a litigation provide material support to litigants in exchange for consideration contingent on the outcome of the litigation. Often that relationship–between the third party and the litigant–is known as champerty. The most basic champerty scheme occurs when a third party provides material support to a party to a lawsuit on the condition that the litigant shares with the supporter any of the proceeds won from the litigation. The third-party supporter must have no bona fide interest in the case; the sole benefit is pecuniary. In the United States, the legality of champerty varies state to state; sixteen permit it explicitly by statute and twelve permit it implicitly.

Consequently, champerty is a subset of a broader concept known as maintenance. Maintenance occurs when a stranger provides something of value to a litigant to support or promote the litigation. The important distinction between maintenance and champerty is that in maintenance, the maintainer is not rewarded for supporting the litigant. Instead, maintenance is helping the litigant prosecute her suit; champerty is maintaining a suit in return for a financial interest in the outcome. Put simply, in champerty, the supporter's reward is completely contingent on the outcome of the case.

The early common law expressed hostility towards champerty. Indeed, the Western legal tradition largely prohibited third-party involvement in litigation since Roman law. The famed legal thinker Blackstone described champerty as "an offense against public justice, as it keeps alive strife and contention, and perverts the remedial process of the law into an engine of oppression." By the early twentieth century, champerty was broadly prohibited. In In the Matter of the Estate of Gilman, Judge Cardozo said that "maintenance for spite or envy or the promise or hope of gain" is forbidden whereas "maintenance inspired by charity or benevolence" is permitted. Today, maintenance in the case of "the promise of gain" is simply called champerty. Gilman addressed a particular champertous arrangement–maintenance by a litigant's own lawyer–that may have been especially repulsive to Judge Cardozo.

Nonetheless, such arrangements are common today. They are called "contingency fees," which are universally accepted in the United States. Indeed, the history of contingency fee arrangements captures the gradual liberalizing of champerty laws in the United States.

Although champerty is largely accepted in the United States, states do not universally welcome the scheme. Some states characterize it as a risky form of gambling, thus deeming it illegal because it is essentially speculation that violates state law. The 2003 decision in Rancman v. Interim Settlement Funding Corp. epitomizes this view. There, Ohio's Supreme Court held that a champertous contract was void for violating public policy. The Court said, "a lawsuit is not an investment vehicle. Speculating in lawsuits is prohibited by Ohio law. An intermeddler is not permitted to gorge upon the fruits of litigation." Consequently, the Court viewed such advance payment as pernicious because it gives a nonparty an impermissible interest in a suit, impedes the settlement of the underlying case, and promotes speculation in lawsuits.

Understanding champerty also requires an understanding of its distinction from other similar doctrines. Champerty is not, for example, an assignment. An assignment occurs when someone transfers to another all or part of one'sone's property, interest, or rights. Champerty is not an assignment because in champerty the litigant retains her cause of action. As in the case of maintenance, the early common law barred all assignments of a cause of action. Over time, restrictions on assignments of a cause of action diminished, and today the "assignability of things in action is now the rule; non-assignability, the exception." Also, a champertous contract is not a loan, although the two concepts are often conflated. In a champertous contract, the third-party supporter's only chance of recovery is contingent upon the lawsuit's success. The litigants are not burdened by an absolute obligation to repay.

In modern parlance, champerty encompasses litigation finance, a growing yet controversial practice for funding plaintiffs' lawsuits. Critics of litigation finance point out that it "prey[s] on financially desperate plaintiffs," give[s] third parties control over litigation in which those parties have no interests at stake," and "prolong[s] litigation by inhibiting plaintiffs from settling lawsuits." Such concerns echo Blackstone who was worried that third-party involvement would spur frivolous litigation. However, supporters of litigation finance view it as a form of venture capital, allowing otherwise barred litigants to pursue meritorious claims. Indeed, champerty essentially enables investors to invest in promising claims in exchange for "equity" in the litigant's outcome. Others argue that champerty benefits society as a whole because it results in more plaintiffs filing meritorious lawsuits.

[Last updated in June of 2020 by the Wex Definitions Team]