Docket: T-608-17
Citation:
2017 FC 826
Ottawa, Ontario, September 12, 2017
PRESENT: Madam Prothonotary Mireille Tabib
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BETWEEN:
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SEEDLINGS LIFE
SCIENCE
VENTURES, LLC
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Plaintiff
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and
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PFIZER CANADA
INC.
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Defendant
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ORDER AND REASONS
[1]
Seedling Life Science Ventures LLC (“Seedlings”)
is a small corporation in the business of health care-related research and
product development. It considers that Pfizer Canada Inc. (“Pfizer’), a large
pharmaceutical company, infringes one of its patents and it has accordingly
commenced this patent infringement action.
[2]
Seedlings believes it has a strong case, but is
concerned that the costs and risks inherent to complex patent litigation such
as this may cause it to incur financial obligations and devote resources that
could put other of its core business projects at financial risk. Prior to
issuing its statement of claim, Seedlings sought out and entered into a
Litigation Funding Agreement (“LFA”) with Bentham IMF Capital Limited
(“Bentham”), the Canadian subsidiary of IMF Bentham Ltd., a professional
litigation funding enterprise from Australia that has subsidiaries and carries
on business in several other countries.
[3]
The LFA, to which Seedlings’ Canadian and
American counsel are also parties, provides that Bentham will fund Seedlings’
legal fees and disbursement in this action, and that each of Seedlings, Bentham
and the Canadian and American counsel for Seedlings will be entitled to
financial returns from a successful outcome of the action, whether by judgement
or settlement. The agreement provides that Seedlings remains in control of the
litigation and of instructing counsel, but that Bentham may terminate the
agreement if it ceases to be satisfied of the merits of the action or of its
commercial viability. Bentham also has the right to be consulted on the issue
of settlement. For these and other purposes, the LFA contemplates that Bentham
will have access to all documents produced in the litigation, but be subject to
the same confidentiality or implied undertaking obligations as Seedlings.
Finally, the LFA is made conditional upon court approval. Specifically, the LFA
provides that if this Court does not approve its terms, Bentham may, at its
sole discretion, declare the LFA null and void.
[4]
Seedlings and Bentham thus presented this motion
to the Court seeking the “approval” of the LFA.
[5]
What, however, does “approval” mean? Why is this
Court’s approval even necessary or useful? Does this Court have the required
jurisdiction to entertain the request for approval?
[6]
There is no precedent in this Court for such a
procedure. The moving parties’ notice of motion and written representations
seem to draw their inspiration from the Ontario Superior Court of Justice’s
practice and procedure in approving funding agreements in the context of class
proceedings, as very recently adapted in one instance in the context of private
commercial litigation (Schenk v Valeant Pharmaceutical International Inc.,
2015 ONSC 3215). Because the Ontario Superior Court is a court of general
original jurisdiction, its jurisdiction to enquire into and approve the terms
of funding agreements incidental to proceedings before it has not been
questioned. However, the Federal Court’s jurisdiction is statutory and cannot
be presumed. The Federal Court has jurisdiction to consider and apply
provincial laws where they are ancillary to the disposition of the substantive
issues that are properly before it. It also has plenary jurisdiction to control
its own process. But it does not have jurisdiction to grant remedies and make
final determinations of rights in disputes and matters over which it has not
been expressly granted jurisdiction by statute and in accordance with the
requirements set out in ITO – International Terminal Operators Ltd v Miida
Electronics Inc., [1986] 1 S.C.R. 752.
[7]
A clear understanding of what the moving parties
are requesting the Court to determine, the purpose for which it is requested
and how that purpose fits within the scope of the litigation before the Court
is therefore essential to determining the Court’s jurisdiction. Having
performed that analysis, as set out below, it becomes obvious that the remedy
sought by Seedlings and Bentham is neither necessary nor ancillary to the
present litigation, that the Court has no jurisdiction, in the circumstances,
to enquire into or make any determination as to the validity or propriety of
the LFA and that the Court should decline to grant any relief on this motion.
[8]
The primary reason for parties to seek prior court
approval of the manner in which litigation is funded is to protect the funding
party from the consequences of a subsequent finding that the agreement might be
champertous.
[9]
Laws regarding champerty and maintenance were
developed in common law jurisdictions in medieval times as a measure to protect
the administration of justice from abuse. At the time, the abuses took the form
of high ranking or influential persons purchasing doubtful or fraudulent
claims, expecting a more favourable outcome in court than the assignor. The
Ontario Court of Appeal in the seminal case of McIntyre Estate v Ontario
(Attorney General), [2002] OJ No 3417, traces the history of the statutes
and common law doctrines relating to champerty and maintenance from the first statute
enacted in England in 1305, through the enactment of Ontario’s An Act Respecting
Champerty, RSO 1897, c. 327 (the “Champerty Act”) and the subsequent
abolition of the common law crimes and torts of champerty and maintenance in
Canada in 1954 and in the United Kingdom in 1967. The Court of Appeal’s analysis
notes, however, that both in England and in Canada, the concepts remain alive
to render contracts that constitute champerty or maintenance unenforceable as
being contrary to public policy. Indeed, the Champerty Act remains in
effect in Ontario, and provides that “All champertous
agreements are forbidden and invalid”.
[10]
In essence, maintenance is directed against
those who, for an improper motive and without justification or excuse, assist
others in litigation in which the maintainer has no interest. Champerty is an
egregious form of maintenance in which the maintainer shares in the profits of
the litigation.
[11]
Where a person agrees to fund the litigation of
another in exchange for a share of the proceeds, the risk is that it may lose
its investment, even if the litigation is successful, if the funding agreement
is subsequently found to be invalid and unenforceable as champertous. That
seems to have been the concern that drove the applicant in McIntyre Estate
(above) to seek a declaration from the Ontario Superior Court of Justice that
the contingency fee agreement entered into between the applicant and its
lawyers to fund a wrongful death suit was not prohibited under the Champerty
Act.
[12]
It is interesting to note that the application
for a declaration in respect of the contingency fee agreement was brought as a
separate application from the wrongful death action, and named only the
Attorney General of Ontario as a respondent. The defendant in the wrongful
death suit was not named as respondents and did not participate in the
application proceedings. Indeed, that defendant’s motion for leave to intervene
in the appeal of the application was dismissed on the basis that the
determination of whether, as between the parties to the contingency fee
agreement, their agreement is valid and enforceable is incidental to but
distinct and independent from the underlying dispute (McIntyre Estate v
Ontario (Attorney General), [2001] OJ No 3206, at para 21). Such
disputes are thus clearly a matter of contract and civil law that falls outside
the jurisdiction of the Federal Court, even where the underlying dispute might
otherwise be properly brought before it. Seedlings and Bentham concede as much,
and counsel expressly stated at the hearing that the “approval” sought would
not be determinative of the rights of the parties to the LFA.
[13]
Judicial approval of solicitors’ fee structures
and associated funding agreements has also been sought and considered in the
context of class actions, for example, in Dugal v Manulife Financial Corp.,
2011 ONSC 1785, Fehr v Sun Life Assurance Co. of Canada, 2012 ONSC 2715,
Labourers’ Pension Fund of Central and Eastern Canada (Trustees of) v
Sino-Forest Corp., 2012 ONSC 2937 and Musicians’ Pension Fund of Canada
(Trustees of) v Kinross Gold Corp., 2013 ONSC 4974. However, in these
cases, the court held that judicial approval was mandated and governed by the
provisions of the Class Proceedings Act, 1992, SO 1992, c. 6, which
requires court approval of fee agreements or the judicial review of class
counsel’s fees and disbursements. The court’s prior approval of third party
funding agreements, whereby a portion of any recovery or settlement would be
diverted from the class to pay the third party funder, is an extension of this
practice.
[14]
The prior vetting of third party funding
agreements in class proceedings is not merely a matter of ensuring that the
agreement is not contrary to public policy as champertous, but a matter of
ensuring the protection of the interests of class members against unreasonable
agreements, as well as protecting courts against potential abuses specific to
class proceedings. Class action legislation is designed to foster access to
justice by overcoming economic barriers to litigating mass wrongdoing,
increasing judicial economy by permitting courts to adjudicate numerous claims
fairly and efficiently, and ensuring means for wrongdoers to be brought to
account. Given the potentially significant returns available to third party
funders in class proceedings, the Ontario Superior Court in Fehr acknowledged
a legitimate concern that “if not regulated, third
party funding might subvert the public policy purposes of class proceedings”.
The court concluded that, in class proceedings, third party funding agreements
were required to be promptly disclosed to the court, and could not come into
force without court approval (Fehr, paras 89 and 90).
[15]
It is easy to see, in the context of a class
proceeding, why the preservation of the class members’ interests and the
protection of the court from abuses of its process by unscrupulous funders
would require the court’s prior approval of LFAs. The Federal Court has, for
matters falling within its jurisdiction, its own class proceeding rules,
including provisions giving it oversight of agreements respecting solicitors’
fees and disbursement (Federal Courts Rules SOR/98-106, at s. 334.1 and
subsequent). The Federal Court’s jurisdiction to consider, and even to give
prior approval to an LFA in the context of class proceedings would hardly be in
doubt as an exercise of the Court’s plenary power to control its own process in
matters falling within its jurisdiction. (See also, for example, Manuge v Canada,
2013 FC 341).
[16]
The underlying proceeding, however, is not a
class proceeding. There is no requirement in the Federal Courts Rules
for the disclosure or the approval of counsel’s fee structure or funding in any
litigation other than class proceedings. There is no class whose interests
might be affected by the terms of the LFA. Nor would the court’s plenary
jurisdiction to control its own process and guard against abuses of its process
be triggered in the circumstances: The legal, procedural and policy imperatives
underlying the practice or requirement developed in Ontario and other provinces
of submitting LFAs to prior court approval in class proceedings do not exist in
the context of private litigation. There is no legal or logical basis to extend
the requirement of pre-approval outside of class proceedings.
[17]
Seedlings and Bentham have argued that because
the concepts of champerty and maintenance exist, in part, to protect the courts
against abuse of their process, the Federal Court’s plenary powers to control
its own process does give it jurisdiction to enquire into, detect and root out
agreements that may be champertous and may constitute abuses of its process.
[18]
To the extent the doctrine of champerty and
maintenance remains relevant in Canadian common law, even as means of
protecting the courts and vulnerable litigants against abuses, its purpose is
not and was never intended to be achieved by conferring on the courts the
discretion to inquire into and approve or disapprove of a plaintiff’s funding
arrangements as a condition precedent to instituting or pursuing litigation. It
simply operates and achieves its purpose by rendering agreements tainted by
maintenance and champerty unenforceable.
[19]
The doctrine of maintenance and champerty does
not seek to penalize or sanction the conduct of the rightful holder of
litigious rights, but only the conduct of the maintainer. Even when it was a
misdemeanor, maintenance was an offence of the maintainer, not of the person
being maintained (R v Goodman, [1939] S.C.R. 446). Indeed, the inquiry as
to whether an agreement constitutes maintenance or champerty focusses on and is
determined by the motives of the maintainer, not of the person being
maintained.
[20]
The sanction for champerty or maintenance, the
unenforceability of the agreement, therefore directly addresses and is
sufficient to discourage the reprehensible motive and conduct, by depriving the
maintainer of the benefits of its conduct.
[21]
Where the champertous agreement takes the form
of the sale or assignment of a bare right of action and it is the maintainer
who purports to bring suit and recover under the rights assigned, it is
possible for the defendant to the action to raise the champertous nature of the
assignment and its unenforceability as a defence, and thus achieve the public
policy objectives of preventing champerty and maintenance by ensuring the
maintainer’s inability to pursue and recover under improperly assigned rights. There
are reported cases where, as a matter of standing and title to sue, the Federal
Court has properly exercised its jurisdiction to consider the validity of an
assignment under the doctrine of champerty and maintenance: Thomas Fuller
Construction Co., (1958) Ltd. v Canada, [1991] FCJ No 562, [1992] 1 FC 512,
reversed at [1992] 3 FC 795 and Wire Rope Industries Ltd. v Amsted
Industries Inc., [1990] FCJ 512, 112 NR 73, 32 CPR (3d) 334. The Court has
also been asked to determine whether the plaintiffs in an action already
commended could validly assign their interest in the action to a third party: Tacan
v Canada, 2003 FC 915. What gives the defendant the right to raise and the
Federal Court the jurisdiction to determine whether the agreement is
champertous in such cases is that the alleged champertous agreement goes to the
foundation of the action: the plaintiff’s entitlement and standing to assert
the rights against the defendant. The determination of the validity of the
assignment becomes necessary to the disposition of the action asserted by the
plaintiff against the defendant.
[22]
In the case before me, the action has been
instituted and is proposed to be pursued by Seedlings itself, the original
holder of the rights asserted. The manner in which Seedlings chooses to fund a
litigation it has every right to bring is of no concern to the Court or to the
Defendant (McEwing v Canada (Attorney General), 2013 FC 525 at para 108
to 115). See also Standal v British Columbia Forest Products Ltd.,
(1981) 57 CPR (2d) 243 and the cases cited therein, to the effect that unless a
plaintiff has to rely on a champertous agreement to establish its title, the
mere existence of a champertous agreement or maintenance is not a defence to
the action and does not disqualify the plaintiff from pursuing an action
otherwise properly vested in it.
[23]
The Defendant has no legitimate interest in
enquiring into the reasonability, legality or validity of Seedlings’ financial
arrangements, its counsel’s fee structure or the manner in which Seedlings chooses
to allocate the risks and potential returns of the litigation, because they do
not affect or determine the validity of the rights asserted by Seedlings in
this action (McIntyre Estate, 2001, above).
[24]
Because of the manner in which the doctrine of
maintenance and champerty operates and is applied, the motives of Seedlings in
entering into the LFA and in pursuing what appears to be a meritorious claim
are not at issue and have no reason to be impugned, by the Court or by the
Defendant. To the extent there were any risks that the LFA might be found
champertous, it would be as a reason of the improper motives of Bentham.
Bentham’s improper motives, if any, would not justify the dismissal of
Seedlings’ claim as an abuse of process, as it would visit the consequences of
the maintainer’s improper motives on the person being maintained.
[25]
In its oral submissions at the hearing, counsel
for Seedlings and Bentham has emphasized that in seeking the “approval” of the
LFA, they were not seeking a determination of the validity and enforceability
of the LFA as between them, but essentially, a declaration and recognition, in
the presence of the Defendant, that the underlying litigation is not an abuse
of process, that the funding arrangements between them do not demean the
administration of justice and that the Defendant does not have the right to
object to the Plaintiff’s right to carry out the litigation under the terms of
the LFA. My conclusion to the effect that the doctrine of maintenance and
champerty does not confer upon this Court the authority to enquire into the
legality of the LFA or on the Defendant the right to have the litigation
pursued pursuant to it dismissed as an abuse of process might be seen as
supporting the issuance of the declaration sought by the Plaintiff. This
however would miss the point I endeavour to make, that in the circumstances of
this case, where the Plaintiff is asserting its own rights against the
Defendant, this Court has no jurisdiction to make any determination in respect
of any funding agreement to which the Plaintiff is a party, whether of the
Court’s own motion, at the behest of the Plaintiff or on a motion of the
Defendant. This has nothing to do with the terms of the LFA itself, but with
the nature of the rights asserted in this litigation.
[26]
Seedlings and Bentham have argued that the
Court’s approval of the LFA (including by way of a declaration that the
litigation is not an abuse of process) is a matter of access to justice, as
without it, the LFA stands to be inoperative and Seedlings may be unable to
pursue a meritorious claim.
[27]
That may be so, but only because Seedlings and
Bentham have chosen to make their agreement contingent upon this Court’s
approval. The Federal Court’s jurisdiction cannot be conferred by agreement
between parties.
[28]
As mentioned, there are no procedural
requirements for the approval of a party’s funding agreement outside of class
proceedings and no substantive grounds upon which this Court might assume
jurisdiction to enquire into or determine the validity of the LFA in the
context of the action as instituted. To the extent Bentham requires the comfort
of a court’s prior determination of the enforceability or moral acceptability
of the LFA before proceeding with it, that is strictly a matter of contract
between subject and subject and properly within the jurisdiction of the courts
of the provinces. As was the case in McIntyre Estate, 2002, the parties
to the LFA were free to bring, before the appropriate provincial court, an
application for a declaration as a matter distinct and separate from the
present underlying action.
[29]
Finally, I have considered whether there was any
need or benefit to the Court recognizing the LFA for the purpose of ensuring
that Seedlings will be able to share information obtained on discovery with
Bentham without breaching the implied undertaking rule, or to give effect to
Bentham’s undertaking to be bound by the implied undertaking rule or
confidentiality orders.
[30]
There are, at present, no confidentiality or
protective orders in place. It is premature to determine whether Bentham should
be included in or bound by any such orders. Further, counsel for the Defendant
conceded at the hearing that it is not unusual for such orders to extend to
permit disclosure to and bind entities or law firms that are not parties to the
litigation, but whose advice and instructions are expected to be required.
[31]
With respect to the implied undertaking rule,
Seedlings and Bentham themselves took the position at the hearing that a waiver
of the implied undertaking rule was not necessary in order for Seedlings to lawfully
communicate the information obtained on discovery to Bentham for the purposes
of the LFA. I agree.
[32]
The implied undertaking rule prohibits a party
who obtains documents or information through discovery from using these
documents and information for any purpose other than for the litigation in
which the documents and information were provided (Canada v ICHI Canada Ltd.,
[1992] 1 FC 571). The rule does not operate to prevent disclosure to
non-parties. Disclosure to non-parties, including experts, potential witnesses,
consultants or others whose advice is relevant to the carriage of the
litigation, or of litigation derived from and in the service of the original
action, is permitted so long as it is not an “alien”, “collateral”, or
“ulterior” purpose (Sovani v Gray, 2007 FCCA 439, Abou-Elmaati v
Canada (Attorney General), 2014 ONSC 6301, Lithwick (In trust) v Hakim
Optical Laboratory Ltd., 2007 CarswellOnt 7907).
[33]
The LFA being, on its face, made for the express
purpose of pursuing the litigation, use of the discovery information for the
purpose of complying with the LFA would appear to be neither improper nor
alien, collateral or ulterior to the litigation. To the extent Seedlings were,
for the purposes of pursing this litigation, to share discovery information
with Bentham, it would be incumbent upon it to ensure that Bentham is made
aware that the information is covered by the implied undertaking rule, and that
Seedlings’ obligations and restrictions to the use of the documents extend to Bentham.
The undertaking, whether implied or expressed, given by recipients of discovery
information is an undertaking given to the Court that can be enforced by the
Court without the need for prior formalities. (Casavant v Alberta Co-op Taxi
Line Ltd., [1996] 188 AR 381, 41 Alta LR (3d) 425, Winkler v Lehndorff
Management Ltd., [1998] OJ No 4462).
[34]
There is accordingly no need for the Court to
waive the implied undertaking rule to enable Seedlings to share the information
with Bentham if doing so is properly for the purpose of the conduct of the
action, and there is no need for the Court to formally recognize or approve the
LFA for Bentham’s agreement to abide by the implied undertaking rule to be
effective.
[35]
While Seedlings and Bentham’s motion ultimately
fails, I decline to order costs in favour of Pfizer. Although it is a defendant
to this action and was made a responding party to this motion, Pfizer does not
have, and never has had, any legitimate interest in enquiring into the validity
or propriety of the LFA. Without a direct interest in the outcome, Pfizer could
have avoided spending any time or incurring any costs in opposing the motion.
It would also have been an appropriate response for Pfizer to participate in
the motion to make relevant observations to the Court on the issue of the
Court’s jurisdiction. Pfizer’s response to the motion however went far beyond
what was necessary or appropriate. It aggressively opposed all aspects of the
motion on substantive and procedural grounds, cross-examined Seedlings’
affiants, brought a motion to compel the production of the unredacted LFA,
opposed the participation of Bentham or its counsel, and objected to the
introduction of evidence on the record of this motion, even where that evidence
had been considered by the Court in the context of a related motion. Pfizer’s
conduct was not at all helpful to the determination of the issues before the
Court, and rather tended to obscure the issues and lengthen the proceedings. Pfizer’s
conduct should not be recompensed with an award of costs.
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