Why A Delaware Supreme Court Decision Affirming Shifting A Contingency Fee To The Losing Party Could Have Applications To Recovering The Costs Of Litigation Funding

In general, the U.S. legal system requires parties to bear their own costs, and does not automate “loser-pays” rules like other jurisdictions or arbitral institutions. There are certain exceptions, notably when the dispute arises under a contract providing that the prevailing party will be entitled to its fees and costs. An incentive to both parties to include such a provision is so that each party will truly be “made whole” after any dispute, rather than netting from any recovery the costs of legal fees and expenses.

An open question for both litigators and contract drafters to consider is whether these provisions cover the shifting of the financing costs where the party has used a litigation funder to finance the litigation. Such costs would include the amounts repaid to the funder out of any recovery plus the profit due to the funder above the capital invested as the cost to finance. (A full explanation of litigation funding pricing is here.)

The concept of litigation finance costs being recoverable as “costs” is not new – it finds its roots in arbitration where cost-shifting is the norm. In multiple decisions interpreting English arbitration law that provide for the prevailing party to recover “other costs,” the High Court declined to set aside arbitration awards holding that the prevailing party was entitled not only to the actual amounts disbursed to lawyers and out-of-pocket costs for experts and the like, but was also entitled to the costs of litigation funding on equitable and logical grounds. (Those decisions are discussed here.)

In the U.S., the logic of a recent ruling in the Delaware Supreme Court in Shareholder Representative Services LLC (“SRS”) v. Shire US Holdings, Inc. (“Shire”) may have applications to parties seeking to recover the costs of litigation funding. The Supreme Court affirmed in a summary decision the ruling of the Court of Chancery, which awarded the full amount of the contingent attorneys’ fees (which were one-third of the damages awarded and amounted to nearly $20 million) to be shifted to the non-prevailing party based on a contractual fee-shifting provision. Like lawyers on a contingency arrangement, funders structure their investments in a client’s claim on a contingency basis (i.e., the funder does not recover anything unless the claimholder is successful).

In the Shire case, the plaintiff represented the shareholders of FerroKin BioSciences, Inc., after it was acquired by Shire. The shareholders contended the merger agreement entitled them to a $45 million milestone payment related to an experimental drug. Through SRS, they sued to recover the payment plus interest and attorneys’ fees.

After a trial, the Chancery Court issued a ruling in favor of SRS and obligated Shire to pay the milestone payment plus interest. The merger agreement also contained a fee-shifting provision: “‘[I]n the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement, the prevailing party shall recover all of such party’s costs and reasonable attorneys’ fees incurred in connection with each and every such action, suit or other proceeding, including any and all appeals and petitions therefrom.’”

Defendant Shire did not dispute the milestone payment amount, the interest, or the roughly $1 million in out-of-pocket costs for plaintiffs attorneys Keker, Van Nest & Peters LLP (KVP). Nor did it dispute the roughly $1.5 million in Delaware counsel’s fees. Shire objected to the attorneys’ fees for KVP, however, contending the nearly $20 million request was “unreasonable.”

The nature of an alternative fee arrangement between SRS and KVP creates a strong parallel with litigation financing. As the Chancery Court explained, the lion’s share of KVP’s sizable bill was the result of a contingent-fee agreement. While SRS first paid KVP on an hourly basis, by late 2017, SRS was struggling to fund the litigation. This “prompted SRS and KVP to negotiate a contingent fee agreement entitling KVP to one-third of any proceeds recovered by SRS.” Claimholders often seek litigation funding in similar circumstances.

In the April 2021 letter order that entered the final judgment, the Chancery Court applied the eight-factor test found in Rule 1.5(a) of the Delaware Rules of Professional Conduct to evaluate whether the requested fees were customary and reasonable. Shire argued that the amount was unreasonable because it was the product of a contingent-fee engagement, but the Chancery Court disagreed. Moreover, it grounded part of its assessment in the public good.

“[T]here is nothing inherently unreasonable in enforcing a contractual fee-shifting arrangement to cover a contingent fee award. Risk-taking of this nature is a normal part of litigation, which Delaware public policy seeks to reward when it benefits stockholders,” the letter order said.

The Chancery Court also noted that a one-third contingent fee is “quite typical and commercially reasonable,” and that in this case, it allowed SRS “to retain skilled and experienced counsel despite a lack of resources to fund the litigation, an arrangement that ultimately inured to the benefit of the former FerroKin stockholders.” Similar findings about the “reasonableness” of a claimholder seeking funding appear in the UK cases awarding litigation finance costs.

As litigation finance matures and becomes a customary practice for claimholders, the logic of Shire and similar cases could extend to recovery of litigation finance costs under the “costs” prong of a fee-shifting provision. Whether the contingent cost is paid to the lawyers or a funder should not make a difference. Per the reasoning of Shire, litigation finance similarly allows risk taking that benefits claimholders who may not have been able to achieve justice absent financing, and it allows parties to pick the counsel best suited to vindicate claims.

Funders and claimholders should consider the possibility of recovering litigation funding costs in all circumstances where a contractual, equitable or statutory fee-shifting provision is present. In addition, contract drafters should consider whether to explicitly clarify fee shifting provisions to include or exclude such recovery.