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Bob Koneck and Jason Lien
Bob Koneck (left), an associate at Nilan Johnson Lewis PA, and Jason Lien, a partner at Maslon LLP

Court green-lights third-party litigation finance

Third-party litigation finance (“TPLF”) has rapidly transformed into an industry with the capacity to affect nearly any party on any civil case. Until now, this transformation has not reached Minnesota, because Minnesota courts regularly found agreements for TPLF champertous and, as such, void. But on June 3, 2020, the Minnesota Supreme Court abolished the prohibition against champerty and authorized TPLF through its opinion issued in Maslowski v. Prospect Funding Partners, LLC.

A brief history of third-party litigation finance

TPLF “refers to the funding of litigation activities by entities other than the parties themselves, their counsel, or other entities with a preexisting contractual relationship with one of the parties, such as an indemnitor or a liability insurer.”1 TPLF “first emerged as an industry in the United States in the early 1990s, when a handful of small lenders began providing cash advances to plaintiffs involved in contingency fee litigation.”2 “These activities have become increasingly prominent in recent years, leading to significant attention in the legal and popular press, scrutiny by state bar ethics committees, and scholarly commentary.”3

There are two main types of litigation funding: consumer funding and commercial funding. Consumer funding “typically involve[s] an individual person as the plaintiff, such as in personal injury or divorce proceedings.”4 The plaintiff “may urgently need funds or have another reason that makes contingency-fee arrangements untenable.”5 Consumer funding predates commercial funding, which started in the United States in the mid-2000s.6

“Commercial funding arrangements cover business-to-business disputes, class actions, and mass tort litigation.”7 Funded cases involve “areas like intellectual property, antitrust, business contracts, and commercial arbitration.”8 Commercial funders also sometimes finance a portfolio of lawsuits, providing a “law firm [] with a large chunk of money in exchange for returns tied to a pool of cases.”9 Commercial funders tend to be sophisticated “hedge funds, banks, and other financial investors.”10 They conduct “extensive due diligence on individual cases and make sizeable financial investments”11 in between “5 to 10 percent of the opportunities presented to them.”12

Funders provide funds to both plaintiffs and defendants. In the former context, funders typically “pay a given amount of money to the plaintiff in exchange for a promise by the plaintiff to pay the [funder] that amount plus an additional amount (sometimes referred to as a ‘fee’) specified in the event of a positive outcome in the suit.”13 These funds are usually provided on a nonrecourse basis, meaning repayment is required only if the recipient prevails in the suit.14

TPLF for defendants is a newer and less common phenomenon.15 Burford Capital, a large commercial funder whose stock is traded on the London Stock Exchange,16 explains its funding of defendants as follows: “The litigation finance firm will pay the entire [or a substantial portion of the] cost of defending against a weak claim in exchange for some kind of multiplier or uplift based on predefined success.”17

The prevalence of third-party litigation finance

According to a 2019 survey from third-party funder Lake Whillans, 41% of lawyers have firsthand experience with a litigation finance firm and, of those who have used litigation finance, 81% said they would use it again.18 In a 2018 survey by Burford of lawyers from the United States, the United Kingdom, and Australia, 77% of respondents agreed that litigation finance is growing. More telling, however, is that 72% of respondents who had not yet used litigation financing expected to do so in the future.19

A combination of factors drives the growth of TPLF. First, fears about and experience with “worldwide market turmoil” “inspired hedge funds, banks, and other financial investors to seek investments that are not directly tied to or affected by the volatile and unpredictable financial markets.”20 “As a new asset class, legal claims provide just that.”21 In fact, litigation can increase during a recession, making litigation funds a particularly desirable investment.22 A second reason for the expansion of TPLF “is the public policy ideal of increasing access to justice for plaintiffs who otherwise could not afford to pursue a meritorious claim individually or through class actions.”23 Third, many “companies [are] seeking a means to pursue a claim or defense against a claim while also maintaining enough cash flow to continue conducting business as usual.”24 TPLF creates this option. And fourth, “companies facing bankruptcy or insolvency [are] seeking funding to pursue claims that may generate cash flow for their business or mitigate the risk of losing a ‘bet-the-company’ dispute.”25

These factors will likely cause continued expansion in the TPLF industry. This is true even as the legal community grapples with the financial effects of COVID-19. Indeed, interest in TPLF has surged despite uncertainty regarding the future of the economy.26

The enforceability of contracts for third-party litigation finance

Many states have invalidated contracts for TPLF. In doing so, they typically relied on the doctrines of maintenance and champerty. “Maintenance involves a party without a bona fide interest in a lawsuit nonetheless encouraging its litigation.”27 “Champerty” is a form of maintenance.28 It is defined as an “agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim.”29

“The doctrines of maintenance and champerty originated in the ancient Greek and Roman legal systems, evolved in the common law system of England during feudal times, and spread to other jurisdictions largely through the far-reaching British Empire.”30 During feudal times, “[t]he wealthy and powerful would ‘buy up claims, and, by means of their exalted and influential positions, overawe the courts, secure unjust and unmerited judgments, and oppress those against whom their anger might be directed.’’31 This facilitated “bribery, corruption, and intimidation of judges and justices of the peace.” Maintenance and champerty were therefore outlawed to prevent “excessive litigation and frivolous claims” and to “safeguard against the extortion and oppression of indigent clients by wealthy funders.”32 Those responsible for maintenance or champerty could face both tort and criminal liability.33

Today, the use of these doctrines varies considerably by jurisdiction, but they “are ‘most visible’ as a contract defense.”34 A growing number of states, however, have abolished or modified these doctrines to allow at least some form of TPLF.

Third-party litigation finance in Minnesota

Historically, Minnesota has been among those states that “continue[d] to rigorously apply” “champerty restrictions” to void contracts for TPLF.35 However, that changed in Maslowski v. Prospect Funding Partners LLC, A18-1906, 2020 WL 2893376 (Minn. June 3, 2020).

In Maslowski, the Minnesota Supreme Court considered whether a TPLF agreement between a funder and an individual pursuing a personal-injury action “violate[d] Minnesota’s prohibition against champerty.” Id. at *2. The Court chronicled Minnesota’s longstanding commitment to the common law doctrine of champerty. Based on this precedent, the Court found the TPLF agreement to be champertous.

But the Court explained that the “development of the common law is ‘determined by the social needs of the community which it governs’” and so “must . . . evolve” “as society changes.” Id. at *3 (citations omitted). “[C]hanges in the legal profession and in society,” the Court held, render “the ancient prohibition against champerty no longer necessary.” Id.

In abolishing the prohibition against champerty, the Court first found that the Minnesota Rules of Professional Conduct and the Minnesota Rules of Civil Procedure now “address the abuses of the legal process that necessitated the common-law prohibition.” Id. (citing, for example, Minn. R. Civ. P. 11.02, which requires attorneys to certify that “pleadings, motions, and other documents” are nonfrivolous). The Court next noted that Minnesota already allows champerty in the form of contingency fee agreements, as does every other jurisdiction in the United States. Id. at *4. The Court then reasoned that TPLF is warranted because (1) the massive “market for litigation financing reflects” a change in attitude towards the value of litigation, (2) businesses use litigation financing “to mitigate the risks associated with litigation and maintain cash flow for their operations,” and (3) litigation financing “may increase access to justice for both individuals and organizations.” Id.

Yet this authorization of TPLF has limits. The Court cautioned that “district courts may still scrutinize litigation financing agreements to determine whether equity allows their enforcement.” Id. at *5. Parties to TPLF agreements “retain the common law defense of unconscionability.” And the Court instructed district courts to “carefully review uncounseled [TPLF] agreements, particularly between parties of unequal bargaining power or agreements involving an unsophisticated party.” Id. The Court likewise directed lower courts and attorneys to “ensure that litigation financiers do not attempt to control the course of the underlying litigation.” Id. at *5 (implying that a TPLF agreement may be unenforceable if it requires the funder’s permission to settle).

Minnesota thus joins the growing list of states recognizing the advantages of third-party litigation financing and authorizing its use.

Endnotes

  1. ABA Comm’n on Ethics 20/20, Informational Report to the House of Delegates 1 (Feb. 2012), PDF link.
  2. New York City Bar Prof’l Ethics Comm., Formal Opinion 2011-2: Third Party Litigation Funding (June 1, 2011), HTML link
  3. ABA Comm’n on Ethics 20/20, supra note 1, at 1.
  4. Jayme Herschkopf, Third-Party Litigation Finance 3, Federal Judicial Center (2017), https://www.fjc.gov/sites/default/files/materials/34/Third-Party_Litigation_Finance.pdf.
  5. Id.
  6. Id.; Mary Ellen Egan, Other People’s Money: Rise of litigation finance companies raises legal and ethical concerns, ABA Journal (Dec. 1, 2018), http://www.abajournal.com/magazine/article/litigation_finance_legal_ethic al_concerns.
  7. Herschkopf, supra note 4, at 3.
  8. Id. at 1.
  9. Egan, supra note 6.
  10. Victoria A. Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 861, 869 (2015).
  11. ABA Comm’n on Ethics 20/20, supra note 1, at 6.
  12. David Lat, A Peek Inside The Pipeline: How A Litigation Finance Deal Comes Together, Above the Law (Sept. 21, 2018), https://abovethelaw.com/2018/09/a-peek-inside-the-pipeline-how-a-litigation-finance-deal-comes-together/
  13. ABA Comm’n on Ethics 20/20, supra note 1, at 6-7.
  14. Id.
  15. Maya Steinitz, Whose Claim Is This Anyway? Third-Party Litigation Funding, 95 Minn. L. Rev. 1268, 1278 (2011); Herschkopf, supra note 4, at 1.
  16. Egan, supra note 6.
  17. Christopher P. Bogart, The reality of financing litigation defense, Burford (May 28, 2015), https://www.burfordcapital.com/blog/reality-financing-litigation-defense/.
  18. Lake Whillans & Above the Law, 2019 Litigation Finance Survey Report, https://lakewhillans.com/research/2019-litigation-finance-survey-report/.
  19. Burford, 2018 Litigation Finance Survey, https://www.burfordcapital.com/2018-litigation-finance-survey/.
  20. Shannon, supra note 10, at 869.
  21. Steinitz, supra note 15, at 1283.
  22. Michael McDonald, Harvard Invests in Litigation Strategy That Has Posted Big Gains, Bloomberg (June 26, 2019), https://www.bloomberg.com/news/articles/2019-06-26/harvard-invests-in-litigation-strategy-that-has-posted-big-gains.
  23. Shannon, supra note 10, at 869.
  24. Id.
  25. Id.
  26. Caroline Simson, Third-Party Funders’ Business is Booming During Pandemic, Law360 (Apr. 8, 2020), https://www.law360.com/articles/1261213/third-party-funders-business-is-booming-during-pandemic
  27. Herschkopf, supra note 4, at 7.
  28. Id.
  29. Steinitz, supra note 15, at 1286.
  30. Shannon, supra note 10, at 874.
  31. ABA Comm’n on Ethics 20/20, supra note 1, at 9 (citation omitted).
  32. Shannon, supra note 10, at 874.
  33. Herschkopf, supra note 4, at 7; Shannon, supra note 10, at 874.
  34. Del Web Communities v. Partington, 652 F.3d 1145, 1154 (9th Cir. 2011) (citation omitted).
  35. Steinitz, supra note 15, at 1289.

RELATED: Champerty could have new life in Minnesota

Jason Lien is a partner at Maslon LLP and focuses his litigation practice on representing clients from the construction, real estate, financial services, food, and railroad industries. He regularly appears in federal and state court on behalf of design-build firms, general contractors, architects, engineers, specialty contractors, property management companies, real estate owners, and lenders.

Email: [email protected]

Bob Koneck is an associate at Nilan Johnson Lewis PA and focuses his practice on business and employment litigation.

Email: [email protected]


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