Minnesota Supreme Court’s Abolition of Age-Old Common Law Ban Against Champerty Paves the Way for Third-Party Litigation Funding | Faegre Drinker Biddle & Reath LLP
In a unanimous decision, the Minnesota Supreme Court struck down Minnesota’s common law prohibition against champerty and upkeep, opening Minnesota up to third-party litigation funding. Maslowski v. Prospect Funding Partners LLC, et al.A18-1906, 2020 WL 2893376 (Minn. 3 June 2020).
For those less experienced in Middle English, champerty is “an agreement to divide litigation proceeds between the owner of the disputed claim and a party unrelated to the lawsuit supporting or helping to enforce the claim” and maintenance is “inappropriate assistance in the prosecution or defense of a trial given to a litigant by someone who has no authentic interest in the case, interfering in someone else’s litigation. Black’s Law Dictionary (11th ed. 2019). Today, champerty and maintenance are often associated with third-party litigation financing.
The ban on champerty and maintenance, rooted in ancient Greece and Rome and the common law of medieval England, was adopted in Minnesota in 1897. See Huber v. Johnson, 70 NW 806 (Min. 1987). The purpose was “to prevent unofficial intermediaries from inflaming strife and strife through vexatious or speculative litigation that would disturb the peace of society, lead to corrupt practices, and pervert the process of law redress.” Under the ban, contracts between lawyers and laypersons to “seek” claims to litigate for profit were voided. Gammons v. Johnson78 NW 1035, 1037 (Min. 1899); see Hackett v. Hammel241 NW 68 (Min. 1932); Holland v. Sheehan122 NW 1, 2-3 (Min. 1909).
Maslowski involved a plaintiff injured in a car accident. While her claim was pending, the plaintiff and a third-party litigation funding service entered into an agreement under which the plaintiff received a cash advance against her eventual settlement. In return, the plaintiff agreed to repay the advance once the case was settled, plus 30% every six months until settled, with a cap. When she failed to make payment after settlement, the dispute arose.
The contract unquestionably violated Minnesota’s existing ban on Champerty. Maslowski2020 WL 2893376, at 7. Nevertheless, the Minnesota Supreme Court found that changes in the legal profession and society made banning champerty more necessary for several reasons:
- First, the rules of professional liability and civil procedure deal with the abuses of judicial process that necessitated the common law prohibition. There are strict limits on solicitation, Minn. R.Prof. Conduct 7.2 & 7.3, and attorneys who file frivolous claims or use the legal system for harassment are subject to discipline and penalties. min. R.Prof. Driving 3.1, 11.02 and 11.03.
- Second, as the law has developed and regulation has increased, courts have narrowed or struck down other prohibitions based on champerty and maintenance concerns, including the relaxation of rules prohibiting contingency fees and the allocation of things in action — English medium for right to sue.
- Third, societal attitudes towards litigation have changed. Many now see a claim as a potentially valuable asset, rather than an evil to be avoided. Businesses often seek financing to mitigate the risks associated with litigation and maintain cash flow from their operations. In addition, litigation funding, such as contingency fees, can increase access to justice for individuals and organizations.
- Fourth, third-party funders are unlikely to fund frivolous litigation because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance – an unlikely outcome in a baseless lawsuit.
- Fifth, the right of tort victims to receive compensation for their injuries does not override their freedom to contract, and those seeking commercial litigation funding understand the risks associated with such agreements.
Notwithstanding its repeal of Champerty’s blanket ban, the Court said courts “may still review litigation funding agreements to determine whether fairness permits their enforcement.”
The court warned against:
- Unreasonable agreements
- Unadvised agreements between parties with unequal bargaining power or agreements involving an uninformed party
- Agreements that allow litigation financiers to control the course of the underlying litigation, particularly with respect to settlement decisions.
Although the reasoning of the Court corresponds to the situation of the individual claimant in the case Maslowski In this case, the analysis does not fully account for the role and influence of litigation funding in larger litigation, particularly in mass crimes involving multi-district litigation (MDL) proceedings. As the courts have observed, the MDL process already incentivizes attorneys to file cases that otherwise would not be decided on their own merit, on the assumption that those cases will be swept up in an MDL where a global settlement will be concluded and the merits of the case will never be considered. See, for example, In re Mentor Corp. Obtape Transobturator Sling Prods. Lib. Litigation4:08–MD–2004 (CDL), 2016 WL 4705827, (MD Ga. 7 September 2016).
The introduction of litigation funders can only compound this problem by providing a ready-made source of funding that can generate thousands of additional claims, some with real value but the vast majority without merit. This is not a theoretical problem; we see it again and again in MDL proceedings across the country. Defendants can only wait and see if the Maslowski decision will generate or aggravate such problems in Minnesota.
A certain consequence of Maslowski ruling will result in a marked increase in disputes over whether and to what extent a party can proceed with an investigation into an opposing party’s litigation funding arrangement. the Maslowski The court makes it clear that litigation funding agreements, while now permitted, are not automatically reasonable or enforceable, and specifically directs courts to be careful of agreements that are impermissible, coercive or unfair, or that may impair the ability of a party to settle a matter. However, to raise or argue any of these possible objections, a party will need information about the existence and terms of an opponent’s litigation funding, and the opponent will undoubtedly object to the discovery. of these questions.
Courts that have dealt with disputes over the discovery of litigation funding agreements have had mixed results. See, for example, In re Valsartan N-nitrosodimethylamine (NDMA) Contamination Prod. Lib. Litigation, 405 F. Supp. 3d 612, 614 (DNJ 2019) (“[C]The courts are divided on the issue and plaintiffs and defendants can each cite cases in support of their positions”).
A number of courts have authorized full or limited discovery of this funding information. See, for example, In re: Am. Med. Sys., Inc.MDL No. 2325, 2016 WL 3077904 (SDWVa. May 31, 2016); Gbarabe c. Chevron Corp., 14-CV-00173-SI, 2016 WL 4154849 (ND Cal. 5 Aug 2016). Now that Champerty is legal in Minnesota, tort defendants will need information regarding litigation funding agreements, particularly regarding settlement limitations, and will no doubt press the courts for the discovery of these. information. We can expect Minnesota trial and appellate courts to devote considerable energy over the next few years to defining what is and is not permissible discovery on this issue.