The Minnesota Supreme Court on Wednesday abolished the common law doctrine barring champerty, providing a major victory for the litigation finance industry.
Dating back to the Middle Ages in England, such bans have long prevented outsiders from investing in legal claims in exchange for a share of the returns. Minnesota’s Supreme Court said changes in the legal profession and society meant that the “ancient prohibition” against champerty was no longer necessary, citing a long list of arguments commonly made by the litigation finance industry.
“Many now see a claim as a potentially valuable asset, rather than viewing litigation as an evil to be avoided,” the opinion, written by Justice Natalie Hudson, said. “It is also possible that litigation financing, like the contingency fee, may increase access to justice for both individuals and organizations.”
The prohibition has been in a global retreat in recent years as the litigation finance industry has grown. Australia and England have done away with laws against champerty, and a number of U.S. states either no longer recognize it or have passed laws permitting litigation funding.
Those states include Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Massachusetts, New Hampshire, New Jersey, Ohio, and Texas, according to an article published in December in the Third Party Litigation Funding Law Review.
Still, other states’ laws against champerty still apply to litigation finance, including Alabama, Kentucky, Minnesota, Missouri, Mississippi, and Pennsylvania, according to the article written by executives at Parabellum Capital.
In the U.S., more than 40 entities actively invest in corporate litigation and they have access to nearly $10 billion in capital, according to a survey of the industry by Westfleet Advisers. The funders spent about $2.3 billion investing in cases during a 12-month span starting in mid-2018, the survey said.
“This is the latest development in the common law recognizing the growing acceptance of litigation finance as an important part of our legal system,” Dai Wai Chin Feman, director of commercial litigation strategy at Parabellum Capital, said in an interview.
While the Minnesota case ruling will impact commercial litigation finance, it originated from a personal injury complaint filed by Pamela Maslowski, who entered an agreement with the finance firm Prospect Funding Holdings LLC after a car accident.
Upon settling her case in 2015, Maslowski told the funder she would owe them about $14,000. Her lawyer, however, told Prospect Funding that their agreement with Maslowski was unenforceable as it violated the state’s ban on champerty. Prospect Funding then sued.
A district court and then an appellate court sided with Maslowski, concluding her contract with the company couldn’t be enforced because it violated that prohibition. Minnesota’s Supreme Court reversed that outcome.
A video on the growing field of litigation finance and what it means to the future of the business of law.
It’s ruling states that courts should review agreements signed by parties without a lawyer and should ensure that funders do not exert control over cases. Other than that, the high court decision read like a wide stamp of approval to the litigation finance industry.
“That is sort of indicative of where states are going with regards to their views on commercial litigation funding,” said Jay Greenberg, co-founder of litigation finance firm LexShares. “States over the past five years have become much more lenient on their view towards litigation finance because they realize it is good public policy and increases access to justice.”
Matthew Barber, an attorney for Maslowski, noted that the opinion said the trial court could still find in his client’s favor if the contract is ruled to be one-sided under the common law doctrine of unconscionability.
“We are disappointed because it was more than 120 years of what is essentially consumer protection common law,” Barber said, referring to the champerty prohibition. He is an attorney in the Minneapolis firm Schwebel, Goetz & Sieben.
Daniel Beckman, a lawyer for Prospect Funding, said he didn’t think the unconscionability argument was applicable to the case, noting the plaintiff was represented by counsel when signing the financing agreement. He said his client was happy with the result.
“Given the prior decisions from the district court and court of appeals, there really was no litigation financing that I would have been doing in Minnesota prior to this decision,” Beckman, who is of counsel at Erickson, Bell, Beckman & Quinn, said. “So it restores the ability to do litigation financing in Minnesota.”