On Wednesday, June 3, 2020, the Minnesota Supreme Court approved of the practice of litigation funding in the state, abolishing common law restrictions prohibiting third parties from covering all or part of the costs of litigating a case that had been in place for over 100 years. See Maslowski v. Prospect Funding Partners LLC, No. A18-1906. As described by the Court, litigation funding refers to “mechanisms that give a third party (other than the lawyer in the case) a financial stake in the outcome of the case in exchange for money paid to a party in the case.” The decision to allow the practice of litigation funding in Minnesota has the potential to significantly increase the number of commercial lawsuits filed in the state.
Litigation funding has grown in popularity in the last decade, internationally and in the United States. The Court pegged the value of this industry as approaching $100 billion. However, the practice is barred in many states due to ethics and public policy concerns related to third parties’ motivations for funding specific kinds of litigation. For example, the Minnesota Supreme Court noted that third-party funding was originally banned in England because it was used by those with means to play “the game of writs,” increasing their power and harassing rivals through the court system. In 1897, the Minnesota Supreme Court banned litigation funding (sometimes called maintenance or champerty), justifying the decision on the grounds that it would “prevent officious intermeddlers from stirring up strife and contention by vexatious or speculative litigation which would disturb the peace of society, lead to corrupt practices, and pervert the remedial process of the law.”
In its June 3 opinion, the Court reversed this 120+ year precedent, stating that the Rules of Professional Conduct and Rules of Civil Procedure now adequately address the risk of such abuses. The Court also recognized that litigation funding, like contingency fees, “may increase access to justice for both individuals and organizations.” Litigation funding may “allow plaintiffs who would otherwise be priced out of the justice system to assert their rights.”
Typically, plaintiffs seek out litigation funding as a way to cover the costs of a prospective lawsuit, but it can also be employed by defendants who assert counterclaims. According to one prominent litigation finance firm, third-party funding can offer would-be business plaintiffs numerous benefits, such as transfer of risk and freeing up of capital that would otherwise be spent on litigation, for outlays on business operations and capital investments.
So far, litigation funders have been primarily interested in commercial litigation. For example, litigation funders backed approximately 50% of federal class actions in Australia in the last 6 years, particularly in securities fraud cases. According to a survey of United States attorneys, 49% said they had used it in connection with intellectual property cases, 31% in connection with commercial litigation, and 15% in connection with unfair competition (false advertising) cases.
Based on the above trends, it can reasonably be anticipated that the Minnesota Supreme Court’s decision in Maslowski will likely lead to increased litigation in Minnesota, particularly in the commercial litigation sphere. The availability of litigation funding provides a potentially useful opportunity to businesses that possess claims against others. However, more plaintiffs means more defendants. This could affect underwriting relating to commercial liability covered by, for example, errors and omissions (E&O) insurance and directors and officers (D&O) insurance.