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Fish Litigation Blog

Minnesota Abolishes Common Law Prohibition on Litigation Financing Agreements

June 9, 2020

Fish Litigation Blog

Minnesota Abolishes Common Law Prohibition on Litigation Financing Agreements

June 9, 2020

Back to the Fish Litigation Blog

 

Litigation Financing (or Funding) Agreements (“LFAs”), also known as “champerty,” are contracts in which a third party both finances litigation and shares in the proceeds.  Nearly half of third-party LFAs pertain to intellectual property disputes,[1] such that “litigation funding is now a well-established…part of the IP ecosystem.”[2]

Minnesota common law has banned LFAs for over a century.  But on June 3, 2020, the Minnesota Supreme Court in Maslowski v. Prospect Funding Partners LLC[3] abolished this prohibition.

In the unanimous decision written by Justice Natalie Hudson, the Court held that its century-old prohibition on LFAs was outdated in light of numerous changes to the legal profession.  For example, the Court noted that the early cases banning LFAs raised numerous concerns about frivolous lawsuits.  But these cases predated both the formal rules of ethics for attorneys as well as the Minnesota Rules of Civil Procedure, which address such abuses of the court system.  The Court also observed that other previously disfavored litigation arrangements, like contingency fees, have already gained universal acceptance.  Indeed LFAs, similar to contingency fee agreements, can “facilitate access to justice by incentivizing attorneys to take cases that they might otherwise decline because the client cannot afford their services on an hourly of fixed-fee basis.”

The Court concluded, however, by noting that litigants retain common law defenses like unconscionability and “that district courts may still scrutinize [LFAs] to determine whether equity allows their enforcement.”  In particular, “uncounseled agreements, particularly between parties of unequal bargaining power” or “involving an unsophisticated party” should be carefully reviewed by courts.

Now litigation funding companies can seek to have their contracts governed by Minnesota law without fear of a per se invalidity rule.  As Justice Hudson noted in the opinion “[m]any now see a claim as a potentially valuable asset, rather than viewing litigation as an evil to be avoided.”  And public policy grounds like unconscionability and disparate bargaining power will still be available to void improper LFAs born out of predatory lending practices.

[1] Matthew Bultman, Why Litigation Funders Are Getting into University Patents, Law360 (Nov. 22, 2019), https://www.law360.com/articles/1222483/why-litigation-funders-are-getting-into-university-patents.

[2] Fatih Ozluturk, The Finance of IP Litigation, IAM Magazine (Jan. 2018), https://www.iam-media.com/finance/finance-ip-litigation.

[3] 2020 WL 2893376, — N.W.2d —, (Minn. June 3, 2020).

Authors: Brianna Chamberlin, Ryan Petty


The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.

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Blog Authors

Brianna Chamberlin | Litigation Attorney, Minnesota
Brianna Chamberlin | Associate

Brianna Chamberlin is a litigation associate in Fish & Richardson’s Twin Cities office. Ms. Chamberlin’s practice spans a wide range of technologies, including small compound and biologic pharmaceuticals, chemicals, medical devices, oil and gas production, as well as memory devices and software. Ms. Chamberlin has handled various...

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