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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 11 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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<img style="max-width: 100%;height: auto;max-width: 100%;height: auto" loading="lazy" class="alignright size-medium wp-image-3589" src="https://www.thelawforlawyerstoday.com/wp-content/uploads/sites/754/2017/10/Money-and-gavel-200x300.jpg" alt="" width="200" height="300">Third-party litigation funding is a <a href="https://www.forbes.com/sites/richardlevick/2019/07/01/litigation-financing-a-controversial-industry-does-well-by-doing-good/#3f866e0a6af2">growing and, some say, controversial</a>&nbsp;industry.&nbsp; We&rsquo;ve written before about whether such arrangements are permitted under&nbsp;state ethics rules (<a href="https://www.thelawforlawyerstoday.com/2018/09/4058/">here</a>), and we reported on the first effort to mandate disclosure of third-party funding via federal court rule (<a href="https://www.thelawforlawyerstoday.com/2017/02/for-the-first-time-a-court-adopts-rule-requiring-litigation-funders-to-be-disclosed-but-only-in-class-actions/">here</a>), as well as the first state statute requiring such disclosure (<a href="https://www.thelawforlawyerstoday.com/2018/04/3854/">here</a>).
But litigation funders <a href="https://www.law.com/2019/05/14/as-litigation-funders-grow-so-do-lawsuits-against-them/">can also become litigators</a> themselves.&nbsp; Some file suit&nbsp;against law firms for non-payment of their fees.&nbsp;(On Tuesday, for example, a Los Angeles state court judge entered a $6 million <a href="http://filehost.thompsonhine.com/uploads/LFGvGirardiJudgment_de0b.pdf">judgment</a> against a prominent plaintiff-side attorney and his firm&nbsp;as part of&nbsp;a dispute with a litigation&nbsp;funder over payment of the funder&rsquo;s fees.)&nbsp; And some funders have found themselves defending against claims that their funding agreements are&nbsp;unenforceable.
In the latest chapter of the second kind of scenario,&nbsp;a Minnesota court of appeals voided&nbsp;a litigation funding agreement under the North Star state&rsquo;s champerty-and-maintenance doctrine, allowing a personal-injury plaintiff to side-step the sixty-percent annual interest she had agreed to in exchange for the funder&rsquo;s advance of $6,000&nbsp;in 2014.
The <a href="https://scholar.google.com/scholar_case?case=16051625671854645995&amp;hl=en&amp;as_sdt=6&amp;as_vis=1&amp;oi=scholarr">ruling</a> upheld the trial court&rsquo;s determination that Minnesota&rsquo;s common law applied, rather than New York&rsquo;s, despite a New York choice-of-law provision in the funding agreement.&nbsp; Under New York&rsquo;s&nbsp;narrower champerty&nbsp;statute, the funding agreement would have been valid, said the court of appeals.
Champerty and what?
You may not have thought about champerty and maintenance since law school &mdash; if you even learned about these old doctrines there.&nbsp; But&nbsp;champerty and maintenance are on the books or part of the common law&nbsp;in many jurisdictions, and they have been dusted off, along with usury laws, in litigation-funding&nbsp;disputes like&nbsp;the Minnesota case, and in <a href="https://ohioadvop.org/wp-content/uploads/2019/06/Adv-Op-2019-04-Final.pdf">other jurisdictions</a>.
Under Minnesota law, the appeals court said, champerty is an agreement between a litigant and a stranger to the litigation in which the stranger &ldquo;pursues the litigant[&lsquo;]s claims as consideration for receiving part of any judgment proceeds.&rdquo;&nbsp; Maintenance is basically &ldquo;meddling in someone else&rsquo;s litigation&rdquo; through assistance to the litigant&nbsp;from &ldquo;someone who has no bona fide interest in the case.&rdquo;
In the Minnesota case, the appeals court flatly said that &ldquo;the [funding] agreement is not valid because it permits [the funder] to receive part of [the tort plaintiff&rsquo;s] judgment proceeds.&rdquo;&nbsp; The court, echoing the trial court,&nbsp;said that champertous agreements &ldquo;have untoward economic effects on the legal system that can provide both improper incentives and disincentives to pursue and settle litigation,&rdquo; and that state public policy bars &ldquo;an outsider&rsquo;s intrusion into a lawsuit solely for speculative gain.&rdquo;
Choice of law
The Minnesota case turned on a choice-of-law issue.&nbsp; The funder had offices and did business in both New York and Minnesota, and the agreement called for&nbsp;New York law to apply.&nbsp; New York&rsquo;s statute defines champerty &ldquo;much more narrowly&rdquo; than Minnesota law, confining the doctrine to situations where the third party intends to bring the action.
The parties&rsquo; agreed choice of law was overcome,&nbsp;the Minnesota court held, because&nbsp;enforcing the provision would&nbsp;&ldquo;thwart&rdquo; the state&rsquo;s policy against champerty.&nbsp; In addition,&nbsp;the funder had&nbsp;admitted that it drafted the agreement specifically to avoid Minnesota&rsquo;s champerty law.
Faced with the conflict&nbsp;between New York and Minnesota law, the court easily concluded that the&nbsp;funder should have expected Minnesota law to govern, as the agreement&nbsp;originated&nbsp;there, it was signed there, the funder was partly located there, and the agreement was to be performed there.&nbsp; Minnesota&nbsp;also &ldquo;has a strong interest in compensating tort victims and in protecting Minnesota&rsquo;s judicial system and litigants&rdquo; from champertous agreements, the court held.
What next?
Over the&nbsp;past decade, the litigation finance industry&nbsp;is <a href="https://www.law.com/2019/05/14/as-litigation-funders-grow-so-do-lawsuits-against-them/">estimated</a> to have grown to&nbsp;possibly $5 billion in the U.S., and $10 billion globally.&nbsp; While suits against consumer-tort finance firms, as in the Minnesota case, seem more common than suits involving large funders of commercial litigation, the scrutiny of these funding&nbsp;arrangements&nbsp;is sure to continue.
Both the <a href="https://nysba.org/ethics-opinion-1145/" target="_blank" rel="noopener">New York State Bar Association</a>&nbsp;(2018) and the New York City Bar Association (in <a href="https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/formal-opinion-2018-5-litigation-funders-contingent-interest-in-legal-fees">2018</a> and <a href="http://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/formal-opinion-2011-2-third-party-litigation-financing">2011</a>) have weighed in on various ethics aspects of litigation funding, as&nbsp;have&nbsp;<a href="http://njlaw.rutgers.edu/collections/ethics/acpe/acp691_1.html">New Jersey</a> (2001); the&nbsp;<a href="http://philadelphiabar.org/page/EthicsOpinion99-8?appNum=4">Philadelphia Bar Ass&rsquo;n&nbsp;(</a>2000); and <a href="http://www.ohioadvop.org/wp-content/uploads/2017/04/Op_12-003.pdf">Ohio&nbsp;</a>(2012).
There are sure to be more&nbsp;bar ethics opinions (and cases) to come.

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Ethics

Legal Ethics, Professional Responsibility and the Business of Law

Litigation-funding agreement “champertous” and unenforceable, MN appeals court rules