How knowledgeable are you regarding litigation financing? If you’re involved with a business operating in Minnesota, it may be time to increase that knowledge, as it can benefit businesses and in-house legal departments.
Recently, the Minnesota Supreme Court opened the door for litigation financing in Minnesota; a practice that was formerly prohibited. Litigation financing involves a third party (the litigation funder) providing funding for a party in a lawsuit—typically the plaintiff—in exchange for a portion of that party’s recovery.
In Maslowski v. Prospect Funding Partners LLC, the Minnesota Supreme Court determined that Minnesota’s prohibition against litigation financing “is no longer necessary” because “the rules of professional responsibility and civil procedure address the abuses of the legal process that necessitated” such prohibition.
Notably, the court did leave the door open to challenge the validity of specific litigation financing agreements on the basis of equity, and acknowledged the Legislature’s ability to further regulate the practice. Despite such unknowns, however, the Maslowski decision validates the use of litigation financing in Minnesota and throws the door wide open for entities to take advantage of what it has to offer.
While some may associate litigation financing with plaintiffs’ personal injury claims or class action lawsuits, those uses are just the tip of the iceberg. Litigation financing can be just as beneficial to businesses—both small and large—and in-house legal departments. Litigation financing’s benefits, and potential threats, may prove especially poignant for companies in the age of Covid-19.
Benefits of Litigation Financing for Businesses
In light of Maslowski, Minnesota businesses should consider how litigation financing can help them achieve their goals. Often, businesses and in-house legal departments must decide between pursuing their legal rights—for example, by litigating violations of noncompete agreements or protecting intellectual property rights—or allowing such rights to go unprotected to mitigate financial risk.
Litigation financing may ease the difficulty of such decisions and the Minnesota Supreme Court itself points out two significant benefits businesses enjoy when they engage litigation financing: mitigating risk and freeing up cash flow.
Litigation financing mitigates the risk to a company as it pursues litigation. This mitigation begins even before execution of a financing agreement. Typically, litigation finance firms include knowledgeable professionals with significant litigation experience. These firms leverage this expertise and undergo due diligence prior to investing in a company’s claims. This due diligence provides an objective third-party assessment of claims’ merits and helps businesses make informed decisions about whether to pursue legal action based on predictions regarding the likely outcome of litigation.
Further, litigation financing agreements themselves are often non-recourse. This means businesses that secure financing need only repay it if they recover a pre-determined amount through a judgment or settlement. Under such terms, litigation financing can enable a business to pursue its claims while minimizing the risk inherent in litigation.
Litigation financing can also help businesses optimally manage cash flow, profitability, and assets. Often, litigation funders commit to paying the upfront fees and expenses of litigation. Simply put, this frees up money that businesses can use for operational expenses and growth, when otherwise such money would be put toward litigation.
Third-party payment of litigation expenses also keeps such expenses off businesses’ books, allowing companies to avoid the possible hit litigation could cause to profits. Additionally, the right litigation claim can be a valuable asset. By pursuing thoroughly vetted and funded claims, businesses can maximize the potential value of settlements or judgments and take full advantage of these assets.
Businesses may also enjoy less direct benefits of litigation financing. Outside funds may provide companies with a wider array of representation choices, such as attorneys who do not work on a contingent basis. Further, by taking advantage of the benefits of litigation financing to pursue claims, businesses may better position themselves for success as defendants in other suits, where funds freed up by litigation funding may provide them with more leverage and flexibility in settlement discussions.
Additional Business Considerations Post-Maslowski
Businesses operating in Minnesota should also be aware of the potential threats litigation financing could have for their interests.
Specifically, it often involves funding plaintiffs’ claims or larger class action lawsuits against businesses. Backed by litigation firms, plaintiffs may be better funded and incentivized to pursue claims they otherwise would not have. Plaintiffs’ claims may also be stronger. Just as businesses can gain the advantage of having potential claims vetted, so can individual plaintiffs. Plaintiffs may therefore come into suits especially prepared and well-informed.
Such considerations may be particularly consequential given current events. Many legal commentators predict that certain types of litigation will rise due to Covid-19, the economic downturn, and the increasing pressure on the health care system. As a result, an uptick in employment, medical malpractice, and insurance related claims could be right around the corner.
With the backing of litigation funders, plaintiffs will likely be in a better position to pursue these claims. Businesses and in-house counsel should consider that such claims may increase and prepare to meet these challenges head on.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Paul Fling is an attorney with the law firm Fox Rothschild LLP, based in the Minneapolis office. He works in a wide variety of litigation areas including contract disputes, antitrust litigation, health-care litigation, personal injury defense, and litigation financing
Kaitie Eke is a summer associate with Fox Rothschild LLP in Minneapolis. She attends the University of Minnesota Law School, and will be graduating in the spring of 2021.