Third-party litigation is growing, with impacts on businesses big and small.
Consider Legalist, based in Westborough, Mass., a startup third-party litigation funder launched with a $100,000 grant from a foundation that was founded by Peter Thiel, a Silicon Valley tech billionaire, in August.
The new firm uses an algorithm to calculate investment return on lawsuits for which it can reap up to 50 percent of awards, according to Legalist co-founders, Christian Haig and Eva Shang, former Harvard University students.
“Legalist’s mission is to expand access to justice for small businesses who can’t afford existing, meritorious lawsuits,” Shang said in a statement to Legal Newsline. “All cases we take on are already underway, such as a local Massachusetts paper company with a breach of contract case or a small bakery with a busted water pipe.”
Will Legalist's business model encourage or discourage more litigation? One West Coast academic concurred with the likelihood of this new third-party litigation funder triggering additional lawsuits.
"Yes, Legalist's business model may cause persons who might not otherwise be able to afford to litigate to enter or stay in the litigation system," Morris Ratner, a professor of law and associate dean at the University of California Hastings College of the Law in San Francisco, told Legal Newsline.
According to Ratner, such litigation funding is an outgrowth of the practice of lawyers funding cases on a contingent fee, payable if or when a plaintiff receives an award.
“More law enforcement via private litigation is not a bad thing,” Ratner said, “especially if Legalist is investing in meritorious cases. And why shouldn't it? After all, if it invests in weak cases, it won't make a return on its investment.”
Shang declined a request to comment on specifics of Legalist’s algorithm to calculate an existing, meritorious lawsuit.
According to the firm’s website, “Our algorithms analyze millions of court cases to source, vet, and finance commercial litigation. Find out if your lawsuit qualifies for financing.”
The financing of another’s lawsuit, or champerty, was not legal under English common law, according to Ratner. Yet that legal prohibition of financing litigation ended in Australia 50 years ago, and has expanded broadly over the past 20 years.
During that time frame, investors seeking return on their capital have looked to courtrooms as a market opportunity instead of focusing solely on financial instruments such as the bond and stock markets, Ratner said.
A leading business association is staunchly opposed to third-party litigation funding.
Lisa A. Rickard, president of the U.S. Chamber of Commerce Institute for Legal Reform, delivered a sharp critique in a New York Times op-ed.
“This practice is a cancerous growth on our civil justice system, turning our courts into profit centers, increasing the number of lawsuits in our already over-sued society, shifting control of lawsuit decisions toward funders rather than litigants, and reducing settlement dollars for truly deserving victims," she wrote.
Meanwhile, third-party litigation funding is growing, according to Burford Capital, a third-party litigation funder. Its 2016 Litigation Finance Survey, for example, found that “28 percent of private practice lawyers say their firms have used litigation finance directly—a four-fold increase since 2013.”
Thiel’s granting of funds to Legalist to launch its business follows the Silicon Valley billionaire’s investment in a multi-million dollar lawsuit on behalf of pro wrestler Hulk Hogan against Gawker.com, the former online media outlet that had posted a sex video of the grappler without his permission.
In time, the Hogan lawsuit drove Gawker into bankruptcy, and it ceased all operations this Aug. 22. What motivated Thiel to bankroll Hogan?
One possibility is revenge, as Gawker had revealed Thiel’s homosexuality in 2007, a public “outing.”
In the meantime, Shang dismissed Thiel’s active involvement in Legalist and its funding of lawyers and litigants as improper.
“We are not affiliated with Peter Thiel,” Shang said in a statement. “It would be akin to a nonprofit receiving a Soros Justice Grant—it doesn’t mean they have any interaction with George Soros.”
“I personally have a background in prison reform,” Shang said, “so I’ve been passionate about access to justice for a long time."
Editor's note: Legal Newsline is owned by the U.S. Chamber Institute for Legal Reform.