When Silicon Valley billionaire Peter Thiel was unmasked this week as the funding source behind a series of lawsuits that could wipe out Gawker Media, it raised reasonable questions about the use of big money to chill freedom of the press. But it also shed light on an entire industry that has slipped mostly under the radar, in which third parties bankroll lawsuits that they think will reap a lucrative payout.
It’s called litigation finance, and while Thiel confesses he was motivated in the Gawker lawsuit by revenge for the news outlet outing him as gay—and isn’t asking for any money from the cases—most of those who practice it are investment firms seeking a profit-making opportunity. It takes the casino-style gambling on equities and derivatives into the courtroom, with investors placing a bet on justice.
Financing someone else’s lawsuit in return for some of the profits used to be called champerty, and under English common law it was illegal. Feudal lords used champerty in precisely the way Thiel is using it, to settle scores against rivals. As U.S. courts established ethics rules for litigants in the nineteenth century, champerty was seen as obsolete. But the rise of the litigation finance industry in the last decade might require a rethinking of that.
First popularized in Australia, litigation finance companies attract investors to acquire capital they can deploy to cases they find promising. The funders of these funders are typically hedge funds and private equity firms. If the cases they invest in lose, they get nothing. But if they win, they get a percentage of whatever award the courts grant. That can be significant; the payoffs are often above what the hedge funds can generate on their own.
Defenders of litigation finance claim noble motives: They are merely equalizing access to a legal system that leaves too many on the wrong side of the courthouse doors. (It’s hard not to hear echoes here of Thiel’s claim that he’s spent millions to go after Gawker for “philanthropic” reasons.) According to a post at Burford Capital, one of the biggest players in this industry, “Litigation finance actually strengthens the justice system by leveling the playing field in litigation between parties with unequal resources.” Investors, the industry says, offer law firms the means to investigate cases, depose witnesses, file motions and appeals, seek and research evidence in discovery, secure experts, and engage in all the costly activities of modern lawyering. No longer, they say, can wealthy individuals or corporations simply intimidate would-be plaintiffs out of suing them. And because frivolous cases would never attract quality investors, the system supposedly polices itself.
But simple economics 101 would suggest that litigation finance drives up the costs of lawsuits by increasing demand for lawyers. That makes it harder, not easier, for American citizens to crack open the courthouse doors—especially if they don’t have the kind of lawsuit a bunch of hedge-fund types would find attractive.
When American Lawyer did an exposé into litigation financing last December, it found that the beneficiaries were not hapless victims who needed money to get their day in court. “The big winners include corporate clients,” American Lawyer’s Julie Treadman wrote, “and their law firms.” Treadman added that defense firms and plaintiffs firms profit equally from the arrangement, because they’re both working cases that would otherwise never have been brought.
While some litigation finance firms portray themselves as champions of the little guy, Burford Capital primarily funds litigation pursued by large corporations. One of the bigger litigation finance arrangements in recent years was former AIG CEO Hank Greenberg’s lawsuit against the U.S. government, claiming shareholders were cheated in 2008 by an insufficiently generous bailout. Home Depot founder Ken Langone and investment fund chief Christopher Flowers contributed to the lawsuit fund. This is an instrument of, by, and for the rich.
Nobody can really say just how big the litigation finance industry is, because there’s no requirement to disclose litigation financing, and court cases seeking such transparency have failed. But Gerchen Keller Capital LLC, which claims to be the nation’s largest litigation financier, says that it holds over $1.4 billion in assets. As a profit-seeking entity, Gerchen’s investments tend to maximize profits above all else. In 2014, Gerchen put $93 million into tens of thousands of claims from AkinMears, a Texas plaintiffs firm that specializes in finding claimants for complications with pelvic implant surgery. AkinMears spent $25 million in TV advertising that year seeking additional plaintiffs. Though still in litigation, one piece of the case has already returned $1.6 billion.
Gerchen has also cut deals to front cash in exchange for a portion of a law firm’s year-end profits. These aren’t investments in individual lawsuits but in bundled claims, and it looks more like bankrolling an entire law firm’s work product. The rest of the industry is following suit, taking on entire portfolios rather than one-off cases. One company, IMF Bentham Limited, listed 18 different large corporate law firms that have either cemented funding relationships, or are in talks to do so.
Turning our legal system into the next hot investing trend raises lots of red flags, from the influence of financiers in lawsuits to the motivations for bankrolling cases—a problem that’s made painfully apparent by the Peter Thiel-Gawker case. But beyond distorting outcomes and using the justice system as a weapon, litigation finance raises the overall cost of legal action more generally. After all, if there’s more demand for lawyers in commercial cases, the price they can charge will go up. If you can’t get a litigation finance firm to float your case, this could lead to less access to justice, not more.
Republican Senators Chuck Grassley and John Cornyn announced last year that they would look into litigation finance, in all likelihood prompted by the biggest public opponent of the industry: the U.S. Chamber of Commerce. Worried that their member corporations could suffer from well-financed opposition in the courts, they have implored Congress to pass, among other things, a ban on third-party funding of class-action lawsuits.
But that threat of victims banding together and acquiring the resources to take on big companies appears to be the exception rather than the rule in litigation finance. This is more about big companies and law firms leveraging big money, with their funders gambling on a big jackpot. And as financialization tends to do, it only increases the costs in the system. The best solution to runaway costs in the legal system is to ensure equal access for all, not to let an unregulated third party turn the courts into their personal roulette wheel.