Peter Thiel, founder of Paypal and Palatir recently made headlines after it was revealed that he had bankrolled Terry Bollea aka Hulk Hogan’s $140 million dollar privacy lawsuit against gossip news site, Gawker Media. This practice is known as third-party litigation funding, which means funding by an outside party of all or part of one party’s litigation costs in exchange for an agreed share of any recovery. Typically, third-party funders invest $2 million – $10 million in exchange for a share of the recovery which could be as much as 2.5 to 4 times their investment. Gerchen Keller, the largest litigation finance fund in the United States, has $1.4 billion in assets dedicated to third-party litigation funding.
Third party litigation funding is mostly self-regulated, with only twenty states restricting it through so-called champerty statutes. Champerty statutes were originally developed in feudal England “to prevent or curtail commercialization of or trading in litigation”. Bluebird Partners, L.P. v. First Fidelity Bank, 94 N.Y.2d 726, 733 (2000). Few States have incorporated champerty rules into their statutory framework, choosing instead to adopt laws that would override the champerty rules so that lawyers could take on client work on a contingent fee basis. England repealed its champerty laws in 1967, and in the US, the trend has also been toward limiting champerty’s reach.
The rise of third-party litigation finance is dramatically changing the legal landscape for corporate defendants. Lisa Rickard, President of the U.S. Chamber’s Institute for Legal Reform, claims litigation finance is resulting in “more lawsuits, more litigation uncertainty, and higher settlement payoffs to satisfy cash-hungry funders.” The Chamber is advocating for a ban on investor control of cases, disclosure of funding agreements, a prohibition on third-party funding in class action lawsuits, and other restrictions.
Will expanding third party litigation financing result in more meritless lawsuits?
The expansion of litigation financing may result in more lawsuits, and larger lawsuits, but not more meritless lawsuits. “Common sense suggests that an explosion of meritless litigation isn’t likely, since outside investors have a financial interest in backing only the strongest claims.” Julie Triedman, “Arms Race: Law Firms and the Litigation Funding Boom,” The American Lawyer (Dec. 30, 2015). As a matter of public policy, third-party litigation funding may increase the number of lawsuits brought by plaintiffs who don’t have sufficient resources to sustain litigation. While the majority of third-party litigation financiers invest only in high stakes corporate litigation, some third-party funds like Mighty have begun to invest in low-wealth plaintiff litigation. These investors aim to give low-income plaintiffs access to the legal system and ensure a level playing field.
Will third party litigation financing result in more class-action lawsuits?
Possibly, because litigation funding firms are showing a preference for large pools of cases instead of riskier one-off suits. For instance, Burford Capital announced that it entered into a joint venture with global litigation firm, Hausfeld LLP, investing €30 million to bring thousands of consumer claims against Volkswagen in German courts. Another litigation funding firm, Bentham IMF, recently retained Quinn Emanuel Urquhart & Sullivan to bring a massive shareholder lawsuit against Volkswagen under the German Securities Trading Act. Burford Capital, together with King and Spalding, LLP are bringing a $1 billion arbitration claim against Argentina on behalf of foreign investors of expropriated aviation assets.
Does disclosing third party litigation financing change the dynamics of the case?
Parties to litigation have no obligation to disclose financing arrangements because financing contracts are protected as attorney work product prepared in anticipation of litigation. Matthew Harrison of Bentham IMF alleges that third-party litigation funding is not relevant to the case, and its disclosure would merely create a sideshow to the litigation.
Disclosure of third party litigation financing could have serious implications for a party’s trial and settlement strategy. Some observers anticipate that disclosing a financing arrangement could be advantageous because it would deter parties from filing unnecessary procedural motions to exhaust their opponent’s resources. Without disclosure, a well-funded plaintiff could afford to prolong litigation to hurt defendant(s), who would be “forced to divert additional time and money from productive activity to litigation.” US Chamber Institute of Legal Reform, “Issue: Third Party Litigation Funding.” Others worry that the disclosure of third party litigation financing might cause the opposing party to “seek lengthy and expensive discovery on a funder, needlessly drawing out litigation.” Boaz Weinsten, Lake Whillans (litigation financing firm). If it is revealed before settlement proceedings that a party has institutional commercial funding, it could “strengthen that party’s bargaining position and enhance the chances of quickly reaching a higher settlement. Finally, disclosure could trigger a counterclaim if the funding is found to be anti-competitive.
Will third party litigation financing result in higher settlement amounts?
Third-party litigation funding can change the relative negotiating power of the parties. This is especially true where “risk-averse, financially constrained plaintiffs are pitted against risk-neutral, well-financed [corporate] defendants.” Joana M. Shephard, “Ideal versus Reality in Third-Party Litigation Financing,” 8 J.L. Econ. & Pol’y 593 (2012). A plaintiff that is self-funded will be risk averse, and usually accept a settlement below the expected value. By contrast, a plaintiff that has third party funding may be risk-neutral, and therefore able to reject initial settlement offers in the hopes of securing a larger settlement. Parties may also be motivated to hold out for larger settlements, knowing that their third party funders will take a large portion of the recovered amount. In some cases, third party funders may even reserve the right to approve settlement agreements or to replace the legal counsel. As a result, parties may be less likely to reach a settlement agreement in the early stages of litigation. The effect being more expensive litigation with higher settlement costs.
The judgment in Hulk Hogan’s case against Gawker is most likely a direct result of third party litigation financing. Without third party litigation financing, Hogan would have been a risk averse plaintiff who would likely have accepted a settlement much lower than the final award of $140 million. Gawker spent $10 million on its defense against Hogan’s suit, an amount equivalent to 40% of Hogan’s net worth of $25 million (at the time of trial). The financial impact of this litigation reportedly wiped out all of Gawker’s profits for 2014 and 2015 leading the media company to take on outside investment, and ultimately declare bankruptcy on June 10, 2016.