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Industry News

Is Peter Thiel's Foray into Litigation Finance Good for the Industry?

June 8, 2016
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4min read

Unless you've been living under a rock, you most certainly heard the revelation that Peter Thiel has been funding Hulk Hogan's legal case against Gawker.

This is not the first instance of a celebrity funding a high-profile legal case. We've written about Taylor Swift's promise to pay the living expenses of Kesha so she could sustain her case against Sony, as well as Donald Trump's offer to fund the legal costs of anyone who beat up a protester at his rally. We at Mighty quickly linked these two events to litigation finance, a connection the media ignored in both cases.

But the Peter Thiel Gawker story is different. The New York Times noted that litigation finance helps not only large cases like Hulk Hogan's, but also lawyers working on small contingencies for everyday, meritorious plaintiffs.  Forbes wrote that "[i]n contrast to naysayers, many lawsuit plaintiffs, whistleblowers, and their lawyers are very happy financing exists." A Washington Post op-ed author reminds skeptics that donations to the ACLU and Legal Aid Society are forms of litigation finance themselves. Twitter has been abuzz with people debating whether litigation finance is a good thing or not. Litigation finance is having its day in the spotlight.

Many in the litigation finance industry, though, are asking if this spotlight is a good thing or a bad thing.

Some feel that staying in the shadows is a positive thing. The industry is still nascent and developing, and the early days of a new market aren't always pretty. The more time the industry has to grow and mature, the more prepared it will be to withstand scrutiny as a mainstream product.

Despite these concerns, something interesting is unfolding. Much of the coverage hasn't been about whether litigation finance should exist at all - it is being widely acknowledged that it should. It also isn't focusing on whether litigation finance is a good thing - most people acknowledge it is. Instead the coverage has focused on the revenge motive of the funding and the secrecy associated with Thiel's involvement.

But most in the litigation finance industry know that Thiel's example is the rare exception, not the rule. Later this spring, the NYU Journal of Law & Business will publish my piece, titled Litigation Finance: Doing Well by Doing Good? Or Just Doing Well?, which introduces the two reasons funders typically invest in litigation finance. Here is an excerpt:

THERE ARE FINANCINGS THAT USE LAW AS A MEANS TO MAKE MONEY ("MARKET-DRIVEN"), AND THERE ARE FINANCINGS THAT USE MONEY AS A MEANS TO MAKE LAW MORE JUST ("JUSTICE-DRIVEN"). THAT'S IT. Justice-driven financing leverages money as a great equalizer. It invests in plaintiffs who have meritorious cases but who lack the resources to put up a fair fight. Financing increases their bargaining power and ensures that the justice system works the way that it is intended. As Joanna Shepherd, an associate professor at Emory University School of Law, explains, when "third-party financiers invest in cases brought by low-wealth plaintiffs, then the financing may remove cost barriers to justice." By helping the "little guy," justice-driven financing effectively uses money to ensure the outcome of a case is not determined by which party has more of it. Market-driven financing is epitomized by this statement from a litigation finance CEO: "We're fundamentally a capital provider... Forget this being about the law or litigation - we're providing risk funding for an investment in the same way as in any other sector of the market." In other words, law is a good way to make money. The only differences between cases are their risk and return profiles. Market-driven financing is indifferent to justice. It does not care about which party has more money - it will finance the litigation expenses of, say, a Fortune 500 company to help that company prevent its legal expenses from hitting the P&L statement. Improving justice is just "a positive side effect" in market-driven financing, as Joanna Shepherd explains, but the objective is simply "to maximize the expected returns on investments.

Simply put, the overwhelming majority of litigation funders are motivated by investing in meritorious cases where they will receive a return. Some are further motivated by funding the pursuit of justice. Peter Thiel is in a small camp of people motivated by settling scores.

What the Thiel coverage proves is that we are ready to debate about making litigation finance better. The debate is over about whether or not it should exist. That is progress.

Image Credit: Dan Taylor

Post by

Joshua Schwadron

CEO & Founder of Mighty

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