The greatest trick that plaintiff financing ever played was convincing the world it didn’t exist.
Here’s a story we like to tell people at parties: a few years back, Techforward was planning a bank-breaking partnership with Best Buy. The young company had invested millions of dollars preparing a national buyback program – preparations that necessarily required putting other projects on the shelf.
Then Best Buy dropped Techforward and launched the program on its own.
The consequences were devastating. Techforward filed suit against Best Buy, but – you guessed it – lawsuits are long and expensive, and Techforward didn’t have a good deal of capital left when the partnership fell through. The board had little recourse but to sell Techforward’s assets to a third party.
All assets, that is, but one: the lawsuit.
Techforward’s venture capitalists, First Round Capital and NEA, financed the lawsuit to the tune of several hundred thousand dollars. This allowed Techforward to bring aboard one of the best law firms in the business, Kirkland & Ellis, and pursue the case all the way to trial. After eighteen months of litigation, a jury found Best Buy liable for breach of contract and misappropriation of trade secrets. It awarded Techforward $22 million; the judge awarded an additional $5 million in punitive damages.
It’s rather evident why we like this story. Though it may not look it, this is the capital-P Platonic ideal of lawsuit financing: Big Guy takes advantage of Little Guy, knowing how difficult it is for Little Guy to fight back; in waltzes a funder with just enough money to fuel the flame, and voila! Big Guy gets taken down, Little Guy gets what he deserves, funder gets a nice return.
Yes, it’s unusual for venture capitalists to dabble in lawsuit financing, and these VCs knew it. But they were compelled by the same reasons that drive every funder in the industry. Here’s First Round’s Josh Kopelman:
We needed to send a message to Best Buy – and every other large company – that they can’t blatantly violate agreements and steal ideas from startups. And if big companies believe they can violate agreements with immunity because a startup can’t afford to sue them, it is bad news for every startup in the ecosystem.
He’s absolutely right, but his comments have much broader implications. It’s not just startups who are victims of big companies – it’s people, it’s small businesses. And most Little Guys at the mercy of Big Guys don’t have rich uncles like Techforward did. Most don’t have anyone, and that’s why large companies get away with making bad-faith and low offers. It might also explain why large companies sometimes make the calculated business decision to breach agreements: because it probably won’t hurt them all too bad.
And that’s why there’s lawsuit and more specifically, plaintiff, financing: to hold those companies accountable, to get plaintiffs what they deserve, to make the justice system more just.
Kopelman concludes, “I hope that going forward we can stop funding lawsuits – and just fund companies.” Well, hey Josh – your wish is granted. You worry about startups; we’ll pick up the legal tab.
Image credit: Laineys Repertoire
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