The controversy surrounding third-party lawsuit financing has been kicked into overdrive after the revelation that venture capital heavyweight Peter Thiel had been paying for Hulk Hogan’s lawsuit against Gawker Media Group over publication of a sex tape of the former pro wrestler.
Top brass at local litigation finance firms seem mildly amused by the uproar coming from some legal and media corners after the trial, which resulted in a $140 million jury verdict for Hogan, whose real name is Terry Bollea, and the subsequent revelation regarding Thiel.
“It’s been a really interesting moment for us,” said Allison Chock, who heads the rapidly growing downtown office of Australian litigation investment outfit Bentham IMF Ltd.
Chock, a former partner at McKool Smith downtown, said the buzz generated by the legal ménage à trois has forced the industry to parry on some issues, but the underlying case – stripped of the revenge motive – is an example of why litigation finance is such a growth industry.
“We’ve got this incredibly expensive justice system that even celebrities can’t afford,” Chock said. “What we do is fund meritorious cases and help parties get the justice they deserve.”
While big, publicly traded litigation finance firms such as Bentham are still a relatively new phenomenon in the United States, industry growth has been rapid. Bentham’s L.A. office, which Chock helped open in 2013, was one of the first firms on the West Coast to undertake the practice. The office has since hired two executives, including one in April, and is looking for a new space so it can add another.
“In the last six months it’s almost like someone waved a magic wand and all the educating we’ve done has helped us turn a corner,” she said. “It’s not just small and medium-sized law firms who want litigation funding, but large firms and big businesses are approaching us as well.”
One of the biggest growth drivers for litigation finance companies has been a shift in funding structures. Initially, Bentham and other firms, such as New York-based Burford Capital Ltd. and Gerchen Keller of Chicago, invested in one-off cases where returns were based on the outcome of a single piece of litigation. The funds were typically pitched as a way for underdog plaintiffs to battle against deep corporate pockets.
As these companies have increased their presence both at home and abroad and the legal marketplace has become more comfortable with the litigation finance mechanism, investment has shifted toward so-called “portfolio” packages. Instead of focusing on a single case, a fund will provide capital to a law firm or company to fund a number of cases and take a cut from the total return.
“Our growth is coming from these larger-dollar transactions,” said Christopher Bogart, Burford’s chief executive. “While we’ve always done some larger portfolio transactions, now that’s our bread and butter.”
Growth charts now look like an investor’s fever dream thanks to portfolio funds. For example, Burford’s revenue rose from $60 million in 2013 to more than $80 million in 2014 and $103 million last year – an increase of 58 percent in two years. The company, which has a market capitalization of more than $871 million, trades at around $426 a share on the London Stock Exchange.
With returns such as these, it seems only a matter of time before more funds enter the market. The reason it hasn’t happened yet is mainly down to timing – the industry did not gain a foothold stateside until about six years ago. While models existed, namely Bentham’s Australian operations and Burford’s U.K. outpost, litigation finance was untested in the U.S. market and faced significant initial skepticism within legal and corporate circles.
Bentham’s Chock said that buy-in from larger companies has grown as in-house legal departments see litigation finance as a way to spread risk around even if it means reducing the upside of their litigation efforts.
“We’re starting to get more and more Fortune 200 companies who could pay for their litigation expenses but want to explore other options,” Chock said.
Question of merit
The industry does have its critics, both from those practicing law and those in the business community.
The U.S. Chamber of Commerce has dedicated significant resources to funding a campaign against litigation funding through its Institute for Legal Reform. The group’s spokesman, Bryan Quigley, said the industry’s proliferation could cause a spike in frivolous lawsuits.
“There’s tremendous concern that litigation finance will increase the amount of litigation in the U.S. and around the world,” he said. “These companies are not just investing in cases that they view as legitimate in the eyes of the law, but looking at what the odds of a payout are.”
Both Chock and Bogart downplayed this scenario, saying their companies’ profit-driven motives actually increased incentives to find cases and litigants with justifiable claims.
“Because we’re … trying to maximize returns for our shareholders, we have to look directly at the merits of a case,” Chock said.
However, the disclosure of which individuals or firms are funding a case is an even thornier issue.
Litigants are under no obligation to disclose if they are receiving any financial backing under existing laws and regulations. This can be particularly difficult for lawyers trying to make strategic decisions during a case and push companies toward settlements that are larger than reasonable, according to the chamber’s Quigley.
“What we know from civil litigation in the U.S. is that the name of the game is to put enough pressure on companies to force them to settle even if a claim is not legitimate,” he said. “Litigation finance makes more marginal cases operative.”
The other disclosure concern is the one displayed in the Gawker-Hogan case, which is just one in a series of lawsuits brought against the media company by Beverly Hills entertainment law heavyweight Charles Harder. Thiel, whose private status as a gay man was revealed publicly by a Gawker site several years ago, funded Harder’s litigation on behalf of Hogan that pushed Gawker to bankruptcy. It also raised First Amendment questions about how lawsuits can be used as a tool to bully both press outlets and individuals into silence.
Harder did not return request for comment on the Gawker litigation and Thiel’s funding of the lawsuits.
The leaders of Bentham and Burford, however, are quick to draw a line between their business models and the actions of financiers such as Thiel.
“Obviously, we fund cases for very different reasons,” Chock said. “We are not motivated by personal vendettas.”