Dark Money in the Field of Litigation Funding


In a story made for Hollywood, it was recently revealed that billionaire Peter Thiel was quietly funding Hulk Hogan’s litigation against Gawker.com. We have previously discussed the silent emergence of hedge funds investing in high stakes divorce and business litigation for a cut of the winnings. What we are seeing here is a long term revenge play straight out of The Count of Monte Cristo.

The story goes like this:

  1. Hulk Hogan had intercourse with a Tampa area woman and he claims he did not know it was recorded. The tape circulated for a while and was then posted on Gawker.com.
  2. Hogan sued Gawker.com for the invasion of privacy for publishing the private tape.
  3. The jury awarded $140 million to Hogan for the invasion of privacy.

Now that alone is an interesting story, but there is so much more. Gawker was pretty well funded and any plaintiff’s firm is going to be hesitant to take on the massive expenses involved in all of the depositions and arguing the Constitutional Freedom of Speech appeals.

Enter Mr. Peter Thiel, billionaire co-founder of Paypal and Tech Savant. In 2007, Gawker drew his ire by outing him as gay against his will. He has gone on record decrying Gawker as a bully website that delights in causing others pain. It has now come to light that Mr. Thiel quietly paid around $10 million dollars to fund the litigation against Gawker by Hogan. The litigation resulted in a $140 million dollar judgment that drove the company into bankruptcy. CNBC article. As a footnote, Gawker settled the case for $31 million recently. How much of that Thiel got back is unknown.

So what is the problem? The problem is billionaires or large companies can now privately fund litigation against their enemies.  Want to shut down a newspaper in a small town that prints articles against the local petrochemical company? Fund another person’s lawsuit against the paper that otherwise would not have attracted a lawyer to their cause. The litigation expenses will grind the paper into dust. Want to take down an abortion clinic? Bankroll a civil malpractice suit that no plaintiff’s lawyer would invest in.

Don’t get me wrong; contingency fees are great for regular folks. It allows our firm to represent families that have been harmed who could not otherwise afford a lawyer to take their case. It just means we work on commission. As with everything though, there is a slippery slope. It is one thing for the handling lawyer to do the work on a contingency. It is quire another to buy lottery tickets in the outcome of a case you have nothing to do with. In the old days, it was illegal to engage in  “champerty and maintenance” also known as investing in other people’s lawsuits.

Because contingency fee structures become so common, it is now legal in most places to sell interests in the outcome of cases not involving personal injury. (This is still prohibited in Georgia).  Let’s say you want to sue Hartsfield Airport for colluding with other tenants to keep your store out? A plaintiff’s lawyer might look at the risk and decline because of costs or the risk is too high. However, a hedge fund could see the payout odds and spread the risk. Lawsuits that are untenable become workable. That can be a good thing.

There is a dark side though and that is when well funded entities and people can fund grudge litigation. The system has no check and balance for that kind of arrangement. Furthermore the payouts agreement can strip away the plaintiff’ rights. For example in the Lago Agrio litigation that went on for two decades between Ecuadorian villagers and Chevron over petrochemical soil contamination, it was revealed that the Plaintiff’s lawyer had entered into a 75 page agreement with Burfurd Capital, an investment entity. That agreement had a series of percentage payouts to Burford, the lawyers and the villagers, depending on the amount of the judgment. Had the Plaintiffs only recovered an amount under $100 million, the villagers would have received a small percentage. According to media sources, most of the plaintiff’s are Ecuadorean peasants and not literate. U.S. Courts threw out the judgment this summer pointing to widespread dirty practices by the plaintiff’s lawyers. That entire saga is a fascinating story in and of itself, by the way.

Insurance is legalized gambling and everyone is O.K. with that because it allows us to crowd-source risk that would otherwise inhibit economic growth. Shadowy investments into litigation is a dangerous offshoot in that it opens the doors for bullies to use the courts to attack their enemies. We need to consider legislation to curb these practices.

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