Litigation finance investments becoming increasingly common in the wake of Gawker verdict

by Charles Miller

Legal experts say that the field of litigation finance investments – in which lawsuits against an individual or corporation are funded by hedge funds or other third parties – has the power to significantly reshape the practice of commercial litigation in the U.S. legal system. Litigation finance was most famously used by investor Peter Thiel to fund a lawsuit filed by former pro wrestler Hulk Hogan against the recently shuttered gossip blog Gawker.

Under a litigation finance investment, legal fees and other expenses that may be necessary to file a lawsuit against an individual or corporation are paid for by a third party investor rather than the plaintiff in the lawsuit. In exchange, the investor is entitled to receive a portion of any damages or settlement awarded to the plaintiff.

Although litigation finance was once uncommon in the U.S., over the last 15 to 20 years, pressure from hedge funds and venture capitalists have made third party-funded lawsuits increasingly more common. Advocates say that investor-financed litigation enables plaintiffs who would have been forced to settle a lawsuit for less than they deserved because of the costs of litigating the case to withstand the delaying tactics of better-funded defendants to achieve a better result in their case. Investors also maintain that, because these investments are decoupled from the broader market, they are not be affected by general economic downturns in the manner of stocks and other investments.

Critics of the practice say that third-party-financed litigation subverts the intended purpose of the justice system because it allows people whose rights have not been violated to seek relief in court. Although courts and lawmakers were historically sympathetic with this view, attitudes towards litigation finance have begun to change as the practice has become more widespread.

The majority of litigation-funding investments involve either commercial litigation cases, such as breach of contract lawsuits, or civil lawsuits involving personal injury matters or civil rights violations. The increased prevalence of third-party-financed litigation has led to the creation of a number of new companies and websites designed to facilitate the pairing of plaintiffs and investors. Companies that offer these services say that vetting potential lawsuits for their legal merit is an important component of ensuring the quality of these cases (and the investment offerings used to back them) for investors. The amounts invested by individuals who purchase litigation-funding investments may range from tens of thousands of dollars to multimillion dollar sums.

Litigation funding was most famously used by hedge fund manager Peter Thiel to fund a lawsuit filed by the former professional wrestler Hulk Hogan against the blog Gawker. Hogan filed a lawsuit against Gawker alleging that the gossip site had illegally published explicit videos in which he was depicted. Thiel, who had been outed by the gossip site several years earlier, helped to fund the lawsuit against Gawker, which eventually netted damages of $140 million against the site. Gawker Media founder Nick Denton was eventually forced to file for chapter 11 personal bankruptcy protection as a result of the verdict.

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