Dimitrije Canic – The 1990s were the start of investing expansion. Wall Street figured out a way to invest into anything and everything; including lawsuits. Known as third-party litigation financing, the idea is that a private investor pays for legal services and negotiates his return on investment with the lawyer or law firm trying the case. A typical payout involves the firm or lawyer paying out the investor the initial investment and then a percent of the remaining award. Although relatively unnoticed at first, the practice gained notoriety when billionaire Peter Thiel invested in Hulk Hogan’s lawsuit against Gawker.
Now, even hedge funds are getting in on the action. It’s easy to understand why. The justice system is well-regulated and is not as volatile like classic securities. It provides people with capital with the perfect investment market. Buford Capital, the “titan of litigation finance,” increased its investments in litigation in 2016 by 83% to $378 million. This trend is continuing in the United States, one of the largest litigation markets in the world.
Moreover, law firms also appreciate the influx of capital. It provides a better alternative to obtaining loans from banks. Although a successful case would result in a lesser profit for the firm that obtained financing from a third party, a loss would not cost as much as it would if a loan was taken out. The risk of debt is far less with third party financing and this could change a firm’s approach to negotiating settlements. Firms speak about third party financing as the tool to “even the playing field” against deep-pocketed defendants. The image of David versus Goliath helped this recent growth of third party financing.
Nevertheless, every investment is a risk, and third party litigation financing is no different. In fact, Buford invested $4 million in a case that lost when the judge determined the suit was “tainted by the plaintiffs’ lawyer’s fraud.” Luckily for Buford, it sold its interest to another investor.
However, such financing can also muddy the waters as to who the law firm actually represents? Is it the party or the lender? Legally speaking, an attorney must always represent his or her client(s). But when there is a large amount of money at stake, the interested parties are more than just the attorney and the client. The ABA prevents attorneys from sharing legal fees with non-attorneys to void this problem. However, a common loophole is the client talks to the third party and gets the funding, thereby technically satisfying the ABA requirement. This still poses a potential conflict of interest problem if the interests of the client and lender are no longer the same.
Another potential issue is whether third party financing can be part of discovery. It would surely be in the opposition’s interest to know where the money is coming from, but there are arguments to be made on both sides whether that fact has bearing on the case itself. Courts are split on this issue and it varies from jurisdiction to jurisdiction.
It is easy to understand the appeal of third party litigation financing. However, as a legal matter there are many ethical issues that come with it. As of now, there is no official ruling banning third party litigation financing in the United States. But, given the recent rise in such financing, it will undoubtedly require some form of judgment as to its permissibility. Although the U.S. Chamber of Commerce is apparently against such financing, there are many success stories surrounding such financing that it has already replicated across the world.
In the wake of the 2008 global financial crisis and the high volatility of cryptocurrency, investors are always looking to invest in a “sure thing.” Although litigation may not involve absolute certainty, its independence from the stock market is as appealing as it gets. There are indeed ethical issues to consider, but as Wall Street has proven time and time again, money talks. And in the courtroom, it’s beginning to talk louder.