In recent years, one of the most important developments in litigation in the U.S. has been the rise of the litigation funding industry. Indeed, the industry’s rise has more recently been fueled by increasing investor interest, even as the industry itself has diversified into lawsuit portfolio investing (as opposed to individual-case investing). The industry’s rise and increasing importance already had attracted scrutiny and criticism, but nothing compared to the deluge of attention that has followed revelations that Hulk Hogan’s privacy litigation against Internet scandal site Gawker was funded by Silicon Valley mogul Peter Thiel. The news about Thiel’s financial involvement has produced a cascade of commentary about litigation funding, which in turn has arguably put the litigation industry on the defensive. The news has also fueled a debate about whether there should be more transparency about litigation funding, and even whether there should be other litigation funding industry regulation, as discussed below.
Readers will recall that in March 2016, a Florida jury awarded Terry Bollea (better known by his nom-de-pro-wrestling as Hulk Hogan) $140 million in damages (inclusive of $25.1 in punitive damages) against the online gossip site Gawker, for violating his privacy and publicity rights by circulating portions of a sex videotape. It recently came to light that Peter Thiel, a Silicon Valley billionaire, had provided Bollea as much as $10 million in financing to fund his litigation against Gawker. Thiel himself, in acknowledging his involvement in funding the litigation, said that what the New York Times described as Thiel’s “secret war” against Gawker was motivated by a 2007 incident in which Gawker revealed information about Thiel that he regarded as private. The New York Times quoted Thiel as saying that his actions in funding the litigation “is less about revenge and more about specific deterrence.”
The news about Thiel’s involvement has sparked controversy, not just about the specific question of Thiel’s actions in this particular case, but about litigation funding in general. There is clearly something about Thiel’s motivations and his use of his billions to fund what was for him is a grudge match that rubs a lot of people the wrong way, and that has in turn caused many to ask questions about litigation funding.
In the past, Thiel’s conduct would have constituted a tort, and possibly even a crime. As Northwestern Law Professor Eugene Kontorovich noted in a May 26, 2016 Washington Post article (here), the support of litigation by a stranger to the case constitutes the common law crime and tort of “maintenance.” Relatedly, the common law also barred “champerty,” which is the financial participation in a lawsuit with an expectation of a participation in the lawsuit’s proceeds. In the United States and the U.K., these common law doctrines, according to Kontorovich, have “fallen into desuetude.” (Alison Frankel has an interesting post on her On the Case blog, here, in which she discusses the fact that because of the decline of these common law doctrines, Gawker is unlikely to be able to rely on Thiel’s financial involvement of the case as a basis to try to have the massive jury verdict set aside.)
Interestingly, these doctrines have not been universally abandoned; as discussed here, just a few weeks ago the High Court of Ireland recently confirmed that the doctrines of champerty and maintenance continue to apply in Ireland and that third-party litigation funding is prohibited in that country.
In this country, litigation funding has been on the rise. A May 15, 2016 Wall Street Journal article entitled “Litigation Funding Attracts a New Set of Investors” (here) details how litigation funding firms’ changing business models has increasingly attracted investment from mainstream institutional investors. As the article explains, the leading funding firms have moved away from single-lawsuit funding arrangements, toward investment in portfolios of lawsuits. For example, the article cites the experience of litigation funding firm Burford Capital, LLC, which at its founding invested 100% of its funds in individual cases, in 2015 invested just 13% in individual cases.
These changes have allowed the firms “to deploy money faster and creased more consistent returns” for investors. The results are impressive; according to the Journal article, Burford Capitals’ internal rate of return is 28%. The fact that these returns are uncorrelated with more conventional marketplace investments has drawn investment from pension funds, university endowments.
The upshot of these developments has been that the financing firms have been able to raise enormous funding amounts. Gerchen Keller Capital LLC has raised funding commitments of $1.4 billion from institutional investors. Burford’s investment pool exceeds $1 billion (as discussed here). Much of this and other funding firms’ capital has been deployed. According to the Journal, Burford Capital has already invested $800 million in the U.S. and abroad; Gerchen Keller has deployed $700 million of the $1.4 million it has raised.
Even before the latest Hulk Hogan lawsuit funding flap, these developments had drawn their share of criticism. The Institute for Legal Reform at the U.S. Chamber of Commerce has been at the forefront in condemning the recent rise of third-party litigation funding in the U.S. It is in this context that the news about Peter Thiel’s funding of Hulk Hogan’s lawsuit against Gawker arose. Inevitably, it drew a sharp denunciation from Lisa Rickard, President of the Institute for Legal Reform, who wrote in the New York Times that litigation funding represents a “cancerous growth on our civil justice system” that risks “turning our courts into casinos.”
On the other hand, Professor Kontorovich, in his Washington Post article about Thiel’s funding of the litigation, suggested that in our present system and given current widespread practices involving public interest litigation, Thiel’s investment “should raise no eyebrows.”
Whatever else might be said about Thiel’s funding of Hulk Hogan’s lawsuit, the news about Thiel’s involvement has undeniably put the litigation funding firms on the defensive. Among other things, the funding firms have been quick to contend that the debate about the kind of spite-motivated funding in which Thiel is involved differs from their more business-oriented approach. In a May 26, 2016 post on his blog on the Burford Capital website, Chris Bogart, Burford’s CEO, tried to draw a distinction between “revenge litigation” and the “large and pretty boring business around commercial litigation,” in a litigation environment, Bogart notes, that includes “insurers (the largest litigation funders around), banks, creditors, investors, and corporate affiliates.” A May 27, 2016 Bloomberg Law article (here) quotes Jim Batson of funding firm Bentham IMF as saying that his firm makes its litigation funding investment decisions “based on objective criteria,” adding that “we wouldn’t be doing a very good job … if we let personal interference assess [the litigation].”
The controversy about Thiel’s involvement in the Hulk Hogan lawsuit has also sparked calls for reform. Among other things, litigation funding critics have called for greater transparency around litigation funding. As discussed in a May 27, 2016 Wall Street Journal article (here), funding critics have tried to argue that litigants should have to disclose when litigation funding is involved. These critics note that under the Federal Rules of Civil Procedure, defendants are required to disclose if they have insurance funds available. The critics (which include the Institute for Legal Reform) have argued that the Rules should require a similar disclosure of third-party funding for plaintiffs. This disclosure, they argue, would give defendants a better idea of how aggressively to litigate, and assist courts in assessing whether or not proposed settlements are fair.
Opponents of increased litigation funding transparency argue that disclosure of litigation funding has a tendency to create “a sideshow” over the presence of funding. They argue that full transparency would have a “chilling effect” on the funding industry by deterring investors because of the added cost of “collateral litigation” that come with such disclosures. (For a recent example of a case in which a litigant sought – unsuccessfully — to challenge its opponent’s litigation funding in a Delaware civil action, refer here.)
From my perspective, there is an important debate that needs to be undertaken about litigation funding; however, the Hulk Hogan lawsuit is not really a good context for that needed debate to take place. The problem with the Hulk Hogan lawsuit is that it is too full of distractions. All of the details – the sex tapes, the scandal magazine, the billionaire investor motivated by spite – interfere with an objective discussion of the issues.
Just the same, it may be that the Hulk Hogan lawsuit, for all of its distracting features, might stir things up just enough for the more important debate to take place.
My starting point for thinking about these issues is that litigation in the 21st century is expensive. It is no coincidence that litigation funding is expanding rapidly in a number of different countries – indeed, litigation funding as an important phenomenon has been relatively late to arrive in the U.S., after it was already well-established in Canada, Australia, and the U.K., among many other countries.
Litigation funding critics charge that litigation funding stimulates the growth of litigation, producing even greater burdens on economic system already cursed with an overabundance of litigation. Funding proponents argue not only that litigation funding facilitates meritorious litigation that might otherwise not occur owing to prohibitive costs, and that the funding firms’ profit motivation acts as a constraint against frivolous litigation.
It could be argued that both sides of this debate have merit. I will say, that regardless of the merits of this debate, there is no doubt that the involvement of litigation funding has helped to fuel an expansion of litigation-based efforts of aggrieved claimants to try to obtain redress, often in the form of collective actions. Recent examples include the Tesco litigation in the U.K. (about which refer here) and the VW litigation in in Germany (refer here).
I think we all need to assume that third-party litigation funding is here to stay and that it will continue to be an important – indeed, likely an increasingly important – part of the litigation environment. But while the acceptance of litigation funding is an important and necessary starting point, that is hardly the end of the discussion. I think there is an important debate that needs to take place about how litigation funding is to be taken into account as part of the litigation process. While I don’t have any particular criteria for how this approach should be managed, I do note that in Canada, where there is a longer experience with litigation funding, it has become an accepted practice that litigation funding must be disclosed and judicially approved.
The possibility of requiring greater transparency and judicial approval are not the only issues that should be considered with respect to litigation funding. There are other concerns that might militate in favor of other steps toward regulating litigation funding. The funding firms most active and prominent now argue that their involvement and profit-motivation will actually help deter frivolous litigation, as they are only interested in funding meritorious suits. Whether or not these arguments are warranted, the litigation funding arena presents the risks associated whenever there are potentially large profits to be made and low barriers to entry. The well-financed firms in the vanguard of U.S. litigation funding today may well be able to claim they help discourage frivolous litigation, but their profits may attract others who are less disciplined and who may nonetheless seek to fund other lawsuits after the best and most meritorious lawsuits have already been funded.
These possibilities at least raise the question whether or not there should be more formal regulation for third-party litigation funding – for example, whether there should be registration and minimum capital requirements, and whether or not there should be mandated disclosures to funding firm investors, as well as to those receiving litigation funding. The possible need for minimum capital requirements could be particularly important as the industry expands. The fact is that while there are a number of successful funding firms, there have also been a number of high profile industry failures, as discussed here. A funding firm’s untimely demise could lead to all sorts of problems of litigants dependent on financing from the firm.
In addition, I think it needs to be asked whether there should be requirements around litigation funding arrangements themselves. In that regard, in a recent Delaware case in which the Chancery Court was asked to review a litigant’s funding arrangements, the Court noted, in approving of the arrangement, that the financing agreement did not assign ownership of the claims to the financier; the financier did not have any rights to direct or control the litigation; and the plaintiff retained unfettered right to settle the litigation at any time for any amount. It may be that a general requirement for judicial approval will in turn lead to the development of general practices consistent with these kinds of more specific funding transaction requirements, but a general discussion about litigation funding requirements arguably ought to include these aspects as well.
I want to emphasize that I am not necessarily advocating any of these steps, but I do think the time has come for a debate on these issues. Indeed, I think it arguably would be in the interest of the firms currently in the litigation funding vanguard to get out in front on these issues, to try to bring about a level and type of regulation that is acceptable to them, as well as to protect their industry from the kind of disrepute that might follow if some unscrupulous firm were to create a scandal that produced public outrage.
Peter Thiel’s involvement in the Hulk Hogan lawsuit arguably is just the latest detail to emerge from a set of circumstances that seem destined to produce scandal rag fodder. On the other hand, it might just be the thing to trigger a much-needed discussion about the growing importance of litigation funding in the U.S. litigation arena.