If there are only two lessons to be learned from the Gawker Media story this week, it’s that money talks and third-party litigation financing matters.
The first conclusion—that money buys verdicts—is not a new idea. Of course money buys more lawyers, more appeals, and, as a result, potentially better verdicts. Although not always the case, the debate is alive and well in America. However, the second idea—that third-party litigation financing matters—is a stickier one.
Third-party litigation financing has existed in some form since the 1980s.1 Personal injury victims, for example, have long been known to accept cash advances from loan agencies while their lawsuits are pending. Furthermore, lenders have been known to share equally in claims, once recovered, as investors.
However, as large-scale litigation increases in America, so has the phenomenon of third-party litigation investors. When several millions of dollars are at stake, new stakeholders tend to appear.
According to the “Report on the Ethical Implications of Third-party Litigation Funding,” submitted by the 2013 Ethics Committee of the Commercial and Federal Litigation Section of the NY State Bar Association, there were six corporations in 2012 that invested in commercial lawsuits in the United States.2 Of the publically-traded corporations among these six, two existed primarily for the purpose of investing in American commercial litigation. The others—private companies—listed little to no information about their investments.
Today, the phenomenon has reached a new scale. Larger companies, even those with in-house counsel, are starting to sell off pieces of lawsuits so that they can smooth out cash flow and offload risk, prompting The New York Times to ask, “Should You Be Allowed to Invest in a Lawsuit?”
With that question in mind, the aforementioned article cites Juridica Investments, a Miami-based fund with $650 million under management, which specializes in working with Fortune 500 companies and aligning the interests of plaintiffs’ lawyers with those of their clients.
“You want the largest recovery, in the shortest time, with the least uncertainty,” explains Chief Executive Richard Fields.
But, hedging your litigation bets doesn’t stop at large corporations. Smaller companies use litigation financing to finance growth with their future award serving as a credit line. For investors, litigation financing of BigLaw is a big opportunity.
On the attorney side, there are potential downsides to accepting third-party litigation funding (TPLF). The New York Bar Association issued a formal opinion, for example, listing the following as potential pitfalls of TPLF, including:
- the potential illegality of the TPLF arrangement;
- issues with the attorney failing as an advisor;
- possible conflicts of interest;
- failure to obtain a waiver of privilege; and
- losing control over the proceeding.
On Friday, Gawker Media told employees that the company has filed for Chapter 11 bankruptcy as a result of Silicon Valley billionaire Peter Thiel’s third party funding of several lawsuits against the company.
“The decision came after the Hon. Pamela A.M. Campbell of Pinellas County, Florida denied Gawker’s request to stay the enforcement of a $50 million bond that would allow it to appeal the $140 million verdict that a 6-person jury awarded Hulk Hogan in March,” writes J.K. Trotter for Gawker in the post, “Gawker’s post, “Gawker Media Is Filing For Chapter 11 Bankruptcy, Will Be Put Up For Sale.”
In a statement by parent company Gawker Media Group, CEO Nick Denton said:
“Authentic writing, whether it takes the form of honest reviews of technology, video games and entertainment, or revelations about the way the system works, is more important than ever. We have been forced by this litigation to give up our longstanding independence, but our writers remain committed to telling the true stories that underpin credibility with our millions of readers. With stronger backing and disentangled from litigation, they can perform their vital work on more platforms and in different forms.”
Now, some sources are suggesting that Gawker may take legal action against Peter Thiel, who was secretly funding the former wrestler Hulk Hogan’s lawsuit against Gawker (he was eventually outted).
“The lawyers are exploring whether this could be a case of tortious interference, racketeering, or other potential claims,” a source at Gawker told Forbes.
The ethics of third-party litigation funding are certainly debatable, although the legality of it remains in a State-by-State chokehold. Maine, for example, requires that litigation finance companies register with the state and include specific funding provisions, while Ohio has a law requiring all contracts to state that the third-party investor “shall have no right to and will not make any decision with respect to the conduct of the underlying civil action or claim or any settlement or resolution thereof.”
Where decisions about third-party litigation funding go from here is a matter for the courts. But, for your law firm, it’s time to brush up on your own ethics opinions.
Third-party investors aren’t the sole source of stress in the legal profession. Difficult clients can be an equal burden. So if you don’t already have a policy or plan in place, consider taking The Center For Competitive Mangement’s course, “Dealing with Difficult Clients: Proven Strategies to Limit Problems, Avert Disagreements, and Ethically Handle Problem Clients.”
During this power-packed session, you’ll also learn how to deal with difficult clients and manage conflict, without sacrificing your sanity or your self-respect. Go here for more details.
In the end, the match-up between Peter Thiel and Gawker Media may not have a clean finish. It seems both sides are just beginning to grapple in what is both an ethical and legal fight to the death—which, after filing for bankruptcy, may be literally true in Gawker’s case.
- Shepherd, Joanna M., Ideal versus Reality in Third-Party Litigation Financing, 8 J.L. ECON. & POL’Y 593 (Spring 2012).
- Shepherd, supra note 2 at 594.