Bankrolling other people’s court fights dates to the Dark Ages, when it was a favorite tactic of noblemen who wanted to harass their enemies. In recent years litigation funding has become a multibillion-dollar industry as investors have quietly fronted the costs of civil suits in exchange for a piece of any eventual monetary awards. The billionaire investor Peter Thiel turned the practice into a tool of revenge this year, surreptitiously paying for pro wrestler Hulk Hogan’s privacy suit against the website Gawker, which published a Hogan sex tape. The case went to trial and ended with a $140 million jury verdict that pushed the site into bankruptcy. Thiel subsequently said he got involved because of a 2007 Gawker story outing him as gay.
Federal judges in California may be about to deal the business a serious blow. In June the rules committee of the U.S. District Court in San Francisco proposed that any party to a lawsuit filed in the jurisdiction would have to disclose any financial support from third-party sources known as litigation funders. The next step is for the full court to consider the question.
The U.S. Chamber of Commerce, which has called litigation funding a grave threat to the civil justice system, and other pro-business advocates contend that letting judges, lawyers, and parties know who’s footing the bill will help avoid hidden conflicts of interest or frivolous suits. Disclosure will “aid in the identification of potential ethical issues and thereby protect the integrity of the judicial process,” the chamber’s Institute for Legal Reform said in 2014.
The loosely regulated funding industry came under scrutiny after U.K.-based funder Burford Capital and other litigation financiers helped plaintiffs win a multibillion-dollar judgment against Chevron in an Ecuadorean court. The oil giant convinced a judge in New York in 2014 that the case was the product of a racketeering conspiracy involving bribery, coercion, and fabricated evidence. Burford wasn’t implicated in the wrongdoing.
That same year, the Judicial Conference of the United States’ advisory committee on civil rules considered—then tabled—a similar proposal for the federal court system across the country. The committee concluded that the practice of institutional third-party funding was relatively new and evolving, so “an attempt to craft rules now would be premature.” It considered and again tabled the proposal this year.
In 2015 the U.S. Senate Committee on the Judiciary opened an inquiry into the “alarming” expansion of “litigation speculation” and asked Burford and another financier, IMF Bentham, to furnish a list of all the cases they had backed over a six-year period. Burford responded in a 12-page letter saying it entered into 83 investments from 2009 through 2014, mostly in U.S. cases, while declining to provide specifics because “we are not free to disclose clients’ information.”
In written comments on the proposed rule change in San Francisco, Bentham and Burford contend that once outside funding is revealed, adversaries will try to pry deeper into confidential communications, resulting in expensive pretrial sideshows. “From a legal perspective it’s rarely if ever relevant to the case,” says Bentham investment manager and legal counsel Matt Harrison. “That doesn’t stop folks from trying to dig in. That increases costs for us and our clients.” Burford says the rule is unnecessary and discriminatory. “Burford is on record providing as much as $100 million in a single financing transaction to a client—collateralized by dozens of separate litigation matters,” the company said in an e-mail. “Managing disclosure obligations in such a complex and rapidly evolving area will add complexity and delay to the judicial process.”
At least one newly created funding firm says it favors disclosure. Legalist opened in Boston and San Francisco this summer after co-founder Eva Shang won a $100,000 prize from the Thiel Foundation to get her startup off the ground. The firm is focused on helping small-business owners pursue cases but relies on the same data-heavy analytic approach larger litigation funders use to determine which cases to take. “Our ultimate goal is for transparency in the industry and greater awareness so that every small business, every grocery store, knows that litigation funding is an option,” says Shang, who has no continuing affiliation with Thiel. A spokesman for Thiel didn’t respond to a request for comment.
University of California at Los Angeles legal historian Stephen Yeazell says greater transparency might work to funded parties’ advantage by encouraging defendants to settle without protracted court battles. Having outside investors backing a suit is “a little like the Good Housekeeping seal of approval,” he says. Most cases, he says, are not like the Hogan suit: “What the third-party funders want is meritorious litigation with a large number of zeros at the end.”
The bottom line: Litigation funders may face disclosure requirements under a rule proposed by federal judges in San Francisco.