Along with the lurid details and a Silicon Valley soap-opera twist, the Gawker vs. Hulk Hogan invasion-of-privacy lawsuit brought to light a less salacious but equally controversial practice: third-party litigation funding.
While billionaire PayPal co-founder Peter Thiel is paying the former pro wrestler’s legal bills out of personal animosity for the acerbic blog network, legal scholars say the practice of funding lawsuits for profit has been quietly growing for some time now, as hedge funds, venture capitalists and other financial risk-takers seek new ways to goose profits.
It strikes many as a misappropriation of the justice system — Wall Street dragging a roulette wheel into the courtroom — and even supporters acknowledge the practice is rife with potential conflicts of interest and thorny ethical questions.
It is cynical and opportunistic — and invaluable for small plaintiffs taking on much larger, wealthier adversaries.
Litigation funding is a lucrative business: Burford Capital, one of the biggest firms in this space, reported an increase of 27 percent in operating profit, to just over $77 million, and a 16 percent return on equity in its most recent annual report.
Trade groups for business and legal interests have different views about the ramifications of outside money in the justice system.
“Third-party funding poses a major threat to the integrity of the legal system by shifting the focus from justice for the litigants to profits for the investor,” the U.S. Chamber of Commerce, which opposes the practice entirely, said in a 2013 article.
A spokesman for the American Bar Association declined to comment about the practice, but the group’s Commission on Ethics 20/20 addressed the practice in a 2012 report.
“Lawyers must approach transactions involving alternative litigation finance with care,” it said, noting the risks and professional obligations, but without issuing a policy declaration either for or against the practice.
Although law firms aren’t allowed to bring on outside investors, the rules don’t say anything about investing in individual cases or even portfolios of bundled cases. And of course, lawyers have long offered services based on contingency that give them a cut of any money they win for their clients.
Contingency financing differs from outside funding in two significant ways, experts say: While lawyers are required to do what’s in their clients’ best interests, critics say outside financiers could push plaintiffs to turn down reasonable settlements, hoping to drag out litigation in pursuit of a bigger jackpot. They also worry that funders more interested in money than the outcome of the case could interfere with the selection of counsel and unduly influence the plaintiff’s legal strategy.
Contingency arrangements also are fundamentally limited by the law firm’s willingness and ability to float the expense of a suit on their own balance sheet.
Some cases “require a substantial devotion of financial resources and time to recover… and that may take several years,” said Charles Delbaum, a senior staff attorney at the National Consumer Law Center. “To devote tens of thousands of dollars to a case could be crippling and might be impossible,” he said, especially for small law firms.
“Overall, litigation funding is a positive thing because it can provide access to justice. But like every form of finance, it can be used or it can be abused,” she said, suggesting that one of the federal financial regulators could step in and provide guidelines and parameters to protect plaintiffs as well as investors.
“It’s interesting that litigation funding is becoming more and more complex … at the same time as the ‘slicing and dicing’ of financial instruments has gotten a bad reputation in the world of finance, where such complex instruments are seems as contributors to the financial crisis,” Geoffrey Miller, co-director of the Center for Civil Justice at the New York University School of Law, said via email. “I predict it may be subjected to greater regulation, but won’t disappear.”
Beyond legal skirmishes among between businesses, the prospect of being able to leverage venture capital to pursue class-action cases against companies encourages consumer advocates.
“For class-actions, in particular, it can take a tremendous amount of money to litigate a case to conclusion,” said Allison Zieve, director of the litigation group at watchdog Public Citizen. Lawsuits over data breaches, for instance, would require hiring computer experts at considerable expense to spend time analyzing both hardware and software for bugs or security flaws. Research and bringing discovery for product liability cases can also be a time-consuming and expensive endeavor.
In cases like this, consumer advocates say, even if a third party has their own financial interests in mind, an investment in a case could benefit class plaintiffs as well.
The University of Iowa’s Steinitz said greater judicial scrutiny applied in class-action settlements seemed to be keeping would-be investors on the sidelines. “We don’t have data because this is a private market. My understanding is there’s very little of it happening,” she said, but predicted that it was only a matter of time before that changes.
Most of the speculative money pouring into litigation today is going into corporate law.
“A lot of this funding is going to corporations, businesses that are suing other businesses,” Steinitz said. Small businesses might not have the financial firepower to take on a larger company that steals trade secrets, violates a patent or breaches a contract.
Having access to funds that would allow them to mount a sustained legal defense could make them whole, or could help them avoid getting tangled in litigation in the first place if executives at the larger corporation know they won’t be able simply to wield their larger checkbook to avoid consequences.
“The big pro of allowing litigation funding is it allows access to justice,” Steinitz said. “Litigation is just too expensive.”
This article originally appeared on NBCNews.com.