May 25--Let's start with the disclaimers. It hasn't been established for certain that Silicon Valley billionaire Peter Thiel has been bankrolling the legal campaign waged by wrestler Hulk Hogan against Gawker, the celebrity-trolling website.
Thiel, who co-founded PayPal and sits on the board of Facebook, in which he was an early investor, was identified Tuesday by Forbes as the money behind the lawsuit. He hasn't denied the report. But it fits in with long-term speculation, not least by Gawker founder Nick Denton, that a deep-pocketed source was secretly standing behind Hogan.
It also dovetails with Thiel's known hostility for Gawker, which outed him as gay in 2007 via its now defunct website Valleywag. In a 2009 interview, Thiel said Valleywag's staff "should be described as terrorists, not as writers or reporters." He called the site "the Silicon Valley equivalent of Al Qaeda."
Hulk Hogan's lawsuit, which involves Gawker's publication of a sex tape featuring the former wrestling star, already has yielded a $140-million trail award in Hogan's favor. A Florida judge on Wednesday denied Gawker's appeal of the award, which could threaten Gawker's survival. But further proceedings are certain.
Thiel's reported involvement with the lawsuit raises disturbing questions about the possible use of litigation aimed at putting a defendant out of business for spite. But it also points to an ever larger issue -- the spreading business of litigation finance, in which investors put up money to support a lawsuit in exchange for a piece of any recovery.
In some respects the practice resembles the ancient common law crime of "champerty," which amounted to buying an interest in the gains from a lawsuit. In Britain and the U.S., legal prohibitions against champerty and related offenses fell away. That was largely because the development of professional ethics in the law was thought to have the same effect of discouraging frivolous lawsuits.
At the same time, lawsuits in general became more acceptable; the Massachusetts Supreme Judicial Court said in overturning that state's champerty law in 1997 that the public view of litigation had evolved "from 'a social ill, which...should be minimized,' to 'a socially useful way to resolve disputes.'"
As litigation became more complex and costly, new methods were needed to cover the expense and keep the courthouse doors open to more than just the wealthy. Contingency fees, for example, arose as a way for lawyers cover their clients' expenses by granting them repayment out of any recovery.
But in recent years, litigation finance has become institutionalized. Investment firms have sprung up with the explicit goal of investing in litigation for a share of the outcome. In January, the largest such firm, Chicago-based Gerchen Keller Capital, launched a $400-million fund aimed at institutional investors. The fund would bring Gerchen's capital to $1.4 billion. Gerchen says it serves litigants as well as law firms by fronting "legal fee receivables and settlement payments." (In other words, providing loans to be repaid from future fees and legal settlements.)
But as the American Lawyer reported in December, growth in the field has outstripped the legal profession's grasp of the ethical issues it raises. Big investors could influence case strategy or settlement negotiations to advance their own interests in conflict with those of the actual clients. Some have made alliances with particular law firms, which may or may not be the right firms for the job.
Some financing terms may be so onerous that the clients' prospects of recovery even from a successful lawsuit may be much reduced. That could have occurred in a huge case pitting Ecuadorean peasants against the giant oil company Chevron, Fortune reported in 2011.
The plaintiffs' case was backed by Burford Capital, a British litigation finance firm that in turn was backed by hedge funds and mutual funds in Britain and the U.S. Burford's potential investment of $15 million would entitle it to up to 5.5% of any award.
The question Fortune raised was whether the group of largely illiterate Ecuadorean plaintiffs understood Burford's arrangement. According to documents and testimony, the magazine said, Burford was entitled to a minimum of $55 million from a $1-billion plaintiffs' recovery -- 5.5%. But that $55 million was the minimum, even if the plaintiffs' recovery was less than $1 billon. In the case of a $70-million recovery, in other words, Burford's $55 million would amount to nearly 80% of the take. After other investors, attorneys, and assorted other hanger's-on got their cuts, the plaintiffs could be left with a handful of centavos. (The Ecuadorean court hit Chevron with a judgment of $18 billion in 2011, but that has been blocked by a U.S. court, which found that it was the product of fraud and racketeering by the plaintiffs' lawyer.)
Lawmakers and judges have wrestled for decades with the possible motivations of financial backers of litigation. Supreme Court Justice Benjamin Cardozo, writing in 1929, when he was a new York state judge, deemed that financial support "inspired by charity or benevolence" was acceptable, but not so "maintenance for spite or envy or the promise of hope of gain."
The problem is that the identity of financial backers, along with their terms, often remain concealed. How then can anyone know what their motivations are?
There's no point in seeking a solution from the American Bar Association, which tackled the field of litigation finance in a 2012 white paper. The ABA paper explicitly disavowed any consideration of such "social policy" issues as "the desirability of this form of financing, or...the systemic effects of litigation financing on settlements," or its effect on "the incidence of litigation generally or unmeritorious ('frivolous') lawsuits specifically." All that was left was the question of the duties of lawyers to their clients when someone else is footing the bill.
The reported involvement of Thiel in Hulk Hogan's case raises these and other issues. Litigation can be so financially ruinous that a lawsuit funded out of "spite or envy" or even mere profit can effectively silence almost any individual or business that a wealthy investor finds annoying.
The identity of anyone and everyone with a financial investment or stake in the outcome of a lawsuit should be made part of the record, just for a start. The investment terms and the involvement in decision-making of anyone not a named party to the suit should also be exposed to daylight. Civil courts exist to enable those who have been injured to recover damages, and those accused of injury to defend themselves. They're the interested parties.
To allow anyone else to skulk in the wings, pursuing their own private goals in secret, is to turn the courts over to the rich, even more than they have been already. Few developments could be more frightening.
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