Litigation financing is a relatively recent phenomenon in the United States legal system, having only been around for the last 20 years. Typically, it involves a third-party entity or investor funding a plaintiff’s litigation in exchange for a portion of the damages award in a favorable outcome. Businesses, universities, and even individuals have used litigation financing to pay for costly legal proceedings in a wide range of disputes, including intellectual property matters.
Recently, the verdict in a high-profile case created a buzz in the media. In the case of Bollea v. Gawker, former professional wrestler Terry Bollea, more commonly known as Hulk Hogan, sued Gawker Media for various claims including invasion of privacy, infringement of personality rights, and intentional infliction of emotional distress. Although the case is notable in that it involved a celebrity and a well-known publishing company, what may be most pertinent to the legal industry is that tech billionaire Peter Thiel funded the litigation for the plaintiff. After the verdict, Gawker filed for Chapter 11 bankruptcy protection, and was ultimately sold months later. It is widely believed that Peter Thiel’s motives for funding the case against Gawker stems from his personal issues with the company, which has published details about his private life to the public.
“Perhaps as a result of Bollea v. Gawker and other cases, multiple startups have entered into the litigation financing market with new perspectives on legal due diligence, which could create new opportunities in that field.”
This case illustrates certain strategic benefits that a litigation financer can attain, which often extend beyond monetary gains. In the case of Bollea v. Gawker, it appears as though Thiel may have gained a measure of revenge against a media adversary along with potentially stopping future damaging articles about him from being published. Perhaps as a result of Bollea v. Gawker and other cases, multiple startups have entered into the litigation financing market with new perspectives on legal due diligence, which could create new opportunities in that field.
In the past, hedge funds and venture capitalists have financed larger litigations in order to seek additional returns. These firms decide whether to fund the litigation based on their underwriting processes, which typically take into account factors such as the defendant’s credit worthiness, the plaintiff’s counsel’s track record, and other qualitative factors. In contrast, recent startups entering the litigation financing industry appear to be targeting a higher volume of smaller cases, using unique approaches for selecting cases. For example, Legalist, a startup funded through Y Combinator, uses proprietary algorithms to quickly vet cases based on certain proprietary criteria. By automating the underwriting process, startups such as Legalist are able to identify potentially valuable cases quickly and efficiently.
Although these startups do not yet appear to have targeted intellectual property infringement cases, there may be an opportunity to address this niche market. Litigation financing startups may use their algorithms to identify cases in which a plaintiff is an inventor or small business that cannot support a full litigation effort against a larger entity, but may have a strong patent and a high probability of proving infringement. Through the rise and prominence of non-practicing entity litigation in the IP litigation space, we know there is an opportunity for smaller entities to have a meaningful impact on the IP litigation market. Through new legal due diligence techniques developed by litigation financing startups, there appears to be a relatively promising opportunity to reach an untapped market in IP cases.