You Too Can Invest In Lawsuits. But Not Quite Like Peter Thiel
If Legalist had arrived on another day in another year, it might’ve slipped under the radar. But it didn’t. It arrived just as Gawker went belly up.
Unveiled last week at a startup launch day in Silicon Valley, Legalist is an online service that lets people invest in lawsuits they otherwise have no connection to. Provided you meet certain requirements, you too can help fund a suit and get a cut of the winnings—if there are winnings to be had. That seems straightforward enough, but the tech press went a bit berserk over the arrival of this new service. And that’s because of Gawker.
The news and gossip site quit publishing stories last week, after losing a high-profile invasion-of-privacy suit bankrolled by billionaire Silicon Valley venture capitalist Peter Thiel. If Thiel could take down Gawker as a personal vendetta, the voices said, couldn’t Legalist do much the same?
But let’s not get ahead of ourselves. With Peter Thiel, the point is that he’s so rich and so powerful, he doesn’t need Legalist. And, well, the idea behind Legalist isn’t new. Other companies—including LexShares, Trial Funder, and Mighty—have been offering similar services since 2014.
These services don’t exactly exist to help mega-millionaires exert their power on lawsuits of their choosing. Rather, they allow investors with much smaller bank accounts to participate in the lesser known industry of litigation finance. And in turn, they provide plaintiffs with broader and more competitive ways of funding a lawsuit. They create a new middle market for litigation finance. They feed cases worth around $200,000 or so—bigger than a simple personal injury claim, but too small to receive funding from a big litigation-finance firm. Until recently, says Maya Steinitz, a professor of law at the University of Iowa who studies litigation finance, this market didn’t exist.
Steinitz likes the idea. But she does point out that, like any utility, these services can be abused. And because they’re new, it’s only natural they would make people uncomfortable, including tech journalists. “It’s not home mortgages. It’s not real estate. It’s not cars or car loans. It’s the justice system,” Steinitz says. For all these reasons, she adds, they certainly deserve scrutiny.
Enter the Internet
Deep-pocketed investors, including investments banks, insurance companies, and hedge funds, have long invested in big lawsuits. But in bringing this idea to the Internet, startups are very much changing the dynamic. In 2014, Mighty launched an online marketplace designed to pair funders with personal-injury claimants. LexShares targets commercial cases that seek about $100,000 to $1 million in funding. Trial Funder deals with cases even smaller in scale, providing several thousand dollars in funding to lawyers or directly to plaintiffs. Now, Legalist is expanding this trend, taking on business-tort cases that require between $50,000 and $500,000 in funding.
Typically, these services use proprietary algorithms to evaluate the merits of lawsuits and judge their potential as an investment opportunity. If a case meets their requirements, they put the details online and invite investments, listing things like plaintiffs and defendants, judges and lawyers, jurisdictions, and damages sought. Anyone can invest as a long as they meet the investor accreditation requirements laid down by the US Securities and Exchange Commission: if they’ve made more than $200,000 annually for the past two years or have a net worth of $1 million.
This is a familiar yarn in the tech world: take a niche activity, put it online, and let anyone play. In this case, the opportunity is pretty big. In 2013, according to entrenched litigation financer Gerchen Keller Capital, the US litigation market spanned more than $200 billion. But online litigation financing is by no means a slam dunk. Mighty has already pivoted, transforming itself into a company that provides software to litigation financers.
The Social Question
OK, but in choosing lawsuits for their services, do these companies make decisions based on the social merits of a case? Are they making judgements of justice? Not really, their founders say. They insist they just judge cases on their financial merits. “We’re not specifically looking for cases with a social impact,” says Trial Funder CEO Anoush Hakimi. “But it can be a side benefit.”
Certainly, social change is often part of litigation finance. In the 1960s, this happened all the time. So many organizations backed legal battles for minorities and women and others who lacked political and financial clout, with funds coming primarily from donations. But these Internet services aren’t really set up for stuff like this.
Expanding this niche industry to more players, Steinitz says, does mean more potential for abuse. But there are safeguards in the system to prevent this. The Gawker case was something different. It was an outlier in the world of litigation finance, says Bradley Wendel, a law professor at Cornell University. It doesn’t make financial sense for a company like Legalist to go after a Gawker just for the sake of going after a Gawker. Legalist, LexShares, and Trial Funder have a fiduciary obligation to shareholders. They can’t waste money on personal vendettas, unlike Peter Thiel.