Legalist, a startup funded by PayPal co-founder, conservative billionaire, and media villain Peter Thiel, has created a new and controversial business model. We've tongue-in-cheekly dubbed it "Lawsuits-as-a-Service."
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Like Thiel, who funded Hulk Hogan's vendetta lawsuit against Gawker Media, Legalist foots the bill for a third-party's commercial legal fees or business operations during litigation; it subsequently takes up to 50 percent of the settlement or award. However, unlike traditional litigation finance companies, Legalist's business model is based around the claim that it uses data analytics and algorithms to determine which cases have the best chance of winning.
The data is derived from historical analysis of more than 15 million cases. Legalist applies 58 variables to the data to determine the likelihood of each specific case's success. In laymen's terms: If your small business is the victim of fraud and you can't afford to go head-to-head against the fraudster in the courtroom, then Legalist will crunch the numbers to conclude whether or not you've got a shot at a winning judgement; if you do, Legalist will fund your case.
If you think this sounds wholly undemocratic and slightly icky, you're not alone. In addition to clogging up an already-congested national judiciary that handles 15 million cases a year, companies such as Legalist might actually encourage more litigation—particularly, unnecessary and opportunistic litigation.
"Litigation finance isn't in and of itself a bad thing," said Steven Ayr, Business Counsel at Fort Point Legal, a firm that specializes in representing entrepreneurs and small businesses. "I think everyone's really nervous about Legalist because of Peter Thiel and Gawker, which [Legalist] is trying to distance itself from. What concerns me is them talking about litigation finance as an asset class. You'll always lose quality as the scale gets that big. That gives me flashbacks of 2008 [and the subprime mortgage crisis]. What kind of oversight will there be? Most states don't require disclosure of situations like this. This company seems like their intention is to do the right thing but you don't know."
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What concerns Ayr is the possibility that larger and more well-funded companies (e.g., Google or Uber) will view litigation finance as an asset class and jump into the fray by investing billions of dollars into new cases. The system, which is already overburdened by civil litigation, pushes most cases into settlement in order to avoid clogged courtrooms. A sudden influx of cases backed by wealthy investors could bring the entire system to its knees. "If you get someone pumping a couple of billion dollars into litigation finance, it would change the way the courts and the system work," Ayr said. "If that money is causing cases to not settle, the system won't be able to handle that."
Legalist co-founder Eva Shang is quick to dispel any comparisons between her company's model and what Thiel did for The Hulkster, clearly stating Legalist wouldn't back lawsuits by individuals. However, it would use its data to help clients win in a manner eerily similar to Thiel's strategy for taking down Gawker (i.e., filing suit in Hogan's home state in a district whose judge has a spotty reputation and is often overturned). The concern here is that litigation will ultimately rely less on argument and fact than on geography, judicial bias, judicial workload, and opportunism.
Legalist, which did not respond to PCMag's repeated requests for comment, is currently accepting applications from clients. It has invested $75,000 in its first case, which Shang said she expects to produce a $1 million award. The very brief Legalist application includes the following fields: Name of Claimant and Defendant, Brief Description of Claim, Attorney Contact Information, Court Location, and Case Number.
"They have this pitch of all of this advanced analytics," Ayr said. "As someone who has been in a courtroom and has seen ridiculous things happen with no rhyme or reason, I'm skeptical of how valuable the data can be."
An Honorable Intention
Let's all stop being cynics for a few paragraphs. Let's momentarily put aside Legalist's Thiel association, its possible encouragement of frivolous litigation, its reduction-to-algorithm of the judicial process, and its clearly stated use of generally and globally unreliable data (I know, it's hard).
If we're able to step back from our initial negative impressions of Legalist, then we might sincerely find magnanimous and valuable use cases for the startup's expertise. By definition, Legalist is attempting to topple giants by serving as David's slingshot. If the company uses scruples alongside its Big Data to fund litigation, it could help to democratize America's highly unfair and capital-driven civil justice system.
"In a perfect world, the [judicial system] has a level playing field," Ayr said. "One of the big issues with the litigation practice is that there are power imbalances and that manifests itself in different ways. That's what leads to settlements—when one person can afford to battle it out and one person can't."
This is where Legalist could step in to help tip the scale back in favor of the everyman. "Any time there is a power imbalance created by finance differences, Legalist would level the playing field," Ayr said. "Their argument is that this would allow cases to be settled on the merits [and not based on who has the biggest war chest]."
Think of the case of Edward J. Friel Company, which went out of business after its client, presidential candidate Donald J. Trump, allegedly failed to pay for $83,600 worth of contract work the company claimed to have delivered. Rather than suing Trump, which Paul Friel (the company's Chief Financial Officer) was warned against doing by legal counsel due to limited funds, the company ate its losses and eventually went bankrupt. With the help of a company such as Legalist, Friehl could have afforded to take its case to court.
What about the data from those 15 million cases that Legalist claims to have accessed and logged? That information (although, admittedly, unreliable) could be used to determine if particular judges have unusual or nefarious biases. The data could help to educate the judges, attorneys, plaintiffs, and defendants to provide more clarity to a highly subjective system that is prone to mistakes and criminality.
Think of the case of former Luzerne County Judge Mark Ciavarella, Jr. He was convicted of taking $1 million in bribes from developers of juvenile detention centers in exchange for handing down harsh and legally unjustifiable sentences to juvenile defendants (to increase the number of juveniles within the facilities). Although that was a federal case and falls outside of the scope of the services Legalist intends to provide, the use of data analytics to investigate and oversee the judiciary might have helped to limit the damage caused by Ciavarella, Jr. All told, he oversaw 4,000 juvenile cases that were ultimately overturned. With someone monitoring the data from these harsh judgements, it's likely Ciavarella, Jr. would have been caught sooner.
We've all seen the movie Erin Brockovich. The story of a legal clerk whose dogged investigation uncovered that Pacific Gas & Electric (PG&E) had been leaking toxic materials into the ground water of Hinkley, California. In the real-life version of this story, the victims received a $333 million settlement as a result of private arbitration with PG&E. Private arbitration is typically used to avoid long and costly trials in exchange for speedy decisions and less expensive legal fees. After the settlement, Hinkley residents complained that their individual settlements were lower than they expected and their legal fees were unnecessarily high. Because arbitration is private and arbitration files are sealed after the fact, it's impossible to determine if these claims are justified. However, with the help of a company such as Legalist (which would never take on a case of this ilk according to its mission statement), the plaintiffs might have been able to afford a full trial or been able to pay less out-of-pocket for their lawyers to manage the arbitration.
And let's not forget the case of Robert Kearns, the inventor who patented the intermittent windshield wiper mechanism and tried to get Chrysler, Ford, and General Motors to license the technology—only to be subsequently ripped off by each when they installed the mechanism without his consent or payment. Kearns battled Ford for more than 12 years, during which time three firms dropped him as a client and his wife filed for divorce. Although he was ultimately awarded $10.2 million from Ford and $30 million from Chrysler, it's likely, with help from a giant firm at his side and Legalist's money footing the bill, Kearns might have gotten closer to the $1 billion he deemed fair.
(Image via: CleanFrameTrap.com)
Even if Legalist becomes a vehicle for the common man to stand his ground against corporate bigwigs and injustice, the type of service Legalist is providing creates ethical gray areas that will need to be addressed, according to Ahmed M.T. Riaz, Associate at Schiff Hardin. "Having a third-party finance litigation raises issues as to who the attorneys are beholden to. There may be a case where the actual client is not interested in going further but Legalist is," said Riaz.
Because Legalist has invested money in seeing the trial through to the end, it might feel it's being wronged if the plaintiff and the plaintiff's attorney decide to drop the suit or settle for a lower payout. What happens then? Does Legalist demand repayment of its investment? Does it accept a smaller portion of a settlement than it originally intended to take? Does it sue its own client?
"There are also attorney-client privilege issues," said Riaz. "You'd think someone financing litigation wants to know as much about the case [as possible]." Would Legalist be willing to invest in a suit without viewing documents that are pertinent to the litigation? What if those documents contain information that leads Legalist to be deposed? What if Legalist becomes privy to something illegal? Because Legalist doesn't have the same privileges as its clients' attorneys, it isn't protected by the law and neither are its clients. Anything you say to Legalist can be used against you in a court of law.
I wouldn't enlist them to handle contract negotiations, and I wouldn't put them in charge of my classified documents. But that doesn't mean they're not onto something revolutionary. As more of its settlements and judgments become public, we'll be able to better determine who and what Legalist represents. Is it a vendetta-based business that targets political and personal enemies? Is it a money-hungry investment company with no regard for the legal system? Does it intend to help balance a justice system that favors capital? Is it prepared to handle the ethical quandaries inherent in litigation finance? For now, the jury is still out.
(Lead image via Flickr)