Intro To Litigation Financing

Litigation finance allows people to buy shares of lawsuit outcomes through financing the legal fees for lawsuits upfront. The practice was pioneered in Australia, since Australian class action affairs are opt-in versus opt-out (meaning every person affected must testify to get the ball rolling), and it soon became apparent that most common people don’t have the means to go up against big, malicious companies.

Soon, litigation finance emerged as a niche yet very high returning asset class, and large funds such as Burford Capital took to the seen as leaders in domestic litigation and international arbitration financing. Not long ago, though, the act of funding lawsuits not only became investment-driven, but also philanthropic, with high net worth individuals backing people’s litigations in order to help change policy around something they care about, or put a malicious company or person in their place.

The main buckets of litigation financing are as follows:

1. Specific lawsuit financing
2. “Angel Investors”
3. Funding law firms, essentially acting as a bank for law firms

Case #1: Underwood Ranches vs. Huy Fong Foods

Win: $23M

Investment ROI: ~2X

Underwood Ranches, a family farm in Ventura County, California, had been supplying jalapeño peppers to Huy Fong Foods for nearly 30 years, enabling the production of the popular Sriracha hot sauce. The partnership was thriving, with Underwood Ranches growing over 100 million pounds of peppers annually on 1,750 acres, with Huy Fong as its primary customer. However, in 2016, Huy Fong abruptly terminated the relationship without prior notice, leading to a devastating impact on Underwood Ranches. The farm lost 80% of its revenue and was forced to lay off 50% of its employees. Underwood Ranches responded by filing a lawsuit against Huy Fong, alleging breach of contract, intentional misrepresentation, concealment, negligent misrepresentation, and intentional interference with contractual relations. In July 2019, a jury found Huy Fong liable for breach of contract, intentional misrepresentation, and concealment, awarding Underwood Ranches a substantial $23.3 million. However, the legal battle was far from over. Huy Fong appealed the decision, and by that time, Underwood Ranches had already suffered significant financial losses and incurred substantial legal expenses.

As a small business, Underwood Ranches faced a daunting challenge. It lacked the necessary funds to sustain its operations and cover additional legal fees during the lengthy appeal process. The risk of not being able to collect the recovery for up to two more years posed a significant threat to the farm's survival, especially considering the additional hardships brought about by the COVID-19 pandemic.

To address the financial burden and uncertainty faced by Underwood Ranches, Burford Capital stepped in to provide legal finance. In February 2020, Burford offered an advance of $4 million from the expected recovery to Underwood Ranches through a monetization deal. This injection of immediate liquidity not only de-risked the appeal process but also played a vital role in the farm's survival during challenging times.

Thanks to legal finance, Underwood Ranches not only survived the legal battle but also used the immediate capital provision to invest in its future. Instead of being forced to close the business or lay off more workers, the farm could retool its operations. Underwood Ranches seized the opportunity to diversify its product offerings by launching its own line of hot sauces, including a Sriracha sauce, which began selling at farmers markets in Ventura County.

Case #2: Hulk Hogan vs. Gawker Media

Win: $140M

Investment ROI: ~4X*

Gawker Media, known for its audacious and provocative journalism, found itself embroiled in a media firestorm. The company published a sex tape involving Terry Bollea, the famed professional wrestler better known as Hulk Hogan. Arguing that his privacy had been egregiously violated, Hogan filed a lawsuit against Gawker, seeking redress for the harm caused by the publication of the intimate video. The case swiftly caught the public's attention due to the prominence of the individuals involved and the questions it raised about the limits of media intrusion.

Behind the scenes, a mysterious figure emerged as a secret benefactor for Hogan's legal battle against Gawker. That person was none other than Peter Thiel, a prominent Silicon Valley figure and co-founder of PayPal, Palantir and Founders Fund. Thiel harbored a deep-rooted animosity towards Gawker, stemming from an incident years prior when the media outlet outed him as gay without his consent. Thiel's support for Hogan's lawsuit presented an opportunity to not only vindicate Hogan but also to exact his revenge on Gawker for the harm he believed it had caused him personally.

Since this lawsuit was never securitized, Theil’s contribution of $10M toward the plaintiff side of this litigation was a no-strings-attached donation.

Case #3: Financing law firms

Investment ROI: ~45% IRR

Many litigation financing firms, such as Burford Capital, trend toward raising larger amounts of capital for larger cases, and rarely touch cases with less than $5M in investment opportunity. Now, many are underwriting not only the return of individual cases, but also the return of law firms as a whole. This allows them to lend more capital than traditional banks, while allowing firms to stabilize their cash flows despite handling multiple different fee arrangements on cases.

In all, litigation financing is a relatively new field of finance, and one that policy is rapidly developing around.