Three Cheers for Litigation Finance and Peter Thiel

The media has suddenly become very concerned about outside financing for litigation. The reason is that such financing is for the first time supporting a well publicized lawsuit against the press. The Silicon Valley mogul Peter Thiel has contracted to provide financial support for a lawsuit against the gossip site Gawker on invasion of privacy grounds.

Litigation financing should be celebrated rather than deplored, because it equalizes access to justice. Some kinds of suits pursue novel or risky claims. Even lawyers on contingency fees may be unwilling to take them for those who cannot pay or they may take an exorbitant cut for their doing so.  But litigation finance can draw on institutional or wealthy investors that can underwrite the risk. Institutional investors finance a portfolio of lawsuits and this diversification permits them to suffer losses in many lawsuits, while still coming out ahead overall.

Thiel, however, is not a diversified investor in lawsuits, but appears to be financing only defamation and invasion of privacy suits against Gawker and similar gossip sites. And given his immense wealth, he is not principally motivated by the prospect of financial gain. This latter point has very much upset many members of the press and commentators, one of whom thinks it shows we need higher taxes on the wealthy.

But we should also celebrate the willingness of the wealthy to press lawsuits that they believe are in the public interest. Our society is premised on the idea that we should enforce laws, both civil and criminal. Of course, not all of these laws are necessarily good, but on balance our premise is that they are. Moreover, we have institutions, both judicial and legal, to sift out the bad from good lawsuits. Thiel’s money is the energy that makes the sieve work more finely.

No one objects when people fund the Sierra Club to bring lawsuits on behalf of environmental causes.  We may disagree with the causes, but a pluralist society respects their rights to pursue such projects within the bounds of the law.  Environmental lawsuits are the charismatic megafauna of litigation, able to attract support from many. Yet the vindication of rights should not require popular support. Individual billionaires like Peter Thiel help fill that gap for less fashionable causes.

It is true that in the United States, the so-called American rule precludes a defendant from recouping its legal expenses from a plaintiff when the defendant prevails. That rule does indeed permit plaintiffs to impose unfair costs on defendants. The argument for this rule is that plaintiffs, particularly those of modest means, should not be discouraged from seeking to file lawsuits to right wrongs.  But the more available are outside sources of litigation finance, the less powerful this rationale becomes. Thus, yet another advantage of litigation finance, including angel plaintiffs like Peter Thiel, is that it provides a new impetus to eliminate this procedural injustice.