Interest in financing lawsuits as a business opportunity seems to be growing even as prominent Silicon Valley entrepreneur Peter Thiel draws flak for financially backing the lawsuit that shut down Gawker. As Silicon Valley Business Journal’s Cromwell Schubarth writes, Legalist, a startup founded by Harvard grads Eva Shang and Christian Haigh, plans to use algorithms to vet and finance commercial lawsuits that could deliver significant returns to investors:
Legalist has invested $75,000 in one case so far, with a predicted potential for a $1 million verdict. The amount Shang expects her company will invest in a case is between $50,000 and $500,000. It hopes to get up to 50 percent of any award or settlement.
The company applies 58 variables that are good predictors of how a case will turn out, based on analysis of 15 million cases it studied in 10 states, including Texas, New York and Massachusetts (but not California yet).
“One of the biggest predictors of case outcome is the presiding judge and one of the biggest predictors of length is the number of cases that judge is concurrently working on,” Shang said.
In June, Shang won a Thiel Fellowship, a $100,000 award created by the billionaire for young entrepreneurs, for an earlier incarnation of Legalist. That version was a service that allowed lawyers to keep up with the latest developments in case law, which required the compilation of data that could be useful in the new Legalist’s efforts to predict lawsuit outcomes. From Motherboard:
[T]he company’s original plan was to scrape and upload state court records to a central database, making it possible for lawyers, journalists, and the public to search state court records, which are notoriously hidden behind paywalls, are difficult to access, and are often stored on hard-to-search websites.
As recently as last month, the startup was content to become the “Lexis Nexis for state records,” a service that would make fragmented state court records “more accessible and transparent.”
Schubarth writes that the new Legalist follows other litigation financing startups such as Trial Funder and LexShares. As Forbes’ Daniel Fisher wrote in a 2014 profile of LexShares and its founder, Jay Greenberg, shrewd investors have been attracted by the now multibillion-dollar litigation financing industry’s uncommonly high returns:
Hedge funds have been doing it for years, and there are even a couple of public companies that invest in litigation, including London’s Burford Capital. But it was the returns that caught Greenberg’s attention: 50% or more per year, better than just about any hedge-fund strategy short of insider trading.
“I thought `This is really interesting,’ ” said Greenberg, 29, a Boston College finance major who joined Deutsche Bank straight out of school. “How are they generating 50%-plus annualized returns, yet not a lot of people know about this?”
According to Fisher, the industry has been met with wariness from lawyers and others who fear that financing firms could promote frivolous lawsuits or suits that would otherwise be dropped for good reason.
One of the concerned parties is the U.S. Chamber of Commerce’s Institute for Legal Reform, which noted to the Wall Street Journal in May that litigation financing is currently subject to little to no oversight or regulation.