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Why Billionaires Can Destroy You with Lawsuits – And Keep it a Secret

May 25, 2016, 11:13 PM UTC
Thiel, partner of Founders Fund, speaks during the panel discussion at the Milken Institute Global Conference in Beverly Hills, California
Peter Thiel, partner of Founders Fund, speaks during the panel discussion "In Tech We Trust? A Debate with Peter Thiel and Marc Andreessen" at the Milken Institute Global Conference in Beverly Hills, California April 29, 2013. REUTERS/Fred Prouser (UNITED STATES - Tags: BUSINESS) - RTXZ43I
Photograph by Fred Prouser — Reuters

How can this be legal? That was my initial reaction to the latest twist in the gutter fight between gossip site Gawker and wrestler Hulk Hogan, who body-slammed the site for $140 million in a March verdict over a sex tape.

In case you missed it, the latest twist is that the Hogan lawsuit is being bank-rolled by billionaire tech mogul Peter Thiel, who confirmed on Wednesday he has paid around $10 million in legal expenses. Thiel’s role helps explain a series of scorched earth legal tactics aimed at destroying Gawker and its publisher, Nick Denton, forever.

Recall, in the beginning, this case was supposed to be about principle: Hogan’s right to privacy versus Gawker’s right to free speech. Instead, it’s really just about a rich man’s vendetta against a media outlet he sees as his enemy.

Many people, including the former public editor of the New York Times, are alarmed.

Not everyone, though, is upset. Some folks, like this paleo diet guru, are just glad someone stuck it to Gawker.

But whoever you support, it’s worth asking if Thiel’s tactics should be legal if the first place. Think about what he did. He crawled into someone else’s lawsuit in order to squash a media outlet, and neither he nor Hogan had to tell anyone about it.

The Thiel-Hogan arrangement, in which Thiel says he is not out to make money, represents a new frontier in the murky corner of the legal system known as litigation finance. As my colleague Roger Parloff explained in a feature about a notorious lawsuit against Chevron, the practice normally involves investors underwriting a lawsuit in return for a cut of the proceeds.

This is different. It appears to be about a billionaire renting a lawsuit in order to destroy someone, possibly in retaliation for Gawker outing him in 2007.

As for why it’s legal, the answer lies in the long-term erosion of old common law rules that forbade “champerty and maintenance” or, in plain English, “funding someone else’s lawsuit to cause trouble or collect a cut.”

According to Stephen Scott, a constitutional law professor at McGill University, the common law rules prevented lawyers from working on contingency, which is what led many states to write statutes over-riding them.

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“Most people regard the old laws as obsolete, archaic and oppressive,” said Scott, noting that bans on outside financing for lawsuits can keep people from seeking justice because they won’t be able to afford it.

But as the old rules are lifted, companies are turning lawsuit funding into big business. This might represent a chance for more people to get a fair shake in court but, as David Lat, a founder of legal blog Above the Law notes, it also raises ethical issues.

Perhaps, this could be solved by disclosure: Isn’t it in everyone’s interest to know when people like Thiel are behind a lawsuit? As it turns out, no one has to say a thing. According to Burford Capital (BUR), a litigation company whose clients include banks and hedge funds, the law is “perfectly clear … there is no obligation to disclose litigation financing arrangements.”

In a Twitter message, Lat noted that some lawyers will voluntarily disclose a financing arrangement, but agreed that there is no general obligation to disclose.

Defendants like Gawker, meanwhile, might try to use the legal discovery process to unearth hidden enemies, but it won’t work. The reason is because it is easy for plaintiffs to shut the door by invoking so-called privileges like “lawyer-client” or “attorney work product.”

So where does it all stop? Who knows. As it stands, Thiel has created a model where any thin-skinned billionaire can ruin a media company without even telling anyone. And it’s all perfectly legal.

This story was updated at 10pm ET to reflect Thiel’s confirmation of his role in the lawsuit.