The ethics of innovation

Earlier this year, a legal periodical called me up and asked my opinion of third-party litigation financing. As you might know, my view of this particular innovation (detailed here on three previous occasions) is not a wildly enthusiastic one, and I said as much, at some length. Shortly after the article was published, I was contacted by a representative of a litigation financing company, who invited me for coffee to discuss the industry and exchange some facts and opinions about it. Since I’m partial to new perspectives and sworn to coffee, I agreed.

In the event, two people from the company met me at the local Starbucks, and we had what I think was a good conversation. They were sincere, well-informed and reasonable, and I came away more favourably disposed towards their company, given what they described as their careful evaluation of the kinds of cases they take on. I learned some things I didn’t know (for example, litigation financing emerged in Australia, where contingency fees remain prohibited). They shared my views on the shortcomings of our present litigation system and they cared about improving access to justice, so there was certainly common ground between us. (You can see the “But” coming, I’m sure.)

But, for all that, I don’t think either side managed to persuade the other towards its perspective, and I suspect much of that was down to the irreconcilably opposed premises with which we approached the subject. I have a baseline aversion towards the encouragement of litigation, as I think we should do what we can to discourage it; they believed legitimate cases should have the chance to be aired before the courts. I have philosophical and ethical objections to disinterested third parties financially supporting private litigation in exchange for a share of the proceeds; they did not. I feel that the proliferation of third-party litigation financing would put an end once and for all to public funding of access to legal services, as governments would come to say that “the private sector can address that”; they said the type of commercial cases they support wouldn’t be eligible for public funding. So while our talk was cordial and informative, there was probably never much chance our minds would meet.

But as we were gathering up our cups to leave, a thought occurred to me (much like Oscar Wilde, I often think too late of smart things to say). Over the course of our conversation, my interlocutors had consistently referred to litigation financing as a way to “level the playing field” between impecunious plaintiffs and rich defendants. And of course, that’s a powerful concept, and who could argue with it? But something about it had been nagging at me, and I finally figured out what it was.

“What would happen,” I asked them as we stood to leave, “if third-party litigation financing was used not to level the playing field between two unequal parties, but specifically and intentionally to imbalance the playing field between two otherwise equal parties? Is there any reason it couldn’t be used for that purpose?” If we’d had another hour, we might have taken that thought in interesting directions, but time was pressing and we didn’t have the chance to explore it further.

A few weeks after this conversation, a man named Terry Bollea won a defamation and invasion of privacy lawsuit in Florida against a company owned by a man named Nick Denton. You might know the case better as Hulk Hogan’s $140 million verdict against Gawker for publishing sex-tape footage featuring Hogan in 2012. What became apparent soon after the verdict was that Silicon Valley billionaire Peter Thiel had financed the litigation as part of a feud stemming from Gawker’s outing of Thiel as gay in 2007. “It’s less about revenge and more about specific deterrence,” Thiel told The New York Times. Denton has since declared bankruptcy and Gawker has shut down.

I know it's hard to believe, kids, but Charlie Sheen was once a bankable movie star.

I know it’s hard to believe, kids, but Charlie Sheen was once a bankable movie star.

Now, there’s a lot to unpack here. I’m pretty much the last person who’ll defend the kind of “journalism” practised by Gawker, especially in its later years, when it seemed to lose any sense of what it was trying to accomplish beyond embarrassing people (I’m inclined towards Jeff Jarvis’s views on that subject). But it’s hard to escape the reality that a billionaire used the courts to kill a publication, not in a case that personally involved him, but in a case to which he had no connection other than sharing the plaintiff’s animus towards the defendant. There wasn’t even a financial return behind the “investment”: Thiel has been quite clear in interviews that Gawker’s destruction was not a side effect of the litigation, but its purpose. (And Thiel is now helping launch a litigation finance company himself.)

If you have any kind of rooting interest in a free press unafraid to uncover important things about powerful people and institutions, the Gawker case should thoroughly unsettle you. Gawker makes an easy villain; but suppose a local paper is pressing a powerful property developer a little too hard, or an online industry watchdog learns about a history of sexual exploitation by a major celebrity. Or go beyond media: if incredibly wealthy people can pursue personal vendettas by leveraging our dysfunctional litigation system to ruin someone’s life, and succeed, then I think we’ve completely lost sight of why we even have a litigation system in the first place.

But my larger point is this: we need to remember that every innovation is a double-edged sword, with the potential to do a lot of good and at least as much harm. We’ve always understood and accepted this in theory, but now we have to grapple with two additional, very practical considerations.

The first is that when considering any new innovation, no matter how highly sung its praises, we always have to ask ourselves: “What if bad people use it? What if reckless people use it? What if it were put to its least valuable and most destructive uses?” Because the worst case is going to happen — in law just as in the world at large. And we have to decide if, and to what degree, we’re morally ready to live with the consequences of that worst-case scenario — especially because we won’t always be the ones on whom those consequences will be visited.

I’m not looking to make litigation financing companies wear the goat horns for Thiel’s perversion of the justice system (from which they’ve striven to distance themselves). But I’d like to think the Gawker case would give the industry serious pause, and encourage it to reflect on whether it really is helping “turn the courts into casinos,” as its critics charge. If the industry chooses not to do that, then it will have missed a major opportunity and created significant future risk, not just for itself, but for a whole lot of other people.

And the second consideration is that innovation in the legal market has now progressed to the point that, in addition to principled arguments on these subjects, we now also have access to test cases. We can now start to see what the real thing looks like, and it’s not always pretty.

I don’t think most people in the litigation finance industry foresaw the Gawker case or would welcome it if they had, but there it is all the same. I doubt most of us who supported the ability of law firms to seek public financing foresaw or welcomed the smoking wreck of Slater & Gordon, but there it is all the same. I wrote, in that linked article, that the lesson to be drawn from Slater & Gordon’s catastrophic flameout is not to ban non-lawyer ownership, but to closely and carefully study its example. Conduct a thorough examination of both the first great success and first great disaster of public ownership, and learn whatever lessons are necessary to help the next firm to try this innovation get it right. I think we need to adopt that approach across the legal innovation spectrum.

I believe that selling shares in law firms should be allowed, because the ethical challenges have so far proven manageable (Slater & Gordon’s failure was caused by a business error, not an ethical one), and because law firms will need access to deeper pools of cash than partnership equity alone can provide. I also think that third-party litigation financing should be strongly discouraged, because at the end of the day, it’s really just an investment vehicle whose operating principle (give everyone equal access to enough cash to pay lawyers and continue litigating) would permanently entrench in the legal system its worst fault, the paramount and perpetual indispensability of money to any hope of obtaining justice.

Now,  I could be right or I could be wrong about both these things. I’ve had the arguments before and I’ll surely have them again. But we don’t have to debate this only in theory anymore. Let’s look at what’s actually happening and make whatever adjustments that honest and serious reflection demands.

I’m willing to take that approach to public financing of law firms after Slater & Gordon. I hope advocates for third-party litigation financing are willing to take that approach following Gawker. And I’d like to urge you, regardless of the legal innovation you favour, to do the same. “What’s the worst that can happen?” That line is usually read as a joke. Ask yourself that question in all seriousness — and in all seriousness, answer it.



4 Comments

  1. Julian Summerhayes

    Jordan

    A neat, tight piece. I’m a former litigator and was at the time at the cutting edge of discounted CFAs, ATE and 3rd party funding, but looking back it seems so wrong. No, it was worse than that. There was no merit to it. Don’t get me wrong I’m not adverse to funders entering the market but having been a very early proponent of ADR, I now see how much of my thinking and methodology wasn’t oriented towards an or any settlement but kicking the can down the road in the hope of meeting my over-inflated and nonsense targets. I think you get my drift…The point I’m making is that if lawyers were skilled in anything other than kicking the proverbial out of each other, then that would render otiose the funders by dint of all or nearly all cases being settled in a mutually beneficial way. I know, all very simplistic but then for me, simplicity is often the thing that’s missing in this whole debate that and the clients’ imperative.

    Best wishes
    Julian

  2. Gary Luftspring

    there has always been and will always be abuses of any system. Imbalances in litigation already exist and have for years; think libel chill, think the Koch brothers, think Trump. We can’t be looking at the abusive situations but rather the reality of most situations. Funding is a reality and has been for years. All that has happened recently is that it is more organized and out in the open instead of a couple of dozen wealthy friends investing in a lawsuit with no transparency. Funding organizations have a place and are here to stay.

  3. Blair L. Botsford

    Very well thought out discussion. With respect to the issue of non-lawyer financing of law firms, I take a slightly different approach. Most firms of any size have at least one management company. Other than securities laws, there is nothing preventing outside investing in the business are of the law firm. This leaves the “pure” practice of law untainted. The investment is needed in systems, technology, etc., which is and should be held in the management company rather than the partnership. I think the tools already exist for many firms to achieve their goals.

  4. Karin Litzcke

    Jordan, I think your position is based on a couple of well-meaning but flawed premises, and so I think I disagree with you.

    First, I don’t think access to justice can be pursued within the context of discouraging litigation. Access-to-justice is by definition going to open the floodgates, or at least take the task of gatekeeping access out of the hands of lawyers and judges.

    Second, as far as unbalancing an equal playing field is concerned, either that situation would not arise (maybe such a case wouldn’t attract third-party funders) or alternatively, nothing prevents both litigants from getting third party funding.

    Third, you can’t limit innovation to only good innovations. Not only can you not always tell in advance what is good but also, there is no such thing as an innovation that is purely good or bad. From the wheel to Facebook to modern pharmaceuticals, every single innovation is a double edged-sword.

    But as a bottom line, going back to your piece on the speech by Justice Finch, I’d propose that maybe lawyers have lost the moral authority to evaluate whether financing innovations are good or not. Problem and solution rarely come from the same source. This is an innovation that seems to be coming out of the finance sector, and I’d go so far as to say that it’s better than anything I’ve seen suggested by a lawyer in any access-to-justice dialogue I’ve tuned in to – with all due respect to present company :-) It is certainly an improvement on pro bono, which alters the balance of power between lawyer and client.

    But all that said, what lawyers could do that would be helpful is discuss the relationship between this third party funding initiative and the doctrines of champerty and maintenance.


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