In courtrooms across America, investors are making money through litigation financing. The process allows investors to cover the cost of a lawsuit in exchange for a share of the financial settlement. Image: Shutterstock
If this process sounds familiar to you, it's probably because it's similar to what billionaire Peter Thiel did when he secretly funded a lawsuit from Hulk Hogan against Gawker Media. It's still unclear whether Thiel benefited financially from $US140 million ($183 million) judgement against Gawker, but the impact of his attack is evident.
Now, a new startup wants to get more people in on the action. Two Harvard undergraduates have created a service called Legalist that uses what they call "data-backed litigation financing", analysing civil lawsuits with an algorithm to predict case outcomes and determine which civil lawsuits are worth investing in.
The startup was developed as part of Y Combinator's Summer 2016 class. Legalist cofounder Eva Shang is a Thiel Fellow and has received a $US100,000 ($131,356) investment from the billionaire's foundation to build the startup. In reference to the Gawker lawsuit, Eva Shang told Business Insider, "That's the kind of thing we're staying away from here." Legalist will not be backing lawsuits by individuals, like Thiel did for Hogan. Instead, the company will be focusing on commercial and small-business lawsuits. (It's unclear whether the defendants of these lawsuits are other businesses or individuals.)
Legalist says it uses an algorithm of 58 different variables including, as Eva Shang told the Silicon Valley Business Journal, who the presiding judge is and the number of cases the judge is currently working on. The algorithm has been fed cases dating back to 1989 and helps people figure out how long a case will last and the risks associated with it.
In a presentation at Y Combinator's Demo Day on Tuesday, the founders claimed that the startup funded one lawsuit for $US75,000 ($98,517) and expects a return of more than $US1 million ($1.3 million). Shang says the $US1.40 ($1.84) is earned for every $US1 ($1.31) spent in litigation financing, which can prove to be a profitable enterprise when you're spending hundreds of thousands of dollars.
In 2014, the largest litigation-finance business raked in $US82 million ($107.5 million) in revenue with an operating profit of $US61 million ($80 million). The practice has no doubt continued to rise in popularity. With companies like Legalist making it easier for everyone to invest in lawsuits, it shows no signs of slowing down anytime soon. What could go wrong?