Big Data

Two Harvard undergrads, Eva Shang and Christian Haigh, recently launched a commercial litigation financing startup that uses 17 years of past-case data to predict case outcomes for small and mid-sized business litigation, taking litigation financing decisions out of the hands of seasoned pros and into the world of data analytics.

But traditional litigation funders warn there is no replacement for the experience of longtime litigators who can best judge a case’s value.

Litigation financing, the practice of investing in litigation in exchange for a cut of the potential settlement, has taken on new meaning in the public following the revelation that Silicon Valley billionaire Peter Thiel backed a string of litigation for the express purpose of killing Gawker Media.

Legalist, Shang and Haigh’s new startup, uses an algorithm drawn from data taken from over 15 million cases in 10 states to predict whether a case will be successful or not. This appears to be the first commercial litigation funder to use applied artificial intelligence to evaluate litigation claim value. Other commercial funders evaluate prospects individually, relying on former litigators at top-ranking Am Law 100 firms to vet cases.

Shang, who coincidentally earned a Thiel Fellowship last year, initially intended for the startup to serve as a legal analytics platform for attorneys before pivoting to legal financing.

In her presentation of the new model at incubator powerhouse Y-Combinator’s Demo Day, Shang described litigation funding as having the potential to be an “explosive asset class.”

Especially given the connection to Thiel through her fellowship, Shang told Business Insider that the kind of interpersonal grievance that fueled the litigation battle between Thiel and Gawker is “the kind of thing we’re staying away from here.”

Josh Schwadron, CEO and co-founder of litigation finance tech company Mighty, told Law.com that while litigation finance is certainly on par with the legal industry’s widespread and well-known resistance to technology, many financiers are already using data and analytics platforms internally in their risk assessments for potential cases.

“The entire legal industry is behind the times on injecting tech into their businesses, and the litigation finance space is no different. But there are certain companies that use advanced analytics to make decisions about whether cases are meritorious,” Schwadron added.

Ralph Sutton, chief investment officer at commercial litigation funder IMF Bentham Limited, told Law.com that while the infusion of technology can only help litigation backers, it can’t replace the kind of due diligence work that litigation financing firms staffed with attorneys can offer.

“Commercial litigation funding is really about old fashion rolled up the sleeves due diligence,” Sutton said. “There are no shortcuts. While you can get a lot of information from data to tell you how certain judges in diff jurisdictions will approach certain issues in certain courts, the most important issues are the merits and the transactional aspects of the case.”

Although Schwadron is heavily invested in technology’s involvement in litigation financing, he also felt that data modeling is not as reliable as attorney analysis.

“Legal cases are very qualitative in nature, and while technology can do a good job at a high level, I don’t see a world anytime soon where people are investing hundreds of thousands and millions of dollars in legal cases based on what a computer spits out,” he said.

“While these startups are certainly an exciting development, I think they’re just a tool in a toolkit of litigation financiers,” Schwardron added.

Like the consumer finance funders who finance plaintiffs with personal injury claims, Legalist’s founders say they contract exclusively with plaintiffs rather than the law firms.

Meanwhile, the handful of large commercial litigation funders, including publicly-listed Burford Capital LLC and Bentham IMF, and private firms Gerchen Keller Capital LLC and Lake Whillans, invest in both plaintiff companies and law firms. They’ve been experiencing enormous growth in the past two years.

There are also an increasing number of individual investors dabbling in litigation finance, including Peter Thiel in the recent case filed by Hulk Hogan against Gawker Media, and Taylor Swift funding Kesha’s legal fight with Dr. Luke, who learn about a case and decide to buy a stake in the outcome.

What all three types of financing have in common is a heavy focus on plaintiffs-side work. They also, as a rule, don’t invest more than a tiny proportion of an expected recovery—generally one-tenth the minimum projected payback or less for commercial litigation funders, as described in a recent investigation of the emerging industry by The American Lawyer.

Legalist’s target client—smaller companies with modest commercial claims—are also quite distinct from the litigation finance offerings currently available. The size of the investment in plaintiff companies—$75,000-$1 million per case—has not been well served. Large commercial funders invest a minimum of $2 million per case, and aren’t interested in claims with an expected payout below $25 million unless they’re part of a portfolio. Personal injury-focused litigation funders rarely contribute more than $50,000 to a plaintiff, because recoveries rarely rise beyond the low nine figures.

Schwadron said that the gap in the market likely exists because smaller consumer litigation funders can’t necessarily deal with the complexity of slightly larger-scale litigation, and bigger commercial litigation funders can’t risk the resources necessary to win a case without the promise of a much greater award amount.

“Many funders are having a hard time weighing the large costs of litigation and underwriting against the relatively small returns of smaller deals,” he noted.

According to Business Insider, Legalist has so far invested $75,000 in one case and expects to make $1million out of an expected settlement. The company will then take settlement earnings and reinvest them in other cases predicted to win through the company’s algorithms.

Legalist’s contracted return of up to 50 percent of “first dollars”—the right to get the money first in any settlement—appears unusually high. Payouts of 40 percent in single-case funding contracts are more common among commercial funders, because many plaintiffs also need to pay their lawyers contingency fees. But each contract is slightly different, depending on the risk and length of time to a projected outcome.