Peter Thiel, co-founder of PayPal
Peter Thiel, co-founder of PayPal (Tobias Hase / Newscom)

SAN FRANCISCO — Reports that Silicon Valley billionaire Peter Thiel bankrolled Hulk Hogan’s privacy suit against gossip news site Gawker took the legal industry by surprise on Wednesday.

The details also provide a window into the largely self-regulated and growing world of litigation funding. While the personalities and motives at play in the Gawker case are unique, the lack of transparency isn’t.

Litigation funding has quietly emerged in the U.S. over the past several years as hybrid of the legal and financial industries. To its boosters, it is a way to give “have nots” with good cases access to justice—and rake in money for shareholders to boot. Others characterize it as a shadowy force fanning the flames in an already litigious society.

Regulation of the industry can be described as patchwork at best. About 20 states restrict third-party litigation funding in some way under so-called “champerty” statutes, according to Matthew Harrison, investment manager at the San Francisco office of litigation funding outfit Bentham IMF. But it is fully permitted in major commercial hubs like California, New York and Illinois.

In jurisdictions where third-party financing is allowed, the rules around disclosure are often unclear. (Two spokesmen for state courts in Florida, where the Hulk Hogan suit took place, couldn’t say whether there were any such transparency rules for the state’s court system.) Most of the time, litigation funders operate in the background—and that’s the way they like it.

“Generally, when these things are disclosed, it creates a sideshow,” said Harrison, a former Latham & Watkins partner who opened Bentham’s Bay Area office last year. “We don’t view it as relevant to the case.

In the Gawker case, Thiel is reported to have financed the lawsuit against Gawker that Hogan—whose real name is Terry Bollea—brought after the website published a sex tape of him. A jury found in favor of the former pro wrestler, and Gawker is now on the hook for a $140 million award, although it will likely appeal. On Wednesday, the court denied Gawker’s motion for a new trial.

There are also unconfirmed suspicions that Thiel is paying for other lawsuits against Gawker. Rather than money, according to The New York Times, the Silicon Valley magnate appears to be going after the news website to exact a personal vendetta. (Gawker outed Thiel as gay, although he is now open about his orientation, the Times noted.)

The theory that a common funder is behind the suits have been fueled in part by the fact that the same lawyer, Beverly Hills attorney Charles Harder of Harder Mirell & Abrams, has filed all of them. Harder did not respond to messages seeking comment Wednesday.

Although some observers see the situation as unsavory, they say it doesn’t raise any clear ethical red flags as long as the attorney is still acting on behalf of the client. Moreover, they say, it would be fraught to curb this type of funding based on a financier’s motivations.

“One person’s vendetta is another person’s cause,” said Joshua Davis, director of the Center for Law and Ethics at the University of San Francisco.

DOG IN THE FIGHT

Boaz Weinstein of Lake Whillans, a litigation financing firm with offices in New York and Palo Alto, said sometimes there are advantages to disclosing the fact that a client has funding—for example, to avoid having an adversary simply “grind them into the ground” through procedural motions. “Knowing that’s not a possibility changes the dynamic.”

But Weinstein argues that imposing a blanket requirement for disclosure could pose other problems. He worries that defendants would seek lengthy and expensive discovery on a funder, needlessly drawing out litigation.

In the U.S. District Court for the Northern District of California, there has been a debate about whether a court-adopted provision called “Rule 3-15″ applies to litigation funding. The rule requires that parties disclose all entities with a financial interest in the case.

Funding firms like Bentham say that rule shouldn’t apply to them. The tension centers on language in the rule suggesting it was adopted to ensure judges could recuse themselves if they found they had a financial interest in a party involved in the case—an unlikely scenario when the party is a boutique litigation funding firm.

John Beisner, a class action and mass tort defense litigator at Skadden, Arps, Slate, Meagher & Flom in Washington, is more skeptical. He argues that a defendant has a fundamental right to know who is behind a lawsuit, whether or not it changes the dynamics of the case.

Beisner said Thiel’s use of litigation funding against Gawker appears to be unique, but that he is familiar with instances in which companies have financed suits against competitors in order to cause them financial harm, even if they don’t directly have a dog in the fight.

Having information like that could impact the direction of a litigation, he said, and could yield a counterclaim if the funding is somehow found to be an anti-competitive act.

As for the notion that litigation funding promotes better access to the courts, Beisner doesn’t buy it. “This is a profit game,” he said. “I think the conclusion is, it’s a wonderful investment, because at a minimum [the defendant] is going to pay you something to get out of the damn lawsuit.”

Contact the reporter at bhancock@alm.com.