Stephen Weiss

Third party financing in commercial litigation is a billion dollar industry and it provides a modern twist on investing while shaking the litigation landscape.  The practice allows third parties with no connection to lawsuits to provide funding to cover expenses in exchange for a return in the lawsuit’s outcome.[1]

Stan Lee Media, Inc. v. Walt Disney Co.[2] is one example in a line of cases where third parties financially supported the plaintiff.  Stan Lee, a comic book genius, created many comic characters including Spider Man and X-Men.[3]  After assigning character rights to Stan Lee Media, Stan Lee sent a letter terminating this assignment, reassigning the rights to Marvel Entertainment, which is a Disney subsidiary.[4]  In 2012, Stan Lee Media sued Disney alleging Disney made more than $5.5 billion off copyright infringement on such characters.  Disney moved for dismissal for failure to state a claim for which relief was addressable.[5]

The court dismissed the case, barring Stan Lee Media from bringing the infringement contentions.  Stan Lee Media, although being the named plaintiff, suffered little loss with the dismissal.  Elliott Management Corporation– one of several financiers backing Stan Lee Media in its suit against Disney–faced the greatest financial loss.[6]

Today, third party financing is a weapon for the once depleted plaintiff.  Elliott Management lost big money, but third party financiers are oftentimes successful.  Similar to Elliott Management, third parties bid on the plaintiff’s claim driving up the plaintiff’s sale price.  With easy access to money, cases survive and the increase in the number of lawsuits filed concomitantly escalates the claim’s value.[7]  Ultimately, even after the bidding process, financiers are able to buy in to claims for far less than their inflated market value, justifying this high-risk game.  While the lengthy litigation process views trial as a failure,[8] third party financiers view trial as a success with the chance for a big payday.

Of course third party financing has serious negative economic consequences on wealthier defendants because it distorts their incentive to settle.  Facing more lawsuits and stockholder pressure, defendants might opt for settlement when fearing catastrophic losses.  Large companies argue, in an effort to save money and to decrease the numbers of lawsuits in which they are involved, third party arrangements lead to inefficient settlements that overcompensate the plaintiff.[9]  Opting to not settle, companies might sacrifice their position in the marketplace.  Diverting human capital and economic resources to legal departments forces companies to sacrifice R&D and product development endeavors.[10]  Consequently, it is argued that third party financiers delay advances across all sectors only to the advantage of greedy financiers.

Many Americans view litigation as “a noble tool that can lead to transformative social change.”[11]  Supporters of third party financing argue these arrangements neutralize the imbalance of power in the courts that favors wealthier defendants.  Investors like Elliott Management provided the financial means for Stan Lee Media to pursue an otherwise lifeless lawsuit.  Similar to the investors in Stan Lee Media, Inc. v. Walt Disney Co. third party financiers must tread carefully because the high-risk/high-return cases are often more attractive and most dangerous financially.  Moreover, as third party litigation financing grows suspicion will linger concerning the legitimacy and sanctity of lawsuits.  Thus, courts will have to absorb the blows brought by cash constrained plaintiffs and their frivolous suits while leveling the playing field for plaintiffs with legitimate claims backed by those greedy financiers.