A Silicon Valley startup is weaponizing the weaknesses in the American legal system as an investing opportunity.
Image: Luc Van Braekl/Flickr
Did you look at Peter Thiel's systematic destruction of Gawker via the American legal system and think "Wow, it's too difficult to extract money from corporations and people using the courts?" Did you think, "Why don't I try that?" If you answered yes to either question, there's a startup you should meet.
Legalist is a Silicon Valley startup that was developed in the Y Combinator incubator offering "data-backed litigation financing" using algorithms to "analyze millions of court cases to source, vet, and finance commercial litigation." It's the latest in a series of companies that allow third parties to "invest" in the success of a lawsuit, by funding said lawsuit.
The idea is that, using historical lawsuit data, the outcome of a lawsuit can be predicted before it's even filed. If you can predict which lawsuits will succeed, you can ensure big financial returns for people who invest in litigation. Similarly, to increase the probability of a lawsuit's success, would-be litigants should file their cases in districts with judges who are notoriously favorable to that type of case.
For example, one-fourth of all American patent cases are heard in one small district in Texas because it's easy to win patent cases with the judge there. Legalist believes that it can similarly Moneyball its way to competitive advantages for all sorts of cases.
"One of the biggest predictors of case outcome is the presiding judge and one of the biggest predictors of length is the number of cases that judge is concurrently working on," Eva Shang, one of the company's cofounders, told the Silicon Valley Business Journal. Shang noted that currently, lawsuit investors return about $1.40 for each dollar they invest; she thinks Legalist can improve upon that figure. The company did not immediately respond to Motherboard's request for comment.
In other words, the company is determined to disrupt the annoying unpredictability of the American justice system. I say disrupt, because it's planning on weaponizing weaknesses in the courts system using historical lawsuit data as an investing opportunity. In a sane world, an idea this crazy would either:
A) Democratize the frivolous lawsuits that rich people, patent trolls, and other litigious types use all the time to extract wealth via the justice system.
B) Force Congress to reckon with a court system that is highly broken and inefficient.
This being a not-so-sane world, perhaps a third thing will happen, where more companies will, like Gawker, lose existentially threatening court cases in a rigged legal system that are funded by what are essentially uninterested parties. If this is the outcome, then Legalist and its investors will get fabulously wealthy in automating the third-party litigation financing industry, which two senators recently called "largely unregulated and operates with no licensing or oversight."
For a real-world example of how venue, judge, and third-party funding can ruin someone's proverbial day, take a look at what billionaire Peter Thiel just did to Gawker. Thiel, stricken with a vendetta against the publication either because it outed him as gay or because he didn't like Gawker's reporting on the insular world of Silicon Valley, sought to destroy the company by drowning it in litigation.
To increase his odds of success, Thiel's lawyer filed the case in Florida, in a district that is notably favorable to Hogan and in a district with a judge that has a history of getting decisions wrong (many legal experts believe Gawker will eventually win its case on appeal, which will be too late to save the company). Making these decisions presumably required careful consideration by a talented lawyer, a luxury few can afford. Legalist proposes to automate these decisions with its algorithm.
The company said it doesn't want to enable lots of would-be-Peter-Thiels, but even if the company's endgame is focused on earning money and not personal vendettas, the machinations and legal strategy are the same.
The underlying technology is interesting and potentially useful—founded by two Harvard undergrads, the company's original plan was to scrape and upload state court records to a central database, making it possible for lawyers, journalists, and the public to search state court records, which are notoriously hidden behind paywalls, are difficult to access, and are often stored on hard-to-search websites.
As recently as last month, the startup was content to become the "Lexis Nexis for state records," a service that would make fragmented state court records "more accessible and transparent." Instead, its chosen a course of action that's far more anarchic than I would have believed possible, given its original mission.
The company—which is already taking "applications" from would-be litigants—will automatically determine where, when, and with what judge to file a lawsuit, turning the American justice system into little more than computer programming problem. Naturally, Silicon Valley's biggest venture capitalists love the idea.