October 3, 2011 13:30 Age: 3 yrs

Third-Party Lawsuit Investors Betting on Big Returns

Angel investors are common among start-up companies. But the practice of enlisting third-party investors to fund litigation costs in exchange for a slice of the lawsuit’s winnings has some legal scholars questioning its validity.

“The idea has critics, who worry about a possible rise in frivolous lawsuits and increased pressure on defendants to settle,” according to a story published Oct. 3 in the Wall Street Journal. Emory Law Associate Professor Joanna Shepherd Bailey 02PhD was quoted, saying the practice has the potential to be ruinous for defendants who feel pressured to settle.

Third-party funders tend to bet on patent or antitrust cases for the biggest profit, but "the potential downsides for the defendants are huge," Bailey said, citing the possibility of treble damages and preliminary injunctions as examples of "negative side effects that can ruin a company."

Previously, common law didn’t allow third-party financing, Bailey said, but current law varies from state to state, and no U.S. court has weighed whether the practice is legal.

Read the article in the Wall Street Journal

Professor Bailey’s profile

 

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