ALTERNATIVE LITIGATION FINANCE: Tales from the Trenches

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ALTERNATIVE LITIGATION FINANCE Tales from the
Trenches
LINZER ASSOCIATES, P.C.

• Presenters
• Kenneth A. Linzer, Esq., LINZER ASSOCIATES,
  P.C.
• Elisha E. Weiner, Esq., LINZER ASSOCIATES, P.C.

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Outline

• What is ALF?
• Brief History of Litigation Finance Companies
• Legal Challenges
• Where is an ALF contract most likely to be
  enforceable?
• How to avoid becoming a discovery dispute pawn
• Could a financer be held liable for the other
  sides attorneys fees?
• ALF as the Newest Asset Class and Wall Street
• Concluding Remarks and Q A Time

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• Litigation finance is an emerging multi-billion
  dollar market in the U.S.
• This asset class is yielding highly attractive
  returns
• for pioneering investors -- . . . .
• Brochure for a recent Litigation Finance and
  Investment Summit
• held in April 2011 a few blocks from the NYSE.

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Will the next asset allocation include commercial
litigation cases in addition to equities, bonds,
cash and gold? If so, will niche markets for
diversified litigation transfer risk products
develop?
5
Much like the commodities market, will there
come a time when you can buy and sell product
liability cases, mass tort claims, shareholder or
corporate governance claims? Will such claims
be traded on a spot market or will an options
market develop for these types of claims
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Will the next referral call come from a hedge
fund rather than your clients general counsel?
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Phrases for the new world of litigation finance

• litigation risk capital
• institutional capitals ability to scale a large
  law firms risk
• bespoke deals
• you got to bet the jockey as much as the horse
• the proper alignment of all participants
  (attorneys, clients, ALF) interests
• the role of market inefficiencies in lawsuits
  attracting sizeable capital interest
• not wanting to take the client off the risk

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Is Alternative Litigation Finance just another
form of off-balance sheet funding for
corporations to fund their commercial
litigation?
9
One way to help the imbalance re a
misalignment of interests among the various parts
of this puzzle is to introduce risk capital into
the proposition which tends to balance out the
imbalances.
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Why do people speak of it as an asset class?

• As an asset class these claims or cases can it
  be treated as tangible and subject to valuation.
  
• Unfortunately, until now, many claimants couldnt
  afford to maximize the value of their asset
  through the prosecution of the claim whether by
  arbitration or litigation.
• As a result, without litigation financing, the
  asset is devalued badly or lost completely.

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The Macro Environment

• Investing in commercial disputes takes 2 basic
  forms
• 1. Providing investment capital to a party in a
  dispute which will be used to pay the costs of
  dispute resolution (typically litigation or
  arbitration).
• 2. Providing capital to monetize the expected
  outcome of a dispute before its been concluded.

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Macro Environment (cont)

• Businesses to whom this capital is provided
• Businesses with liquidity, budgetary or resource
  constraints on ability to pay the legal fees and
  costs of disputes in which they are involved P
  or D.
• Businesses with no such financial constraints,
  but prefer not to use their own capital to pay
  the costs of disputes.
• Businesses with expected recoveries from claims
  or disputes that would like immediate capital for
  business purposes instead of waiting for the
  expected recovery to be paid.
• Law firms who are willing to provide clients with
  alternative fee arrangements but whose propose
  arrangements dont go as far as the clients would
  like, maybe because they dont cover the fees of
  expert witnesses or forensics.

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Why is capital flowing into the claim investment
marketplace?

1. Anachronistic model of big law firm economics
   hourly rate and inverse relationship between
   hours and results
2. Sophistication of corporate legal markets - In
   case one general counsel of a major Fortune 100
   company legal department is itself a profit
   center.
3. Off balance sheet financing concepts
4. Desire for corporate risk mitigation or to shift
   the risk of loss
5. Non-correlated investment criteria
6. Recession-proof business
7. Counter-cyclical nature of claim finance space
8. Pure hedge against risk of pursuing an asset of
   speculative value

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• Essentially, this industry is monetizing a
  legal claim to reduce to present value the
  expected income stream of that claim to generate
  a return for an investor who is looking for an
  absolute, uncorrelated investment with a zero
  beta.

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Overview of ROI

• Pricing of investments is based on a multiple of
  capital invested (3 or 4 to 1) or a portion of
  recovery (20 to 40).
• Typical time line to recovery 2 or 3 years.

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Types of Claims

• Intellectual Property claims
• Bowie Bonds - see Intellectual Ventures, Inc.
  funding
• Patent infringement or patent licensing claims
• Antitrust
• Price Fixing

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Investment Portfolio Strategy and Business Model

• We do not just write checks. We act as business
  advisors to structure financings, drawing upon a
  team of proven and renown litigators and other
  interdisciplinary specialists.
• Our goal is not only to arrange critical funding,
  but to improve the odds of a favorable outcome.
• Using a portfolio investment approach, we seek to
  provide investors with attractive dividend
  returns and capital appreciation.
• We are not simply lawyers although having great
  lawyers is important. Rather, we are litigation
  managers and investment professionals who
  understand that disputes exist in a broader
  financial and management context.
• Disputes and claims are financial assets, capable
  of being bought, sold, securitized,
  collateralized. Just as corporations rely on
  bankers to structure equity and debt financings,
  they rely on us to structure dispute financings.
• Burford Annual Report Chairmans Statement

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History of Litigation Finance Companies

• In the beginning there were . . .
• Consumer or retail claims
• consumer - individual or domestic disputes
• personal injury
• class actions
• mass tort
• divorce cases

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Next, came Australia . . .

• First there was Insolvency Management Fund
  Limited (IMF)
• Started by Hugh McLernon (ex-prosecutor) in 1989
• Initially funded litigation brought by bankruptcy
  trustees, who had statutory authority to sell
  interests in estates to finance recovery efforts.

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• IMF has funded cases in the past decade that have
  resulted in settlements and awards totaling
  almost A 900 Million.
• Currently has in excess of A 1.7 Billion in
  active claims under management.
• Went public in 2001 - listed on the Australian
  Securities Exchange
• Stock price has risen from less than a A .25 a
  share in 2002
• To almost A 1.90 in May 2011.

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• IMF contracts with individual plaintiffs to
  finance their case,
• offering security against costs and paying the
  lawyers fees,
• all in exchange for 30 to 35 of the total
  settlement.
• Typical case funded is A 5.4 MM (USD 5 MM)

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Then immigrated to Europe . . .

• UK about 15 years ago
• Calunius Litigation Risk Fund, UK
• Harbour Litigation Funding, UK
• Germany, Switzerland, Holland about 10 years ago
• Germany Allianze ProzessFinanz and Deutche Bank
• Switzerland Credit Suisse

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And, now, in addition to IMF on the Australian
Securities Exchange, we have . . .

• UK - Publically traded funds
• Juridica Capital
• Burford Capital
• Headquartered on the Isle of Guersney, U.K.
• Listed on the Alternative Investments Market on
  the London Stock Exchange.

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Litigation Finance can be either plaintiff
side or defendant side
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SIMPLE LITIGATION FINANCE ECONOMICS

• Initial cost of financing the case C
• E.g. 1,000,000
• Total value of benefit if case settles or is won
  B
• E.g. 10,000,000
• Probability of settling or winning P
• E.g. 10, 20 . . .
• Financiers return on investment R
• E.g. 3,000,000
• Financier will invest where C lt P x B
• 1,000,000 lt .10 x 10,000,000 1,000,000

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SIMPLE LITIGATION FINANCE ECONOMICS

• But, in order to get expected ROI, financier must
  obtain R
• 1,000,000 lt .20 x 10,000,000 2,000,000
• 1,000,000 lt .30 x 10,000,000 3,000,000

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Defense side Litigation Funding

• Motion for Summary Judgment or Summary
  Adjudication
• Defendant considers filing MSJ with cost estimate
  of 50,000.
• Goes to counsel and says will pay 25,000.
• If successful and case dismissed or damages
  minimized
• will pay 75,000.
• ALF pays difference - 25,000 against possible
  recovery of
• 50,000
• 75,000 - 25,000 50,000
• 200 return on investment

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Damages Minimization Example

• If company sued and damages judgment likely
• defendant company attempts to contain costs
  (legal fees)
• by bringing in ALF to pay its legal fees on a
  sliding scale of recovery.
• Essentially, ALF buys a portion of the claim
  defense for a share of the damages minimized.

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Defense Example - Economics

• ALF invests in case and adjusts the relative risk
  calculus for share of damages minimization.
• Possible damages exposure 100,000,000
• ALF investment 5,000,000
• If damages limited to 50,000,000
• ALF recovers 15,000,000 to 25,000,000
• Defendant company
• total out of pocket 65,000,000 to
  75,000,000
• Yields savings of 25,000,000

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Challenges to ALF

• Enforceability of the ALF Contract
• Discovery of documents and information
  communicated to Financer
• Liability for Attorneys Fees

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Enforceability of the ALF Contract

• Maintenance
• Champerty
• Usury
• Unregistered Securities
• Unconscionability/Duress
• Public Policy

32
Saladini v. Righellis, 687 N.E.2d 1224 (Mass.
1997)
Held champerty and maintenance no longer
applicable in Mass.
33
Osprey, Inc. v. Cabana Ltd. Partnership, 340 S.C.
367 (S.C. May 15, 2000)
Held champerty not a defense in SC
34
Rancman v. Interim Settlement Funding Corp. 789
N.E.2d 217 (Ohio 2003)
Held Champerty is alive and well in Ohio.
35
Echeverria v. Estate of Lindner, 2005 NY Slip Op
50675U (N.Y. Sup. Ct. 2005)
Held Not champertous even though champerty
exists by statute in NY (Judiciary Law 489),
BUT it is usurious!
36
Anglo-Dutch Petroleum Int'l, Inc. v. Haskell, 193
S.W.3d 87, 90 (Tex. App. Houston 1st Dist. 2006)
Held Not usurious because its not a loan.
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Legislation

• Maine, Ohio, and Nebraska are the only states so
  far that have statutes defining and regulating
  ALF
• There is pending legislation in other states,
  including Kentucky and Illinois

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Enforceability Summary

• Are you in a state that recognizes champerty,
  doesnt recognize champerty, or is somewhere in
  the middle?
• What is the risk threshold in your state at which
  it will be treated as an investment rather than a
  loan and therefore not usurious?
• What are the best practices in your state for
  ensuring that the contract is fair?

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Champerty and Maintenance

• Yes Champerty
• Pennsylvania (Kenrich Corp v. Miller, 377 F.2d
  312, 314 (3rd Cir. 1967))
• Oklahoma (Parks v. American Warrior, Inc., 44
  F.3d 889, 893 (10th Cir. 1995))
• Alabama (Wilson v. Harris, 688 So. 2d 265, 270
  (Ala Civ. App. 1996))
• Nevada (Del Webb Communities v. Partington, 2009
  WL 3053709 (D. Nev. Sept. 18, 2009))
• Officious Intermeddler
• New York (Judiciary Law 489 but, construed
  narrowly in Fairchild Hiller Corp v. McDonnell
  Douglas Corp., 270 N.E.2d 691, 693 (NY 1971))
• Florida (Kraft v. Mason, 668 So.2d 679 (Fla.
  Dist. Ct. App. 1996))
• No Champerty
• Massachusetts (Saladini v. Righellis, 687 N.E.2d
  1224 (Mass. 1997)
• South Carolina (Osprey, Inc. v. Cabana Ltd.
  Partnership, 340 S.C. 367 (S.C. May 15, 2000))
• California (Muller v. Muller (1962) 206
  Cal.App.2d 731, 733 Estate of Cohen (1944)  66
  Cal.App.2d 450, 458)
• New Jersey (Bigelow v. Old Dominion Copper Mining
  Smelting Co., 71 A. 153, 167 (N.J. Ch. 1908))

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Usury How risky does the investment actually
have to be?

• NJ Dopp v. Yari, 927 F.Supp. 814 (D.N.J. 1996)
• MT Nyquist v. Nyquist, 255 Mont. 149 (Mont.
  1992)
• MI Lawsuit Financial, LLC v. Curry, 261 Mich.
  App. 579 (Mich. Ct. App. 2004)
• FL Kraft v. Mason, 668 So.2d 679 (Fla. Dist. Ct.
  App. 1996)
• NY Echeverria v. Estate of Lindner, 2005 NY Slip
  Op 50675U (N.Y. Sup. Ct. 2005)
• TX Anglo-Dutch Petroleum Int'l, Inc. v. Haskell,
  193 S.W.3d 87, 90 (Tex. App. Houston 1st Dist.
  2006)

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Unconscionabilty/Fairness

• Osprey factors for fair and reasonable under the
  circumstances
• Equal bargaining power
• Aware of terms and consequences
• Necessity of Financers help
• Disproportionate share to Financer
• Extent of officious intermeddling

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Enforceability of Arbitration Clause

• ST Oil Equipment Machinery, Ltd v. Juridica
  Investments Limited 2011 WL 864637 (S.D. Tex.
  March 10, 2011)

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How can you protect against intrusive discovery
about alternative litigation financing?

• Is attorney-client privilege waived by disclosure
  to potential financer?
• Are documents shared with a potential financer
  discoverable?

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Leader Technologies, Inc. v. Facebook, Inc., 719
F.Supp.2d 373 (D.DE. 2010)
Held discoverable, but that doesnt necessarily
mean admissible
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Whats the Federal Rule?

• 9th Circuit exemplifies the trouble
• Hewlett-Packard Co. v. Bausch Lomb, Inc. (1987)
  115 F.R.D. 308
• Unless it serves some significant interest
  courts should not create procedural doctrine that
  restricts communication between buyers and
  sellers, erects barriers to business deals, and
  increases the risk that prospective buyers will
  not have access to important information that
  could play key roles in assessing the value of
  the business or product they are considering
  buying.
• Nidec Corporation v. Victor Company of Japan
  (2007) 249 F.R.D. 575
• While JVC litigation abstract might have been
  helpful to facilitate the potential commercial
  transaction, it did not further a common legal
  strategy in connection with the instant
  litigation.

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How different are state privileges?

• Titan Investment Fund II, LP v. Freedom Mortgage
  Corp. 2011 WL 532011 (Supp. Ct. DE, February 2,
  2011)
• Held failed to meet burden to show common
  interest doctrine extends to parties engaged in a
  collaborative business venture
• STI Outdoor LLC v. Superior Court (2001) 91
  Cal.App.4th 334
• Held no waiver because disclosure to third party
  was reasonably necessary to further the interest
  of both parties in finalizing negotiations.

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Discovery Summary

• Confidentiality Agreement
• Argue Prejudice
• Argue Work Product
• Maybe its discoverable, but not admissible
  (argue prejudice)

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Alternative Litigation Financers Privilege?

• Do we need one?
• Should we have one?
• Less Funding of Weak Cases
• Lower Cost of Money

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Litigation Financers Privilege What would it
look like?

• Nebraska
• No communication between the attorney and the
  civil litigation funding company as it pertains
  to the nonrecourse civil litigation funding
  contract shall limit, waive, or abrogate the
  scope or nature of any statutory or common-law
  privilege, including the work-product doctrine
  and the attorney-client privilege.R.R.S. Neb.
  25-3306

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Liability for Attorneys Fees?

• Abu-Ghazaleh v. Chaul, 36 So. 3d 691, 692 (Fla.
  Dist. Ct. App. 3d Dist. 2009)

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Litigation Finance as the Newest Asset Class and
Wall Street

• Selection Criteria
• Need to balance the competing interests -
  client, law firm, investors
• Risk of adverse selection
• Likelihood of recovery is one component of the
  calculus, another is the potential amount of
  recovery.

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Sir Peter Middleton Chairman of Burford in 2010
annual report

• Were focused on building a long-term
  sustainable business the majority of litigation
  investments are inherently of medium duration and
  will produce lumpy results given their
  character, and the real value in this business
  comes from selecting and investing over time in a
  diversified portfolio of high quality
  investments.

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Burford

• Chevron case invested 4MM up to 15 MM for
  1.5 increasing to 5.5 stake in any recovery.
• Seeks cases in which legal fees run from 5MM to
  15MM
• Does not control litigation strategy or
  litigation decisions in any cases that they
  finance.
• Burford does not hire or fire the lawyers, direct
  strategy or make settlement decisions.
• Burford is a purely passive provider of
  nonrecourse financing to a corporate party.
• A car lease is not a bad comparison. The leasing
  firm simply provides finance it does not tell
  the driver how to drive the car.

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Global Arbitration Litigation Services

• requires at least a 70 chance of success

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Allianze PozessFiananz

• only funds claims in excess of 100,000 pounds and
  10 of its portfolio is invested in international
  arbitral claims

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IMF

• Only funds less than 5 of the 350 cases it looks
  at each year.
• Mostly shareholder actions.
• Between 10/01 through 12/10,
• In AU IMF is projecting 450,000 profit per
  claim with 31 claims currently underway.
• Funded 118 cases to completion, 79 resulted in
  settlements, 9 were outright victories, while 5
  were lost and 25 withdrawn.
• IMF netted 187 MM in this period
• Investment managers are all ex-lawyers

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IMF

• Investment Criteria
• Primary factors
• Reprehensible conduct,
• in addition to breach of contract, inadvertence
  or bad forecasting.
• Strength of the claim
• Potential value of claim
• Ability of defendants to pay settlement or
  judgment

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IMF

• Secondary factors
• Cases that are as straightforward as possible.
• The richer the fact pattern, the less likely IMF
  is to fund the case.
• Avoids cases involving multiple defendants.
• As each named defendant increases the litigation
  costs as well as the risk of adverse-cost
  liability.
• Clients who come in insisting a defendant will
  pay a big settlement just to avoid publicity tend
  to get cold shoulder.

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IMF

• Representative examples of cases
• Case 1
• settled for A 145MM (158 MM USD)
• IMF netted A37MM or USD 40MM
• 37 / 145 40 of recovery
• Facts
• gaming machine maker
• allegedly misstated earnings on 2 occasions
• and issued a highly misleading profit forecast.

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IMF

• Case 2
• Grain distributor defendant was found by a U.N.
  investigation to have paid kickbacks to the Iraqi
  government of Saddam Hussein in exchange for
  wheat contracts under the prewar oil-for-food
  regime,
• criminal charges were brought, which were
  eventually dropped,
• a civil suit brought a A40MM or 43.5 MM USD
  settlement,
• of which IMF got A 7MM (USD 7.6MM)

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Future of the Industry
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QUESTIONS?

• Contact information
• Kenneth A. Linzer, Esq.
• Elisha E. Weiner, Esq.
• Linzer Associates, P.C.
• 12100 Wilshire Blvd., Suite 1275
• Los Angeles, California 90025
• [phone]
• klinzer_at_linzerlaw.com
• eweiner_at_linzerlaw.com