ALTERNATIVE ALTERNATIVE LITIGATION FINANCE: LITIGATION FINANCE:

Tales from the TrenchesTales from the TrenchesPresenters:Presenters:

Kenneth A. Linzer, Esq.,Kenneth A. Linzer, Esq., LINZER & ASSOCIATES, LINZER & ASSOCIATES, P.C.P.C.

Elisha E. Weiner, Esq.,Elisha E. Weiner, Esq., LINZER & ASSOCIATES, LINZER & ASSOCIATES, P.C.P.C.

LINZER & ASSOCIATES, P.C.

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 side’s

attorney’s fees? ALF as the Newest Asset Class and Wall Street Concluding Remarks and Q & A Time

“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.

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?

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” orwill an options market develop for these types of claims

Will the next referral call come from a hedge fund rather than your client’s general counsel?

Phrases for the new world of litigation finance litigation risk capital

institutional capital’s ability to scale a large law firm’s 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

Is Alternative Litigation Finance just another formof off-balance sheet funding for corporations

to fund their commercial litigation?

“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 propositionwhich tends to balance out the imbalances.”

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 couldn’t 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.

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 it’s been concluded.

Macro Environment (con’t)

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 don’t go as far as the clients would like, maybe because they don’t cover the fees of expert witnesses or forensics.

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 concepts4. Desire for corporate risk mitigation or to shift the risk of loss5. Non-correlated investment criteria6. Recession-proof business 7. Counter-cyclical nature of claim finance space8. Pure hedge against risk of pursuing an asset of speculative value

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.

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.

Types of Claims:

Intellectual Property claimsBowie Bonds - see Intellectual Ventures, Inc.

funding Patent infringement or patent licensing

claims Antitrust Price Fixing

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 – Chairman’s Statement

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

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.

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.

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)

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

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.

Litigation Finance – can be either

plaintiff side or defendant side

SIMPLE LITIGATION FINANCE ECONOMICSInitial cost of financing the case = CE.g. $1,000,000

Total value of benefit if case settles or is won = BE.g. $10,000,000

Probability of settling or winning = PE.g. 10%, 20% . . .

Financier’s return on investment = RE.g. $3,000,000

Financier will invest where C < P x B $1,000,000 < .10 x $10,000,000 = $1,000,000

SIMPLE LITIGATION FINANCE ECONOMICS

But, in order to get expected ROI, financier must obtain R

$1,000,000 < .20 x $10,000,000 = $2,000,000

$1,000,000 < .30 x $10,000,000 = $3,000,000

Defense – side Litigation Funding Motion for Summary Judgment or Summary AdjudicationDefendant 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 minimizedwill pay $75,000.ALF pays difference - $25,000 against possible recovery of $50,000$75,000 - $25,000 = $50,000

200% return on investment

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.

Defense Example - EconomicsALF 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

Challenges to ALF

Enforceability of the ALF Contract

Discovery of documents and information communicated to Financer

Liability for Attorney’s Fees

Enforceability of the ALF Contract

Maintenance Champerty Usury Unregistered Securities Unconscionability/Duress Public Policy

Saladini v. Righellis, 687 N.E.2d 1224 (Mass. 1997)

Held: champerty and maintenance no longer applicable in Mass.

Osprey, Inc. v. Cabana Ltd. Partnership, 340

S.C. 367 (S.C. May 15, 2000)

Held: champerty not a defense in SC

Rancman v. Interim Settlement Funding Corp.

789 N.E.2d 217 (Ohio 2003)

Held: Champerty is alive and well in Ohio.

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!

Anglo-Dutch Petroleum Int'l, Inc. v. Haskell, 193

S.W.3d 87, 90 (Tex. App. Houston 1st Dist. 2006)

Held: Not usurious because it’s not a loan.

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

Enforceability Summary

Are you in a state that recognizes champerty, doesn’t 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?

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))

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)

Unconscionabilty/Fairness

Osprey factors for “fair and reasonable under the circumstances”:Equal bargaining powerAware of terms and consequences Necessity of Financer’s helpDisproportionate share to FinancerExtent of officious intermeddling

Enforceability of Arbitration Clause

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

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?

Leader Technologies, Inc. v. Facebook, Inc., 719 F.Supp.2d 373 (D.DE. 2010)

Held: discoverable, but that doesn’t necessarily mean admissible

What’s 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. 575While 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.

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.

Discovery Summary

Confidentiality Agreement Argue Prejudice Argue Work Product Maybe it’s discoverable, but not

admissible (argue prejudice)

Alternative Litigation Financer’s Privilege? Do we need one? Should we have one?

Less Funding of Weak CasesLower Cost of Money

Litigation Financer’s 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

Liability for Attorney’s Fees?

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

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.

Sir Peter Middleton – Chairman of Burford in 2010 annual report

“We’re 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.”

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.

Global Arbitration Litigation Services requires at least a 70% chance of success

Allianze PozessFiananz

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

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

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

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.

IMF

Representative examples of cases: Case #1: settled for A $145MM ($158 MM USD) IMF netted A$37MM 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.

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 A$40MM or $43.5 MM USD settlement,

of which IMF got A $7MM (USD $7.6MM)

Future of the Industry

QUESTIONS?

Contact information:Kenneth A. Linzer, Esq.Elisha E. Weiner, Esq.

Linzer & Associates, P.C.12100 Wilshire Blvd., Suite 1275Los Angeles, California 90025(310) 826-2627klinzer@linzerlaw.comeweiner@linzerlaw.com