LINZER & ASSOCIATES, P.C. ALTERNATIVE LITIGATION FINANCE: Tales from the Trenches Presenters: Kenneth A. Linzer, Esq., LINZER & ASSOCIATES, P.C. Elisha E. Weiner, Esq., 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” or will an options market develop for these types of claims
Will the next referral call come from a hedge fund ratherthan 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 form of 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 proposition which 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 maximizethe 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? • Anachronistic model of big law firm economics – hourly rate and inverse relationship between hours and results • Sophistication of corporate legal markets - In case one general counsel of a major Fortune 100 company’ legal department is itself a profit center. • Off balance sheet financing concepts • Desire for corporate risk mitigation or to shift the risk of loss • Non-correlated investment criteria • Recession-proof business • Counter-cyclical nature of claim finance space • 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 claims • Bowie 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 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% . . . Financier’s return on investment = R E.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 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
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 - 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
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: • NewYork (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) • SouthCarolina (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 power • Aware of terms and consequences • Necessity of Financer’s help • Disproportionate share to Financer • Extent 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. 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.
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 Cases • Lower 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)