Chicago Business Article
Patent infringement can threaten a company’s profits and, in some cases, even threaten its very survival. But patent enforcement is expensive. For example, the cost to litigate a patent case in the U.S. with greater than $25 million at stake can easily exceed $10 million in attorneys’ fees in some jurisdictions, according to a 2021 survey by the American Intellectual Property Lawyer’s Association.
These high costs can discourage even well-capitalized companies from protecting their intellectual property through enforcement actions. As a result, third-party litigation funding has become a popular option for companies both small and large. For example, in 2021 litigation funders provided approximately $812 million for patent cases, and industry observers estimate that 30% of patent litigation cases are now funded through litigation funding. A majority of those deals involved investments in a portfolio of cases or patents.
Here are some common questions regarding litigation funding:
Litigation funding is an arrangement by which a funder that is not a party to a lawsuit provides funding to a litigant or law firm in exchange for an interest in the potential recovery in the lawsuit. The details of the financial arrangement are based on the potential value of the litigation. Litigation funders are typically private entities that obtain investment capital from a variety of investors
Plaintiffs – individuals or companies instigating lawsuits – use it to fund litigation expenses and provide working capital. Attorneys serve as custodians of funds for all of the litigation’s stakeholders and distribute those funds accordingly. In some cases, law firms representing multiple plaintiffs on contingency fee arrangements (this is not common in patent cases) may also receive legal financing directly.
Litigation funding can hedge financial risk to the litigant or law firm. It also helps undercapitalized plaintiffs pursue meritorious cases by financing key litigation expenses, including expert witness fees, and enables greater access to top legal resources. In some instances, funding provides capital injections for already-filed cases that experience funding constraints, and it can reduce the risk that clients will run out of money during litigation. Further, litigation funding enables attorneys and law firms to offer more flexible payment arrangements to prospective clients.
The entity bringing the claim will provide the funder with information about the matter. Using this information, the funder will consider the strengths and weaknesses of the client’s case and the likelihood of success. Funders also consider the ability of the opposing party to pay, thus gauging the likelihood of recovery. Based on these perceived factors, the investor may contribute the capital necessary to pursue the lawsuit. Litigation funding typically involves an agreement that contains the funder’s identity, investment amount, payment schedule and whether the funder may exercise any strategic control over the litigation.
“Patent infringement can threaten a company’s profits and, in some cases, even threaten its very survival.”
Moreover, litigation funding is usually a non-recourse investment, meaning the litigation funder only receives payment if the case is favorably resolved. The funder usually gets paid before the attorneys and the claimant. Parties do not have to repay the funder if their lawsuit is not successful. Parties that win their cases will generally repay the funder the amount funded plus a return on their investment as outlined in the agreement governing the terms of the funding.
A party may seek funding at all stages of a case, from before a complaint is filed to after final judgment is entered. Most commonly, funding happens before the complaint is filed, with the patent owner and law firm needing funding to proceed with the litigation. Other times, the patent owner and law firm may have launched litigation without funding, but their financial situation changed mid-litigation, causing them to seek additional capital to finance discovery or trial.
In the event of a successful outcome, the fee to the litigation funder will be taken from the patent owner’s damage award. It is therefore crucial to have sufficient margin between the level of funding required and the expected level of damages.
In addition, some court jurisdictions require disclosure of the agreement between the patent owner and the funder during the phase of the litigation where the parties exchange information, commonly known as the discovery phase. If a party wishes to keep its funding under wraps, that may not be possible in some jurisdictions.
Therefore, a party must be vigilant in what it discloses to a litigation funder. It is best to disclose publicly available information, and disclosure should be no broader than necessary to outline the operative facts, issues and procedural posture of the case. If the funder seeks a party’s confidential information, the party’s attorney should advise of the risks of disclosure and obtain informed consent to disclose information to the funder. The attorney should also take appropriate steps to limit the risks that disclosure will affect a waiver of attorney-client privilege or work-product protection.
There is a limited pool of patent cases that are likely to qualify for litigation funding. But companies with a strong patent position, clear evidence of infringement, a substantial monetary claim and an opponent from which a judgment can be collected will likely be able to attract a funder.
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