A patent is only as valuable as the patent owner's
willingness, and ability, to enforce it. But patent litigation is
expensive -- and risky. The average patent lawsuit in the United
States costs about $3 million in attorney fees alone. Additional
litigation expenses, including electronic discovery, expert
witnesses and court reporters, can tack on $1 million or more. One
patent litigator describes the risk this way: "There are more
ways to lose a patent case than any other area. ... Patent cases
are harder to predict." Historically, companies and law firms
have addressed these cost and risk concerns by pursuing patent
litigation through various alternative fee arrangements. Within the
last few years, a new solution, "third-party funding,"
has gained popularity. What is third-party funding? What are its
pros and cons? And who might be a candidate for it?
Candidates for third-party funding include those who are unable or
unwilling to fund the litigation on their own. Individual
inventors, small companies and universities are obvious candidates,
as they rarely have the money to self-finance patent litigation.
But larger companies with deeper pockets might be candidates as
well. Management may not want the impact of litigation expenses on
the company's financial statements and may view the investment
in patent litigation as being particularly risky.
Before examining third-party funding, it is worthwhile considering
what makes patent litigation so risky. As with any type of
litigation, if the case is tried by a jury, factors such as which
side has more articulate witnesses and the particular personalities
of the trial attorneys can influence the outcome of the case,
sometimes in seeming contravention of the facts. One reason patent
litigation is uniquely risky is that if the defendant in the case
can find an obscure piece of prior art previously unknown to the
inventor and the patent examiner, a court can find the patent
invalid after the patent owner has invested years in
litigation.
As mentioned above, companies and law firms have historically
entered into various alternative fee arrangements to pursue patent
infringement litigation. These fee arrangements vary widely and
include, among others, straight contingent fees, mixed
hourly-contingent fees, flat fees and not-to-exceed fees with a success component. Possible
arrangements have been practically limitless and depend on many
variables, including the nature and magnitude of the case, the
company's goals (e.g., injunction, monetary damages, business
deal), and the company's and law firm's respective
tolerances for risk.
Third-party funding is an alternative risk-management tool.
Third-party funding is provided by a professional investment entity
that, in return for funding the litigation, will demand a success
fee or contingency fee to be paid out of the "proceeds"
of the claim. In the event of a successful outcome, this fee will
be taken from the company's damage award. It is therefore
crucial to have sufficient margin between the level of funding
required and the expected level of damages. Should the claim be
unsuccessful, however, the funder will simply lose its investment
without recourse.
Funded patent litigations generally have certain key features,
which limit the availability of funding to a relatively small pool
of cases. The following criteria provide a good general guide:
- Strong patent position
- Clear evidence of infringement
- Substantial monetary claim
- Judgment-worthy defendant
There are generally two different
types of third-party funding sources. The first type of third-party
funding entity will fund all of the expenses of patent assertion,
including attorney fees. The other type will pay litigation
expenses when there is a law firm willing to take the case on a
contingency basis. Often, although a law firm may be willing to
take a case on a contingency basis, it is unwilling or unable to
pay the substantial litigation expenses required to prosecute the
case through to conclusion.
The main disadvantage of third-party funding sources is the cost of
such funding. The entities that will fund 100 percent of a patent
litigation generally share revenue on a "net" basis. By
the time all costs and fees are deducted, however, there may not be
much net revenue left for the company. Even financing for only the
litigation expenses is usually very expensive money.
Most entities providing litigation financing will require that they
get repaid first, before the company shares in any of the money
recovered. They will usually expect a five to 10 times return on
the money they invest (to compensate for the risk), and it's
not unusual for their return to increase dramatically if the case
takes longer than a predetermined amount of time to resolve.
Setting a predetermined time to resolution, however, is often
unrealistic given the unforeseeable delays of civil
litigation.
Nonetheless, with costs often in the millions of dollars, companies
and other patent owners frequently require some amount of financing
to support a patent litigation. For companies confronting the cost
of major litigation, under the right circumstances, third-party
funding sources may offer a practical solution.
Even organizations that have the financial resources to launch
patent litigation may find it economically advantageous to finance
the campaign with third-party funding. When a company is spending
only its own money, at some point it may be disinclined to take on
more risk and to invest more money as litigation fees and expenses
accumulate. Third-party funding gives companies more "staying
power," making it more likely that they can see litigation
through to conclusion and obtain a larger damage award.
A well-crafted third-party funding arrangement creates an alignment
of interests in the outcome of the litigation, reflects the
expectations of all of the parties, and provides an equitable and
ethical distribution of the proceeds. A funding arrangement that
achieves these goals gives the patent owner a real opportunity in
patent litigation to realize the benefit of any resulting
success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
