When patent infringement threatens a company’s business and possibly even puts its survival at risk, effective patent litigation can become a necessity. The cost to litigate a patent case in the U.S., with greater than $1 million at stake, can easily rack up significant fees and exceed a million dollars, according to a 2019 survey by the American Intellectual Property Lawyer’s Association.
With such potential costs, even the strongest cases can discourage small and medium-sized companies from protecting their intellectual property (IP). To address this challenge, increasingly popular alternative patent litigation funding options have been developed.
Here are some basic options and what to consider when pursuing them.
Potential Ways to Fund Patent Litigation
In the U.S., litigants have historically funded their own patent cases under the so-called “American Rule.” The American Rule states that, regardless of who wins the case (though there are exceptions), the two opposing sides in a legal matter must pay their own attorney’s fees. This rule ensures that a plaintiff will not be deterred from bringing a case to court by the risk of paying the other side’s legal fees.
As such, the main way to pay for patent litigation is out-of-pocket.
In response, law firms have implemented solutions for immediate litigation funding shortfalls by offering alternative billing arrangements, such as contingency fees and other billing options. Contingency fees, in their most basic form, typically involve the firm foregoing all fees incurred in lieu of securing a share or percentage of any later damages awards obtained.
Another potential funding solution is obtaining a third-party funder or investor. In this scenario, third parties fund the litigation in return for a portion of any financial recovery from a lawsuit. Though still limited or prohibited in some states by statute, these third-party funding arrangements are increasingly being permitted and, in turn, employed today in jurisdictions that allow the practice.
This third-party funder option is typically utilized when any arrangement with the law firm does not cover the expected shortfall. It can also be combined with other funding arrangements with the law firm or with funds out of the company’s reserves.
Where available, third-party litigation funding typically is non-recourse (as opposed to a loan, which is recourse), meaning that the company is not obligated to pay back the costs advanced for the litigation. If the litigation results in no financial recovery, the funder typically gets nothing.
When it comes to funding arrangements, consider the timing of the third-party funding request. Funding may be sought at any time along the litigation timeline, including at the start of the litigation, during the litigation, or even on appeal. But requesting funding later in the case may improve the chances of securing it and even garnering more favorable terms. That’s because the issues at the start of the case are later boiled down to the key disputed elements, providing the funder with great certainty of a particular outcome.
In some circumstances, a company may have a portfolio of cases to pursue. In such situations, another way to further distribute litigation risks and maximize funding benefits is to seek funding for the entire portfolio, and not a specific case. This approach may be available even where different patents and/or different opposing parties are involved. The funder’s return here is therefore dependent upon the portfolio’s overall net financial performance. Spreading the risk and potentially increasing the potential funder gains might also result in the funder requesting a lower percentage return.
What If You’re on the Defense?
While the above arrangements are commonly used on the plaintiff’s side, various forms of law firm and third-party funding may be available on the defense side — though they are less common.
Such defense arrangements include:
- Litigation insurance: policies that will pay future legal costs related to disputes a company might encounter that require litigation.
- Defense aggregator memberships: cost-sharing agreements among parties facing the same opponent.
- Reverse contingency arrangements: contingency agreements based on success outcome criteria (such as the difference in the amount plaintiffs were seeking and what they were awarded).
Many of the same considerations are relevant in defendant-side funding as in plaintiff-side funding.
A Checklist of Considerations
Now that you’re armed with an introductory understanding of funding alternatives, here’s a quick checklist of what to consider:
- Establish a patent-counsel relationship. It is important to establish a trusted relationship with a skilled, trial-experienced litigation patent attorney capable of assessing the strength of the patent claims and of framing, where needed, creative funding arrangements with or without third-party litigation funders. The infringement claims should be developed before seeking litigation funding as it will serve to provide more credibility to the funding request.
- Consider all payment options before, during and after litigation. Consider alternative payment options and funding sources that may provide a better risk profile. Also evaluate when to seek funding and whether to combine funding options.
- Require transaction transparency. Require transparency in every aspect of agreements with funders and law firms to make fully informed decisions about the funding options.
- Excessively protect the company’s attorney-client privilege. A sacred attorney-client privilege protects communications between the company and its legal team (as opposed to business communications with funders, which may not enjoy that protection). The company’s privilege can be inadvertently lost by casually sharing protected information in the funding process. Carefully framed disclosures to the funder (probably best made by the company’s lawyer) should minimize attorney conflicts and protect the attorney-client relationship.
- Put all key funding provisions in writing. All key provisions must be in writing. These include: that the company retains control of the litigation, that the legal team retains independent professional judgment and has not given legal advice to the funder, and the financial specifics of the funding arrangement. Be mindful that these agreements may, in some cases, be examined by a court or an opposing party. In short — draft with care.
In the end, it is worthwhile to evaluate alternative funding methods, as they could help to optimize cash flow and minimize downside risk.
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The opinions expressed here are the present opinions of the author and may not reflect the opinions of McAndrews, Held & Malloy, its clients, or any individual attorney or employee. This is for general information purposes and is not intended to be, and should not be taken as, legal advice.
