2020 has just begun, and the cost and duration of IP litigation is at an all-time high. Research published last year by Morrison & Foerster revealed that annual spending on IP litigation reached $3.3 billion, up from $1.7 billion in 2005. While total spending has grown, however, the average number of patent disputes per company has decreased—signaling a sharp rise in the average cost of IP matters.
It is no wonder then that in 2019 we at Burford saw a surge of financing inquiries from a wide range of patent owners: Large companies, venture-backed start-ups, universities and international companies—all demonstrated growing interest in financing IP claims. With no financial relief for patent owners in sight, it will be imperative in the year ahead for companies of all sizes to find innovative solutions to address the enormous risk and cost of IP litigation.
Large corporate IP portfolios
In 2019, IP portfolio financing arrangements were in high demand, most of which were sought by large operating companies. The trend itself isn’t entirely surprising: As companies hit the maturity phase of their business life cycle, they need new revenue sources to maintain or grow revenues and often turn to the significant IP portfolios they’ve amassed over time. With portfolio finance, a patent owner can undertake a broad campaign, monetizing multiple patent families in parallel, while benefiting from a lower cost of capital due to the diversified funding risk.
More surprising is that a growing number of operating companies have been approaching legal financiers directly, rather than through their law firms. This trend signals a growing understanding in the corporate world that legal finance isn’t only a tool of necessity, but can be a tool of choice—one that can lead to profitable returns on expensive IP assets that would otherwise be illiquid. As patent owners of all sizes seek to unlock untapped value and gain financial efficiencies, and particularly with fears of a recession looming, we expect this trend in legal finance to accelerate.
Venture-backed companies taking advantage of innovative financing structures
Venture-backed companies also showed increased interest in legal finance last year. The use case for them is more existential: Enforcing IP against a competitor could very well be crucial to the company’s survival. A striking example of that is Sonos in its recent case against Google.1 And unless like Sonos they’ve reached an extraordinary level of success already, these companies often lack the resources to pursue even essential IP litigation. This has been particularly true in recent years, in an IP environment that places a significant financial burden on smaller IP owners out of a long-held fear of so-called patent trolls.
Without legal finance, these companies might not survive, let alone thrive. Indeed, IP-related pressure has hampered companies’ ability even to raise equity financing rounds. Thus, our venture-backed clients have seen great utility in a hybrid investing approach, whereby they can finance their IP litigation and equity in their business against the value of the claim. In this model, the mechanics of the litigation finance investment remain largely unchanged. But we also acquire an interest in the company’s equity, rather than rely exclusively on the underlying case to earn our return.
This approach gives the company more options for creating value—enforce an injunction, reach an a future royalty-bearing agreement—besides just seeking the lump-sum cash settlement or judgment most litigation financiers expect. And they can effectively leverage a contingent future litigation award at a time when cash is critical for the success of their business. We expect to see greater utilization of hybrid investing approaches in the year ahead, given the flexibility and added upfront cash they provide to venture-backed companies with short-term liquidity constraints.
Universities seeking to monetize their patent portfolios
Universities have likewise been more proactive in trying to monetize their IP portfolios, despite facing similar financial and political pressures. They tend already to have robust in-house support programs for their core mission: Licensing IP and launching start-ups with their highest-profile assets. But universities also tend to have a very significant volume of IP assets, some of which get left “on the shelf” due to lack of resources, competing priorities and other unavoidable constraints. Increasingly, universities have been seeking legal finance to help them capture value from these other assets on a portfolio-wide basis—a much more efficient approach than the single-case financing scenario.
Though traditionally universities viewed IP enforcement as posing reputational challenges, there is a growing awareness that IP enforcement (or at least, being prepared for it) is par for the course of any meaningful licensing discussion. Thus, like venture-backed companies, universities are beginning to treat IP enforcement as an unavoidable problem. We anticipate that a growing number of universities will work with legal finance providers to ease the unavoidable financial burden of capturing value from their IP portfolios.
Multi-jurisdictional strategies and activity in unexpected markets
In a trend connected to the globalized economy, more patent owners now optimize their IP strategy by engaging in litigation across several jurisdictions. This allows them to leverage a global portfolio, benefit from more pro-patent legal regimes and drive toward a broad business resolution rather than a piecemeal approach. Enforcement in German and Chinese courts has been at the forefront of multi-jurisdictional litigation in recent years, and we don’t expect that to change. In 2019, we also saw an uptick in activity in South Korea and Japan, and the Asian IP market is likely to be vibrant in the coming years. As the US continues to prove to be a challenging market for patent holders to enforce their rights—perhaps with the exception of an ITC strategy where possible—a growing number of them will increasingly seek relief in Asia and Europe.
What to expect in 2020Common to all the above trends is not only the growing complexity of patent disputes, but also the equally complex financing needs that accompany them. Whether a large corporate is seeking a legal finance portfolio to monetize several patent families, or a small venture is looking for innovative ways to finance bet-the-company litigation, legal finance providers increasingly need to provide financial innovation and expertise beyond their capital.
Though some investors are trying to buy into the market created by this increased interest by offering under-priced capital, buyers beware: Patent litigation is a years’ long process with significant complexity and risk. Choosing a bargain financing provider that may be unable to meet the long-term needs of a commitment could prove a recipe for disaster, not only for the underlying litigation, but also for the company’s overall financial health. There’s a reason why 46 percent of lawyers surveyed in Burford’s 2019 Legal Finance Report cite expertise and track record as a “very important” consideration in choosing a legal finance provider, while just 33 percent cite cost of capital: Legal capital is not commodity capital—particularly in the long game of IP disputes. And we don’t expect this to change any time soon.
Katharine Wolanyk is a Managing Director of Burford Capital, and leads its IP business as well as its Chicago office. Her experience spans the business, legal and engineering sectors, with roles including President of Soverain Software, an attorney at Latham & Watkins LLP and a systems engineer at Hughes Aircraft Company. She writes and speaks frequently on IP issues, and was named a World’s Leading IP Strategist by Intellectual Asset Management (IAM) from 2015 through 2019.
Emily Hostage is a Vice President at Burford. Prior to joining Burford, she was Vice President of Strategic Analytics and Policy at RPX Corporation, a leading global provider of patent risk management services. Previously, she practiced law at Arnold & Porter, where she represented high tech clients in patent, copyright and trade secret litigation cases.
 Jack Nicas and Daisuke Wakabayashi, “Sonos, squeezed by the tech giants, sues Google”, The New York Times (Jan 2020). Available at: https://www.nytimes.com/2020/01/07/technology/sonos-sues-google.html.