What you need to do before obtaining IP litigation financing

December 15, 2019

Litigation finance is growing—particularly in the intellectual property space, where patent owners face uniquely high cost and risk. Understanding the benefits of litigation finance and how to obtain it can be the key to waging a successful enforcement and litigation campaign.

IP litigation is expensive and risky. A patent owner relies on costly experts and attorneys, and confronts the possibility that the entire case could be dismissed at any point during a lengthy litigation process (likely against a well-heeled, seasoned opponent). The patent legal landscape has continued to become more challenging, with patent owners now virtually guaranteed to be required to dual-track Patent Trial and Appeal Board proceedings alongside litigation.

In the past, patent owners could share costs and risks with any number of law firms that would take IP cases on full contingency. But in today’s heightened risk environment, even the most successful of those firms are rethinking their willingness to absorb pure contingency risk in patent matters. That has driven an increase in demand for litigation finance, which effectively offers the same ability to warehouse the cost and risk of litigation as a contingent fee arrangement.

Given increased demand for litigation finance in the IP space, it’s more crucial than ever for patent owners to understand their financing options so they can secure the optimal solution. In that spirit, below is an overview of what patent owners and their counsel need to know about securing financing for IP matters.

Preparation

There are many ways in which claimants and their counsel can prepare to seek financing. Specifically, claimants and their counsel should be prepared with:

Brief overview of the proposed litigation, including likely defendants, patents to be asserted, where the case (or cases) will be filed, any relevant prior litigation, licensing, re-examination, sales discussions, etc.
Draft claim charts for key claims to be asserted.
High-level litigation budget through trial, broken down by fees and costs and inclusive of inter partes reviews.
Explanation of the portion of the litigation budget sought to be financed — in order to align interests, financiers will expect counsel to have “skin in the game” in the form of a material discount on fees or partial contingency.
Litigation counsel’s estimate of the trial damages per defendant.
If the patents relate to computer-implemented technology, a thorough Section 101/Alice analysis.

In addition to these preparations, claimants and their counsel should develop the litigation strategy. Given the technical and jurisdictional complexities associated with IP litigation, developing such a strategy will take work — but it’s a prerequisite to obtaining funding.

Prerequisites

The best candidates for IP finance should also meet certain criteria (see below). Matters that don’t meet these criteria may still be considered — but counsel will need to provide additional information before the matter can undergo diligence.

Counsel: The patent holder has retained legal counsel with a proven track record of success in patent matters, preferably in the same field as the patented technology. Demonstrated expertise and capacity to handle the contemplated campaign matter greatly to finance providers; whether counsel is from a large firm or boutique do not.
Capital requirement: The matter under consideration requires at least $1 million in financing.
Damages: There is a clear path to more than $20 million in damages at trial — the minimum amount required to satisfy the economics of funding.
Invention: The invention is in a field with high, established royalty rates, or where the value of the patented technology is easily quantifiable.
Risk: The opportunity presents a compelling mix of risk and reward. Matters best suited to funding are high-risk and high-reward, as they can be the hardest for a litigant to self-fund.

Diligence Process

Litigation finance partners typically provide capital on a nonrecourse basis, with investment return dependent on successful case resolution. As a result, every matter undergoes a rigorous diligence process to determine merits and damages claims and whether the economics of an investment are viable.

IP matters are subject to the following review:

Technical analysis;
Infringement analysis;
Validity analysis/prior art search; and
Damages analysis.

The length of the diligence process varies depending on the case stage:

For yet-to-be-filed suits and/or patents that have not yet been tested, the diligence process takes time—generally 60 days.
For matters that have already made it past the PTAB or survived dispositive motion practice, the process is typically shorter—closer to 30 days.
For matters on appeal, the diligence process can be very short—as few as 10 days.

Investment Process

Ideally, each financing arrangement is structured to meet the specific needs of the counterparty and ensure counsel and their client have the resources they need throughout the full duration of the case. In creating financing solutions that suit these needs, it’s important that capital is structured so that all parties’ interests are aligned.

Post-investment, financiers require periodic reporting but have no control over the case. That said, clients often find that a financier’s perspective can add strategic value to a given case.

Assessing Potential Financing Partners

Commercial litigation finance has seen explosive growth in the past few years, as clients react positively to having more choices and more flexibility around managing litigation cost. As new players emerge in the space, it’s important for patent owners and their counsel to carefully consider prospective funders on several points:

Expertise: Partnering with an experienced finance provider with specialized in-house IP expertise means gaining access to an additional resource to help answer questions, provide insight, and serve as a second set of eyes.
Experience: IP litigation is complicated. It pays to work with a finance provider that knows the space and has considerable appetite for risk.
Longevity: Because most patent matters eventually continue through to appeal, it’s important to select an established partner that will have the capital to see the matter through to its conclusion. Among other reasons, this prevents parties from being pressured into an early settlement due to a lack of resources.
Terms: While some finance providers offer capital on a nonrecourse basis, others require owners to give up an equity stake in their patent as collateral.
Capabilities: In addition to more traditional financing arrangements, some financiers provide fee-shifting protection for patent owners. Recent court rulings and legislative proposals have increased fee shifting under 35 U.S.C. § 285. To prepare for this risk, clients and firms may wish to seek out financiers willing to pay patent fee-shifting awards imposed under § 285.

Final Key Considerations

IP diligence takes time—but the process is worth it.
It typically takes at least 60 days to conduct a thorough analysis of yet-to-be-filed suits and/or patents that have not yet been tested.

It’s not expensive.
Litigation finance cost of capital is in line with the economics offered by contingent fee law firms — economics that have been the standard for 40-plus years. And in return, litigation finance is nonrecourse: if you lose, you don’t pay a dime.

Beware fake term sheets.
Litigation funders may lure potential counterparties with pre-diligence term sheets offering attractive (sometimes impossible) pricing. But it’s a waste of the patentee’s time and resources to dangle attractive economics, only to change the deal dramatically after completing due diligence.

Separating finance from litigation just makes sense.
Some firms choose to self-finance patent matters. But obtaining capital from an external source lets lawyers focus on doing what they do best while offering a better alignment of incentives among counsel, client and capital provider.

Conclusion

Securing IP financing can be challenging for those unfamiliar with the process. Patent owners and their counsel can benefit from partnering with professional investors who understand the complexity of patent matters and have the longevity and scale to support the IP litigation process.

This article by Burford managing director Ashley Keller and Katharine Wolanyk first appeared in Law360.

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