The legal market has adopted third-party legal finance at varying rates, but perhaps the earliest adopters are those in the intellectual property (IP) space. Since IP litigation is very expensive and high risk compared to other areas of litigation, IP experts have shared legal cost and risk with third parties for decades, by using third parties to finance patent litigation.
Unique challenges of IP litigation
IP litigation is notoriously risky and expensive. It is rare for a patent case to reach trial with all its asserted claims completely intact. In most cases of any significance, the patents must survive the separate hurdle of inter partes review (IPR) challenges before any meaningful settlement discussions occur. After investing significant capital developing intellectual property, many companies, universities and other entities face the challenge of justifying spending still more to protect that IP through enforcement or litigation which could take many years to reach a conclusion.
The good news is that there is plenty of "smart money" with a real track record of backing meritorious IP cases, because the IP field has embraced legal finance for some time now. Capital users must simply remain discerning and vigilant to find it.
There are risks associated with using new inexperienced entrants to the legal finance market
With the growing demand for legal finance, we are seeing an increase in newer and more opportunistic finance providers in addition to the more established providers of legal finance capital. To compete, the less established providers often float inexpensive terms in an effort to win new business and develop their track record.
In theory, this competition is good for consumers of capital. In practice, you get what you pay for. Pricing is important, but it is also crucial that law firms and their clients understand that legal finance is not “commodity capital” and that deciding about a legal finance partner (like a law firm partner) should be based on many other factors. It is essential to diligence capital providers as much as the merits of the case. The added value from engaging a sophisticated legal finance partner can make all the difference in achieving a successful litigation outcome.
Below are some of the key risks of working with a newer inexperienced capital provider.
Less established finance providers almost certainly underprice risk in ways that leave their smaller, younger portfolios more vulnerable to shocks from adverse events in individual cases. Unsurprisingly then, cheap financing terms often come with restrictive conditions.
Underpriced capital is particularly problematic for IP litigation. IP cases are expensive, lengthy and often full of interim twists and turns that can seem to the uninitiated like catastrophic developments. Therefore, clients must ensure that their finance provider is equipped to handle this reality.
Unfair terms and conditions
Less established finance providers may provide capital from funds with sunset dates that precede the resolution of the litigation—rendering them unable to call capital down the road to fund unanticipated critical expenses. Additionally, the capital may come with exit provisions that let the provider freeze funding and jettison the investment from its portfolio in the event of even minor adverse events in the case.
Lack of diversification
Finance providers are increasingly concentrating on niche claims and market verticals, which leaves them more vulnerable to isolated shocks or black swan events whose damage otherwise could have been contained inside a diversified portfolio. This lack of diversification isn’t just bad for the provider; it can also leave unsuspecting clients and counsel stranded if the impact leaves the finance provider with insufficient liquidity.
Some finance providers even seek to exert control indirectly over the underlying matters, with things like unfettered veto rights or unilateral approval conditions—conditions that, taken too far, could very well interfere with the patent owner’s legal standing to sue. Such terms pose more than just a “flight risk” down the road. A half-hearted commitment like this jeopardizes the litigation strategy from the outset.
Burford’s Legal Finance 101 outlines how the use of legal finance from an established provider does not alter control of decision-making or attorney client relationships. Burford does not control the litigation settlement strategy and decision-making, except in very rare circumstances when agreed in advance by the client.
What should clients look for in a legal finance provider?
Clients are fortunate in having choices in potential partners. With the above factors in mind, it is important to make the right choice in partner for IP litigation based on careful diligence.
Reputation and experience are the two most important factors in choosing a legal finance provider according to the 2022 Affirmative Recovery Programs Report. When it comes to reputation, Burford has a well-established track-record: The 2022 Affirmative Recovery Programs Report found that about 8 out of 10 (80%) of senior in-house lawyers cite Burford as the commercial legal finance company with which they are most familiar. Burford also has over a decade of experience in the field and an extensive bench of litigation experts.
Burford conducts all core diligence in-house and provides substantive analysis as the case develops, adding value beyond mere capital provision. In our experience, this is what it takes to stay on top of the inevitable twists and turns and to ensure that a litigant and its law firm achieve a positive result.
Ultimately, legal finance is smart money, not commodity capital. Price is important but selecting a finance provider on price alone is a recipe for disaster. Particularly in high-risk, developed markets like the one for patent litigation, it is essential for law firms and their clients to work with finance providers that know what they’re getting into and can add value both before and after the investment is made. Burford stands ready to do just that.
This article was originally published on Burford’s website on April 27, 2020, and was updated on November 08, 2022.