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Introduction

The monetization of patents is a significant business objective for many patent owners because it can be source of substantial revenue. A successful monetization campaign can be used to support the patent owner’s business, including making new investments in innovative research and development programs.

Monetization can take many forms, including the outright sale of a patent or a patent portfolio or the patents’ inclusion in a patent pool (such as a pool administered by a standards-setting organization).

A common form of monetization is licensing patent rights to entities who use or plan to use the patented invention. This is a particularly attractive model for entities such as universities and research institutions that do not manufacture or otherwise commercialize the inventions of their workforce. Licensing is a highly flexible framework, allowing the parties to agree on a variety of terms, including the duration of the license, lump-sum and/or royalty-based periodic payments, geographic area where the license is operative, and so on.

But while some users of the patented invention willingly take a license, many do not, thereby infringing the patent. When a patent owner identifies acts of infringement, and the infringer refuses to take a license, the patent owner has a choice to make: to litigate or not to litigate. This is not a simple question.

Patent litigation is often a complex and costly endeavor because it involves both legal and technical issues in the context of novel and evolving technologies. It requires the retention of multiple subject-matter experts and the review and production of massive amounts of documents and data in discovery. Patent litigation is also risky because the patent infringer may challenge the validity of the asserted patent, and it has several avenues in which to mount its challenge: as a defense to the infringement claim, through a reexamination at the U.S. Patent and Trademark Office (USPTO) and through an inter partes review at the Patent Trial and Appeal Board (PTAB). The complexity and cost of patent litigation increases if multiple patents are asserted or if the infringer chooses to assert its own patents against the patent owner.

Over the last decade, as the cost of patent litigation has risen, so has the frequency of third-party funders financing patent cases. We, ourselves, have represented several plaintiffs with third-party financial backing and helped negotiate terms. We have also discussed third-party funding trends with other patent litigators as well as third-party funders. Below is our take on third-party patent litigation funding and the considerations that should inform patent owners’ decision on whether to seek such funding for the enforcement of their patent rights.

What is third-party litigation funding?

Third-party litigation funding is an investment strategy that capitalizes on the potential for large proceeds from patent litigation. The investors, who are not parties to the lawsuit, provide the funds either to the plaintiff or to the plaintiff’s law firm to pursue infringement claims. In exchange, the investors are typically first in line to get a multiple of their investment from the proceeds of the litigation. If the proceeds are not sufficient to cover the agreed-upon payout to the third-party funder, the plaintiff gets nothing. But, on the other hand, third-party funding arrangements are generally non-recourse, which means that the plaintiff and the plaintiff’s firm do not have to repay the funder’s investment if the litigation does not result in sufficient proceeds to cover the third party’s funding.

Litigation funders vary in size and specialization. They range from family offices to small private equity firms to publicly traded companies. Many employ or contract with experts in patent litigation and valuation to inform their decision about whether to finance a particular case. These experts, including patent litigators, patent prosecutors, and economists, provide an independent assessment of the asserted patent’s likelihood of surviving a validity challenge, the likelihood of proving infringement, and the magnitude of the potential damages award for the infringement. This third party evaluation is helpful to confirming the viability of a patent lawsuit and is generally not charged for by the funders.

Common third-party funding arrangements

Funders often provide funding directly to the plaintiff who then retains a law firm to litigate the case. On occasion, the funder provides the funding to the law firm, which then offers a contingency arrangement to the plaintiff. The funding is typically disbursed in tranches corresponding to major stages of the litigation like claim construction, fact discovery, expert discovery, summary judgment, and trial. Some funders prefer arrangements that incentivize earlier settlements, because their investment and their risk are lower.

Third-party funding agreements typically specify a “waterfall” distribution of litigation proceeds. First, the funder is repaid its original investment and gets a profit that is usually a multiple of its investment – often between 100% and 300%.

After the funder is paid, the remainder may go solely to the plaintiff (if the law firm was paid by the plaintiff without any contingency arrangement). Alternatively, if the funder paid the law firm and the law firm entered into a contingency fee arrangement with the plaintiff, the law firm takes its contingency fee (usually between 20% and 50%), and the remainder goes to the plaintiff.

Factors considered by funders when deciding on whether to fund a patent litigation

Third-party funders are highly selective when it comes to financing patent litigation. A recent U.S. Government Accountability Office study found that 5% or fewer of the patent cases pitched to funders are financed. Funders are so selective because of the unique risks associated with patent litigation, including the possibility that the patent is found invalid through a relatively inexpensive procedure like an inter partes review or reexamination, that a plaintiff’s victory is overturned on appeal, and that damages awarded by a jury are significantly reduced because they are not sufficiently tied to an infringing feature.

In deciding whether to fund a case, funders assess the following factors:

• Whether the patent owner has a single patent family or a portfolio of patents
• Strength of the infringement position
• Whether the patent reads on the whole product or at least a valuable and essential feature
• Value of potential damages
• Quality of the patent and the likelihood of it surviving a validity challenge
• Likelihood of a favorable settlement
• Factors that help support defensible damages theories and amounts (such as well-established royalty rates in the industry or comparable licenses)
• Whether there are foreign counterparts that could be used to put more pressure by using foreign courts such as Germany (which has a quick path to injunctions) or the Unified Patent Court (which covers territories throughout Europe)
• Patent owner’s assumptions and expectations about the case

Factors patent owners should consider in seeking third-party funding

While the prospect of being bankrolled by a third-party funder may be attractive to many patent owners for whom the expense of asserting a patent claim in litigation is daunting, there are several factors that they must consider before deciding on this arrangement.

• Third-party funders have no fiduciary responsibility to the patent owner. While both the patent owner and the funder would like to win, their definition of winning and their priorities can diverge. For example, if a funder thinks that a settlement offer is good enough, but the patent owner would like to continue litigating, the funder may try to pressure the patent owner to settle. Alternatively, we have seen cases in which a funder strenuously argued for continuing to litigate – even though the patent owner’s position has become unsupportable – because the settlement offer did not cover the funder’s investment, let alone its hoped-for profit.
• Third-party funding makes more sense in bigger cases. In a case where damages could reach tens of millions of dollars, third-party funding could be a less expensive proposition than a contingency arrangement with a law firm. This is so because the third-party funder typically bases its fees on its investment whereas a standard contingency arrangement is based on a percentage of the proceeds from the litigation without limit.
• And yet, third-party funding may make sense for a subset of smaller cases. If a patent owner contemplates an enforcement campaign against multiple infringers, it could be a good strategy to use third-party funding for the first case so that there are sufficient resources to either win the case or to reach a highly favorable settlement. Although the patent owner may end up with no proceeds from this case as all the proceeds go to the funder, the outcome in this case can be very helpful for negotiations with other infringers and may ultimately result in licensing deals without the need for additional litigation.

Additionally, even if it ultimately does not make business sense to accept third-party funding, discussing the potential case with a third-party funder can be a useful assessment of the strengths and weaknesses of the case. Because funders are highly sensitive to the risks of patent litigation, getting their opinion on the potential outcome of a contemplated litigation can help set realistic expectations and highlight any pitfalls and challenges.

Conclusion

Third-party patent litigation funding is an important option for patent owners contemplating asserting their patent rights through litigation. If you are considering seeking third-party funding and would like to analyze whether it is a good fit for your case, we can help. Contact Partner Kate Cassidy for further discussion.