Getting to "yes": Securing finance for IP litigation

It’s well-known that litigation finance is growing—and that’s particularly true in the IP space, where patent owners face uniquely high cost and risk. Understanding the benefits of litigation finance and how to obtain it can provide 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 an inevitably 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 PTAB proceedings alongside litigation.

In the past, patent owners could share those 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 re-thinking their willingness to absorb pure contingency risk in patent matters.^[1] As patent holders seek new risk partners, 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, we offer an overview of what patent owners and their counsel need to know about securing financing for IP matters.

Criteria for financing patent litigation

As a precursor to seeking financing, claimants and their counsel should thoroughly 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. Burford conducts extensive due diligence of every IP matter, and that thorough review is not possible without a fully developed plan for monetization.

The best candidates for IP finance meet the following criteria:

• 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. It makes no difference whether counsel is from a large firm or boutique, so long as they have the expertise and capacity to handle the contemplated campaign.
• Checklist: Counsel has completed Burford’s IP checklist (see “Litigation Ready” Checklist below).
• Capital requirement: The matter under consideration requires at least $2 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.^[2]
• 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. (In other words, the matters best-suited to funding are those that are high-risk, high-reward, as they can be the hardest for a litigant to self-fund.)

If the criteria above are not met, it could mean the matter is not best suited for litigation finance or that counsel will need to provide additional information before the matter can undergo diligence.

Diligence process

Our financing is typically non-recourse, with return dependant on the successful resolution of a case. As a result, every matter we consider undergoes a rigorous diligence process by our in-house underwriting team to determine the strength of the 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
• 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 generally takes 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

Once diligence has been completed, we work with the claimant and counsel to develop a term sheet that reflects the basic economic terms of the transaction.

Investment process

We customize each financing arrangement to meet the specific needs of our counterparty and to ensure counsel and their client have the resources they need throughout the full duration of the case. At Burford, we pride ourselves on providing innovative solutions (see “Emerging Uses for IP Finance” sidebar), and we’re committed to structuring our capital so that all parties’ interests are aligned.

Post-investment, our involvement is largely that of a consultant: We require periodic reporting on progress but have absolutely no control over the case. That said, when asked, we are happy to be as involved as our clients want us to be. Indeed, we are in a unique position to add strategic value to a case: Not only do we have a deep understanding of the patent space (we’ve reviewed billions of dollars of patent matters since 2009), but because we perform our own diligence, we also are well acquainted with the facts of the matters we finance. Given this perspective, patent owners and their legal counsel often consider our input to be a considerable strategic benefit.

In addition to more traditional financing arrangements, we also provide fee-shifting protection for patent owners through our affiliate, Athena FSP. Recent court rulings and legislative proposals have increased fee shifting under 35 U.S.C. § 285. Athena commits to pay any patent fee-shifting award imposed under § 285, up to the total commitment amount of $3 million (with larger commitments available in certain circumstances), with the commitment lasting for the life of the litigation or licensing campaign.

Assessing potential patent financing partners

Commercial litigation finance has seen explosive growth in the past few years. As new players emerge, 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 provides access to an additional resource to help answer questions, add 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 prevent parties from being pressured into an early settlement due to a lack of resources.
• Terms: While some finance providers offer capital on a non-recourse basis, others require owners to give up an equity stake in their patent as collateral.

Getting to “yes” for patent litigation finance

In many ways, the patent space was the precursor to litigation finance: owners that otherwise would have been unable to afford the cost of litigation enforcing their patents could work with firms willing to take their cases on partial or full contingency. As IP firms become increasingly reluctant to share risk, it’s natural that there is greater demand for outside capital in the space. Still, securing IP financing can be challenging for those unfamiliar with the process. Patent owners and their counsel can benefit from partnering with professional investors that understand the complexity of patent matters and have the longevity to support the long and costly IP litigation process.

IP "litigation ready" checklist

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

[1] See e.g., Susman Godfrey Retreats From Contingency Model, Looks to Oil and Gas Clients (April 5, 2017), http://www.texaslawyer.com/id=1202783085225/Susman-Godfrey-Rethinks-Contingency-Model-Looks-to-Oil-and-Gas-Clients and McKool Smith MP on Market Doldrums, Winning on a Budget and Why Alternative Fees Aren’t the Answer (April 19, 2017), http://www.americanlawyer.com/id=1202784118659/McKool-Smith-MP-on-Market-Doldrums-Winning-on-a-Budget-and-Why-Alternative-Fees-Arent-the-Answer?mcode=0&curindex=0&curpage=2 .

[2] Not that smaller cases aren’t meritorious, but because the economics don’t make sense for either the client or us given the costs of patent litigation.