Litigation Funding In Patent And Intellectual Property Cases
The complex and challenging world of IP law presents a number of problems to be solved -- and litigation financing can help.
Litigation finance — what’s the deal with that? There are lots of ways to look at this increasingly important field. For example, you might think of litigation funding as a big help to clients (if you’re a litigator), an uncorrelated asset (if you’re an investor), or a great new exit option (if you’re a Biglaw associate looking to try something new).
At last week’s Litigation Funding Forum, Scott Mozarsky — current Regional Managing Director at Vannin Capital, former President of Bloomberg Law, and contributor to these pages — offered another interesting framing for funding.
“What intrigues me about litigation funding is how it solves problems,” Mozarsky said. “For litigants, think of access to justice problems, and access to capital problems. For law firms, which are becoming commoditized, think of growth and differentiation challenges.”
Which brings me to another interesting panel I attended at the Forum, “Litigation Funding in Patent and Intellectual Property Cases.” The complex and challenging world of patent and IP law presents a number of problems to be solved — and litigation financing can help with many of them, as I learned from the panelists:
- Michael Gulliford (moderator), managing principal at Soryn IP Group;
- Ron Laurie, chairman of InventionShare;
- Phil Hartstein, president and CEO of Finjan Cybersecurity; and
- Heather J. Kliebenstein, partner at Merchant & Gould.
Michael Gulliford opened by observing that litigation finance is an appealing alternative investment right now, given the relatively high prices for other asset classes, with patent cases in particular generating a lot of interest. So in this sense, funding is a solution to the problem of finding reasonably priced, non-correlated assets. But financing IP cases has its pitfalls; if you’re going to work in this space, you need the expertise.
Ron Laurie of InventionShare — an engineer turned IP lawyer (a founding partner of the Silicon Valley office of Skadden Arps) turned IP investment banker — certainly has such expertise. In his current role as an IP-focused banker, he advises parties to M&A transactions about intellectual property issues, which historically have been treated as an afterthought in many tech transactions.
Why? Laurie chalked it up to the bankers: “When working on a deal, the traditional investment bankers know that the last thing they want to do is introduce any topic that will create a price gap, increasing the risk that the deal won’t close — and that they won’t get paid.”
So historically in tech deals, both sides (or the bankers to both sides) tended to pay little attention to the value of IP assets, meaning that “the acquirer would get the IP basically for nothing” — even if that IP might actually be worth billions. This insight is what led Laurie to become an investment banker focused on enhancing the value of IP assets in complex corporate transactions in the tech space. (Laurie contrasted the tech space with the biotech/pharma space, where it’s all about the value of the IP, and where the parties focus intensely on patent valuation.)
Given his focus on M&A deals, why does Laurie care about litigation? Because valuing IP assets can be very difficult, and patent litigation is the most effective mechanism that currently exists for determining the value of an IP asset. As Laurie put it, “Until a judge and the Federal Circuit tell you the value of your patent, you don’t really know.” After litigation resolves the status of a patent, generating a final determination of its validity and eliminating the risk of it someday being held invalid, that “de-risked” patent is worth so much more.
So patent litigation sounds very useful as a valuation method — but the problem is that it’s also very expensive. According to Gulliford, a straightforward, single-patent case, outside the pharma space, could take anywhere from $2.5 million to $5 million to litigate. And that litigation, including possible appeals to the Federal Circuit or even the Supreme Court, could drag out for anywhere from three to seven years.
This is where litigation financing comes in. Phil Hartstein of Finjan, which has a large and very valuable portfolio of IP that it licenses, is a regular user of litigation funding.
“You can’t run a licensing program today without having some amount of litigation,” he said. “We run a litigation program not because we like litigation, but because it’s a prerequisite for setting up and maintaining a successful licensing program.”
Finjan has annual litigation spend of somewhere between $16 million to $18 million — and as a public company, litigation expenses show up on its balance sheet. Working with funders like Soryn allows Finjan to protect and monetize its valuable IP while keeping expenses to a minimum.
And the funders who have worked with Finjan have been very pleased as well, according to Hartstein. In one case, the company borrowed $10 million and returned $15 million to its funders in short order; in another, the company borrowed $10 million and paid back $19 million before too long.
Litigation funding has also been a boon to IP litigators and law firms. Heather Kliebenstein of Merchant & Gould, which first started exploring the space about two years ago, said her firm has benefited in two ways. First, its clients avail themselves of financing opportunities, which helps them move forward with cases they might otherwise not pursue. Second, the firm gets hired by litigation financiers for due diligence, when the funder wants an outside opinion on the merits of a patent case that it’s thinking about funding. Kliebenstein said she receives about two to three requests each week that are related to funding, either from a client who wants to explore financing or from a funder who wants help with diligence.
“I wouldn’t say it’s out of control,” she said of interest in funding, “but it has blossomed in the past six to twelve months.”
As Michael Gulliford of Soryn noted, however, players in the IP space need to stay on their toes, because both Congress and the U.S. Supreme Court have upended the space in recent years. These legal changes have affected everything from what’s patentable (Alice Corp. v. CLS Bank International) to how and where litigation takes place (the America Invents Act and TC Heartland LLC v. Kraft Foods Group Brands LLC) to what remedies are available (eBay Inc. v. MercExchange LLC). All these shifts how long a case might last and how lucrative it might be.
So navigating the rapidly changing world of IP law can be trickier than ever, for plaintiffs and lawyers alike. But with the help of litigation funding, solving the problems and facing the challenges can be that much easier.
David Lat is editor at large and founding editor of Above the Law, as well as the author of Supreme Ambitions: A Novel. He previously worked as a federal prosecutor in Newark, New Jersey; a litigation associate at Wachtell, Lipton, Rosen & Katz; and a law clerk to Judge Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit. You can connect with David on Twitter (@DavidLat), LinkedIn, and Facebook, and you can reach him by email at dlat@abovethelaw.com.
