Enforcing a patent can be expensive and time consuming. Patent litigation funding, also known as patent litigation financing, is one way patent owners can protect their rights without incurring the unwanted expense of litigation.
Generally, such funding takes the form of a non-recourse investment in return for a percentage of any ultimate recovery. That is, if no damages are recovered, the patent owner is not liable to repay the investor. If damages are recovered, however, the investor is entitled to the agreed-upon share. Such arrangements allow patent owners to move the expense of litigation off their balance sheets, but at the cost of receiving only a fraction (if any) of the damages awarded.
Litigation funders, for their part, will perform due diligence of the matter to assess the minimum share of potential damages they are willing to agree to. This assessment may be based on a number of factors, including the likelihood of success, the potential damages and the ability of the infringer to actually pay a judgment. Some litigation funders have minimum damages thresholds for the cases they fund.
Patent and independent litigation-finance counsel can play important roles in this process and should be engaged as early as possible. Patent counsel can compile and provide evidence related to likelihood of success including rebutting potential defenses open to the infringer. By presenting the matter in a clearly understandable manner, the patent owner is more likely to receive favorable funding terms. Litigation-finance counsel specialize in funding deals and can assist in early-stage negotiations when issues can be more readily identified and addressed. The failure to appreciate the unique legal issues presented by litigation funding can result in undesirable consequences.
Background
Patent ownership confers the right to exclude others from making, using, offering for sale, selling or importing into the United States the claimed invention.[1] These rights allow patent owners among other things, to maintain market exclusivity, add value to the business for investment or develop licensing revenue. However, it is up to the patent owner to enforce these rights. Typically, enforcement begins with patent counsel contacting the infringer, either to initiate negotiation for a license deal or to send a cease-and-desist letter. If negotiations fail, the patent owner may have no recourse but to file an infringement action in federal court. According to one source[2], however, the average cost of litigating a patent is $3.5 million. Even the initial stage of claim construction, with the associated discovery costs and expert-witness fees, can easily exceed a few hundred thousand dollars. Litigation costs can be an important consideration because in the United States each side generally bears its own attorneys’ fees. Patent owners may understandably prefer to spend their capital on improving their business rather than paying high legal fees just to vindicate their rights. This may be especially true when facing a well-heeled infringer who is willing to embark on a scorched-earth policy to overwhelm its opponent. However, failing to vigorously defend patent rights can negatively impact the patent owner’s business and rights.
Who Controls the Litigation?
One potential concern facing patent owners is whether accepting patent funding will result in loss of control over the litigation. The short answer is no — if there is a carefully drafted litigation funding agreement. Under the doctrines of champerty and maintenance[3], courts generally disfavor parties granting control to entities who are not parties to the litigation. To steer well clear of these doctrines, reputable litigation funders avoid initiating, encouraging, or entering into agreements that allow funders to exercise undue control over litigation. However, champerty and maintenance laws vary by jurisdiction. Therefore, it is important to have counsel familiar with these doctrines review any litigation funding agreement beforehand.
For example, in a patent case in Delaware[4], defendant E.I. Du Pont De Nemours and Company (DuPont) filed a motion to dismiss based on a litigation funding agreement between patent owner Charge Injection Technologies, Inc. (CIT) and a subsidiary of Burford Capital, Ltd. (Burford). The funding agreement did not give Burford any right to direct, control, or settle CIT’s claims against DuPont. Regardless, DuPont argued that the agreement provided Burford with de facto control over the litigation because the agreement gave Burford the right to collect “any judgment.” The Superior Court was not persuaded by DuPont’s arguments. Instead, the court focused on CIT’s unfettered right to settle the litigation at any time and for any amount and denied DuPont’s motion to dismiss.
In New York State, Judiciary Law § 489 prohibits business entities from purchasing claims or demands with the intent and purpose of bringing an action thereon. The statute also contains a safe harbor provision for assignments with a purchase price of at least $500,000. However, in a split decision, the New York Court of Appeals[5] held that when an agreement lacks a binding and bona fide obligation for the purchaser to pay the purchase price (e.g., other than from any proceeds of the lawsuit), the purchaser is not entitled to the safe harbor. Thus, patent litigation funding agreements executed in New York may not be protected by the safe harbor provision. Therefore, it is always important to avoid giving funders undue control over litigation.
Must Funding Arrangements be Disclosed to the Court?
Litigation funding raises a number of legal issues that a patent owner should know. Chief among these is whether information related to the litigation funding must be disclosed to a court. As with champerty and maintenance, disclosure laws vary by district. In general, however, a patent owner should be prepared to disclose at least the existence of a litigation-funding agreement.[6] For example, Chief Judge Connolly of the District of Delaware has a standing order[7] requiring parties to disclose the entity of any third-party funders. If the third-party exercises sufficient control over the litigation, the parties must further disclose the nature of the terms of that control. On at least one occasion, Chief Judge Connolly directed a plaintiff to produce additional information related to funding arrangements when he felt that the plaintiff was less than forthright in complying with the standing order.[8] Other jurisdictions, such as the District of New Jersey and Northern District of California, have adopted mandatory third-party litigation funding disclosure requirements as part of their local rules or standing orders.[9]
Further requirements could happen. Earlier this month, the U.S. Chamber of Commerce, in connection with dozens of other business and legal associations, sent a letter to the Judicial Conference’s Committee on Rules of Practice and Procedure requesting that the committee adopt proposed amendments to the Federal Rules to require the disclosure of litigation funding agreements.
Does Litigation Funding Risk Exposing Confidential or Privileged Information?
One pitfall with litigation funding is the potential to inadvertently waive attorney-client privilege or work product. Attorney-client privilege generally protects confidential communications between attorneys and their clients from disclosure. The privilege is designed to encourage honest, full and frank discussions between clients and attorneys. The work-product doctrine similarly protects confidential information prepared by an attorney in anticipation of litigation. However, these protections may be waived, such as by sharing privileged communications or documents with a third party.
Patent owners should keep in mind that sharing information with a litigation funder may jeopardize these protections and potentially give the infringer access to sensitive diligence and strategy information during litigation. If enlisted during the early stages of funding discussions with investors, experienced litigation-finance counsel can guide discussions and craft a strategy to protect disclosures, such as using a non-disclosure agreement (NDA).
Generally, work product is the strongest basis to protect communications with funders. For example, the Eastern District of Texas has found that the work-product doctrine extends to protect slide presentations created for potential investors and shared under NDA in order to raise funds for future litigation. The work-product protection would only be waived if it was “treated in a manner that substantially increases the likelihood that an adversary will come into possession of the material.”[10] While the standard for maintaining privilege may vary across jurisdictions, there are best practices that patent owners should generally follow, which include, to the largest extent possible, only sharing public or non-confidential information with litigation funders and limiting the sharing of any confidential information, privileged information, or litigation strategy. Patent owners should also subject any shared information to an NDA. Patent counsel can assist with drafting an appropriate NDA, provide additional guidance on steps to avoid waiving privilege and otherwise safeguard confidential information based on local rules and practices.
Recommendations
When considering litigation funding, patent owners must be cognizant of the legal implications of their disclosures and agreements. It behooves patent owners to consult with experienced patent counsel and litigation funding counsel before having substantive discussions with funders. This will not only allow the patent owner to put forth persuasive arguments for funding, but also will avoid the patent owner having to disclose additional (and potentially more sensitive) details of its funding arrangements and discussions to an adversary during litigation.
[1] 35 U.S. Code § 271.
[2] https://legal.thomsonreuters.com/blog/patent-litigation-101/.
[3] See, e.g., Black’s Law Dictionary 279 (10th ed).
[4] Charge Injection Technologies v. E.I. Dupont de Nemours & Company, No. N07C-12-134-JRJ, 2016 WL 937400 (Del. Sup. Ct. Mar. 9, 2016).
[5] Justinian Capital SPC v. Westlb AG, 28 N.Y.3d 160 (N.Y. Ct. App. 2016).
[6] See, e.g., Erika Levin et al., Who Is Paying? NJ Federal Court Orders Disclosure of Third-Party Litigation Financing, https://www.foxrothschild.com/erika-levin/publications/who-is-paying-nj-federal-court-orders-disclosure-of-third-party-litigation-financing.
[7] Standing Order Regarding Third-Party Litigation Funding Arrangements (https://www.ded.uscourts.gov/sites/ded/files/Standing%20Order%20Regarding%20Third-Party%20Litigation%20Funding.pdf).
[8] Mellaconic IP LLC v. Timeclock Plus, LLC, No. 22-244-CFC, 2023 WL 3224584 (D. Del. May 3, 2023).
[9] D.N.J. L. Civ. R. 7.1.1 (https://www.njd.uscourts.gov/sites/njd/files/completelocalRules.pdf); Standing Order for all Judges of the Northern District of California, Contents of the Joint Case Management Statement (effective January 17, 2023) paragraph 18 (https://www.cand.uscourts.gov/wp-content/uploads/judges/Standing_Order_All_Judges_1.17.23.pdf).
[10] Mondis Technology, Ltd. v. LG Electronics, Inc., No. 2:07-CV-565-TJW-CE, 2011 WL 1714304 (E.D. Tex. May 4, 2011)
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