Financing Patent Infringement Litigation

Wealth of Ideas Newsletter, February 2009

Patent infringement litigation is expensive. In medieval times, war was called the sport of kings. Today, patent litigation is the sport of corporate CEOs.

That is not news to an independent inventor or a small patent owner whose patent has been infringed and who is seeking justice and compensation. There is good news, however, for these inventors and patent owners: There are several ways to finance patent litigation.

After anti-trust litigation, patent litigation is the most expensive. It can easily cost millions of dollars to prosecute a patent infringement lawsuit. Plaintiffs in patent infringement lawsuits can be individuals or small businesses with limited financial resources, while the defendants are often large corporations that can easily afford to spend millions of dollars to defend themselves.

Two main components make up the overall cost of a patent infringement lawsuit: Legal fees and disbursements. Legal fees are what the attorneys that represent you charge for their time, and legal fees can run into the millions of dollars. Disbursements are out-of-pocket expenses that go to pay for filing fees, court reporters, travel expenses, video depositions, discovery expenses, trial demonstratives, expert witnesses and jury consultants. These can also run to one million dollars or more.

Several litigation financing options are available to an inventor or a patent owner who believes his patent has been infringed.

Patent Enforcement Firm: Considering all the options, working with a patent enforcement firm offers the most benefits for several reasons. General Patent Corporation (GPC), for example, works on a 100% contingency basis. That means that if GPC accepts you as a client, the company covers ALL fees and costs involved in the litigation. General Patent is not a law firm, so it will retain a law firm to actually try the case. It will, however, underwrite all legal fees and out-of-pocket expenses related to the lawsuit(s). If the plaintiff/patent owner has to be deposed or testify in court, GPC will even cover travel costs to and from depositions and trial.

Patent enforcement firms recoup their expenses and earn their fees from the proceeds of the settlements or judgments that result from the lawsuit and share in license fees and royalty payments obtained by them through licensing of the patent. General Patent’s arrangement is a 50/50 split of all net recoveries. Should the patent enforcement firm fail to secure a settlement for the patent owner, however, they are out the money they invested in the case and the patent owner owes the patent enforcement firm nothing! GPC underwrites all expenses and assumes all risk in enforcing your patent!

The second advantage of using a patent enforcement firm is that the company manages the entire process. General Patent keeps you informed as the case progresses, and handles all the details, including selecting and engaging a law firm or several firms if that is required, retaining local counsel, and assisting with the selection of expert witnesses, jury consultants and other experts as may be necessary to effectively litigate the lawsuit. General Patent has attorneys on staff that coordinate the outside litigation counsel and contribute to litigation strategy and tactical decisions.

The third advantage of partnering with a patent enforcement firm is that it may reduce your liability and the chances of counterclaims by the defendant. If you are an NPE (non-practicing entity) – that is, you own the patent but do not use it to produce a product or service − GPC will transfer your patent to a separate LLC (limited liability company) which will act as the plaintiff. The defendant is then less likely to file a counterclaim and come after your personal or business assets. Such counterclaims are not always made by defendants, but when they are, having that layer of protection from liability is very comforting.

Contingency Law Firm: The inventor and patent owner must understand that patent attorneys are not necessarily patent litigators. Patent attorneys (and patent agents who are not lawyers) are admitted to practice before the US Patent and Trademark Office (USPTO), and they help inventors file and prosecute patent applications. Most of them do not try patent infringement cases. For that you need a patent litigator.

Until recently, very few law firms would even consider taking patent infringement cases on a contingency basis. The plaintiff simply had to come up with the money to cover the attorneys’ fees and expenses up front, Today, however, there are a IP litigation firms that will take a patent infringement case on a full, partial or hybrid contingency basis. Hybrid representation means that you will be paying reduced hourly fees (say 50% of the hourly fees billed on a monthly basis) plus, at the end, the firm will get a smaller contingency fee or “success fee,” say 15% or 20%.

In partial contingency, the client covers out-of-pocket litigation expenses, while the attorneys take their fees on a contingency basis. However, litigation expenses can quickly run into hundreds of thousands of dollars and can easily exceed a million dollars, making patent infringement litigation too expensive for many patent owners. Patent law firms that represent clients on a contingency basis, but require them to front the expenses, usually charge 33% as their contingency fee.

There are a few patent litigators who will take a patent infringement case on full contingency, agreeing to take both their fees out of the settlement or judgment as well as to bankroll all litigation expenses and be reimbursed for them out of the proceeds of the litigation. In this arrangement, contingency fees can run to 40% or higher. Some law firms will put into the retainer agreement that they are advancing money on behalf of their client and the client is ultimately responsible for this investment. That means, in the event you lose, you are on the hook for hundreds of thousands or, perhaps, even millions of dollars. Although law firms usually refrain from enforcing this debt against their clients, one never knows what a law firm may choose to do in the future when it is within their legal rights to collect this money from you – their client.

Even if a law firm promises to front the expenses, they are often reluctant to do so. It is one thing for a partner who spearheads the case to invest his own time. It is quite another thing for him to gamble with cash that belongs to all partners in the law firm. Once his law firm has spent its first hundred thousand dollars, your attorney may twist your arm to accept the first settlement offer that’s put on the table by the defendant.

Unlike a patent enforcement firm like General Patent that provides a seamless, comprehensive, turnkey package of services that requires no expense and no management of the process on the part of the plaintiff, this is not the case when you hire a law firm to litigate your patent infringement claim. A law firm may have a conflict of interest with one or more of the infringers, so you may end up having to hire more than one law firm in order to pursue all of the infringers of your patent. In this case, you will need to make sure these law firms coordinate their activities so none of them takes a conflicting position.

Also, when you select a law firm to litigate your case, you are the plaintiff, you still own the patent, and that creates potential liabilities for you and/or your business down the road. If you run a business, you may be counter-sued for the alleged infringement of the defendant’s patents. If you are an individual, you may be countersued for antitrust violations, patent misuse, fraud and/or attorney fees. However frivolous these claims may be, you will still have to defend yourself against counter claims and that means hiring defense attorneys and more legal fees for you. This is precisely why defendants file such bogus claims: To intimidate the patent owner, to spend him into the ground, and to wear him out until he goes away.

IP Litigation Financing: The third option is to find a law firm that will take your patent infringement case on a fee-only contingency basis, and then find a litigation finance company that will loan you funds to cover your out-of-pocket expenses. A litigation finance company will analyze your claim, they will probably require that you pay a due diligence fee to examine your case and, if they like the case, they may loan you funds. Litigation financing (also referred to as “lawsuit funding” or “pre-settlement funding”) is done on a non-recourse basis. So, in a sense, it is also contingency funding, because the lawsuit funding company is paid back from the proceeds of any settlements, and only if you reach a settlement or win the case. Some litigation financing companies will require that you pay the due diligence fees up front in cash, but others will roll it into the advance.

There are some downsides to using a litigation finance company, however, to fund your lawsuit. First of all, lawsuit funding companies will generally not fund a case unless the attorney or law firm litigating the case has taken it on a contingency basis. The logic here is that if the attorney does not have enough faith in the case to take it on a contingency basis, the lawsuit funding company will not risk its capital either. The problem, of course, is you might find an attorney to take your patent infringement lawsuit on a fee-only contingency, but NOT be able to find a lawsuit funding company to provide litigation financing, and you end up having to abandon the case because you cannot cover the litigation expenses!

Moreover, most litigation finance companies will not advance you more than one or two hundred thousand dollars at a time. Once you run out of this money (and that will happen very quickly) you will be standing at the doors of the litigation finance company hat in hand again and again. They may (and often do) stop funding after the first or the second round if their risk assessment of the case changes. If that happens, you cannot proceed with your litigation.

There are also two other factors to consider: Lawsuit funding is very expensive. The fees (effectively, the interest rate, although lawsuit funding companies do not use that term) lawsuit funders charge run about 5% per month or 60% on an annual basis. If your case runs for two or three years, the litigation financing costs will eat up an increasingly larger and larger portion – even possibly all – of the settlement, although most litigation financing companies do cap fees once the case has run for three or three-and-a-half years. Second, some lawsuit funding companies will not provide litigation financing until there has been a Markman hearing, and that often occurs well into the process, so you will have to cover all litigation expenses yourself up to that point. In some jurisdictions, such as the Eastern District of Texas − which is a popular forum for patent litigation − the Markman hearing takes place after the discovery is complete, when you could already be a million dollars or more into disbursements.

Options to Consider: If you’ve already engaged a patent litigation law firm to represent you on a fee-only contingency basis, and you now need cash to cover litigation expenses, finding a lawsuit funding company to finance your litigation expenses is your only option. If, however, you are at the beginning of the patent enforcement process, partnering with a patent enforcement firm like General Patent is the total-package-of-services turnkey solution that provides the greatest benefits.