Litigation Funding in IP: Caveat Emptor

By: Nicholas Lipperd

Gambling seems to be an American tradition, from prop bets on the Super Bowl to riding the stocks through bear and bull markets. The highest stake gambling is done by investment firms, some of whom are finding profitable bets to be had on civil court cases. The process of Third-Party Litigation Funding (“TPLF”) is simple enough on its face: a funder pays a non-recourse sum either to the client directly or to the law firm representing the client. In exchange, subject to the agreed upon terms, the funder receives a portion of any damages awarded. Thus, TPLF is no more than a third-party placing a bet on the client’s case, somewhat similar to the choice a law firm makes when taking a case on contingency. With $2.8 billion invested in the practice in 2021, TPLF seems to be a betting scheme that is paying off.

TPLF is expanding from business litigation into patent litigation. Since the creation of the Federal Circuit, damages in patent infringement cases have skyrocketed, increasing attention to patent cases. TPLF is no exception. The emergence of third-party funding in patent litigation could allow individuals to assert patent rights who previously could not have afforded it. Unlike agreements directly with law firms, third-party funding is not controlled by the American Bar Association’s (“ABA”) Rules of Professional Conduct for lawyers. While this creates some concern in any TPLF case, this lack of protection in patent cases is unique: the funder can obtain the rights of the patent(s) from their clients. 

As previously mentioned, a barrier many patent owners face when attempting to assert their rights is the cost of litigation. While patent litigation cases rarely proceed to a bench trial, these cases typically take three to five years to complete. Intrinsically linked to this timeline is the price tag. Infringement cases where over $25 million in damages is at risk may run a median of $4 million in litigation costs. For cases with less than $1 million at risk, the median litigation cost sits at just under $1 million. A simple look at the risk versus rewards tradeoffs in this case paints a discouraging picture for the plaintiff. Regardless of the expected damages, the cost of litigation is an undeniably large factor, and one that leads to many cases being settled within a year rather than being tried on their merits. 

When the client cannot afford to pay the price of litigation yet intends to assert the patent rights, TPLF creates an opportunity to pursue the case. Plaintiff-side litigation seems like a simple win-win for the client. Yet as with anything, the devil is in the details. A funder is naturally motivated to see a return on this investment, so a client looking at the deal must look past the surface. Not all funding is arranged on a non-recourse model, leaving clients no better off should cases become losers than if they had chosen a billable hour payment structure with the firm. TPLF often does not cover attorney’s fees awards, so clients may be on the hook for more than they realize. Litigation funding arrangements often come with “off-ramps” for the investor should the case take an unexpected turn or the funder stops believing in the merits of the case. This means the funder may be able stop funding the client at certain stages of litigation, leaving the client or the firm without funding for the remaining stages. 

TPLF has often been described as the “wild west” of funding cases. In part, this is due to the lack of regulations surrounding the practice. It is also due to the fact that third-party funders are not constrained by the ABA’s Rules of Professional Conduct like attorneys are. 

Attorneys may not abdicate their Rule 1.1 duty of competency, yet TPLF creates tension with this duty. A third-party funder has made an investment in a case. Like any diligent investor, the funder likely wants to track the case closely to ensure it continues to align with the funder’s financial interest. Should the funder attempt to exert control over the case to protect this interest, it is up to the lawyer to resist. This may leave the client in trouble; should the disagreement be large enough, the client could see their funding removed as the TPLF exercises a contractual “off ramp.”

Perhaps the most implicated ABA rule in TPLF structures is Rule 1.6, the Duty of Confidentiality. This rule, and the related Federal Rule of Evidence 502 regarding attorney-client privilege, create friction with TPLF arrangements. Funders want as much information as possible before and during the funding of a case, as they want to be able to gauge the strength of their future and current investments. While all disclosures must be clearly sanctioned by the client, when do these disclosures waive attorney-client privilege? The majority of lower courts hold that communications about the case with a TPLF fall under work-product privilege protection, a question the Supreme Court has not answered and one the Federal Circuit danced around. (See In re Nimitz Techs. LLC, (Fed. Cir. 2022) denying a writ of mandamus to protect the District Court from reviewing litigation funding materials in camera.)

While ABA Rule 1.5 prevents firms from charging unreasonable fees, including contingency rates, it does not prevent a TPLF from doing so. A funder can bargain with a client for whatever portion of the damages award they like, and they have much more bargaining power than the client does. This bargaining power may be used for more than simply leveraging a larger percentage contingency fee than a firm could charge.

While damages in patent cases are high enough to attract TPLF, it is more than money that may attract third-party funders to patent litigation. Often, the patent itself is just as valuable as the damages award. Rule 1.8(i) prevents attorneys from acquiring proprietary interest in the cause of action or subject matter of litigation. Again, this does not apply to third-party funders, who are free to include any and all patent rights in the contract to fund a client’s case. 

Patent owners may face a catch-22 style choice in this scenario. If they cannot afford to stake the cost of litigation and if a firm does not see value in taking it on contingency, owners may turn towards TPLF. Yet, if funders see more value in the patents than the potential litigation damages, patent owners must make a hard choice. Obtaining funding will give a patent owner a one-time shot at a large damages award. The owner, win or lose, will not be the owner of the patent any longer, and will lose any potential revenue stream it would produce. Yet if owners cannot assert their patent rights in court, what value do their patents hold? Patent owners have promoted the progress of science and useful arts in the United States, and in exchange they receive limited monopolies in the form of their patents. These monopolies are not so easily maintained and defended though. Patent owners must carefully consider their options when looking to assert their rights. Patent litigation is expensive and lengthy, and while having TPLF cover all litigation costs may seem like a sterling option, owners must dig deeper to fully understand the trade-offs. Could they lose funding support halfway through litigation? Would funding the case be worth giving up their patent rights? TPLF is still newly emerging in patent litigation cases, but for potential clients, the message is already clear: in deciding to take on a third-party funder, let the buyer beware.

One thought on “Litigation Funding in IP: Caveat Emptor

  1. Pingback: CaseText Launches True Legal Trained AI – TECHSHOW Goodness – AI Lawyer Talking Tech

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