Patent litigation funding and insurance
For parties involved in patent litigation, the potential costs and financial risks involved can often be a significant factor in dictating strategy. In some cases, concerns about costs risks or a lack of funding may even be a complete barrier to commencing litigation against known infringers.
Guest contributor James Blick, Director of TheJudge Limited (litigation funding and insurance brokers), discusses the emergence and development of a range of alternative litigation funding options, which can be used to manage the cost of litigation, reduce financial exposure to costs and potentially even take the cost of litigation off balance sheets altogether.
IP litigation insurance
It has long been possible to buy insurance to cover the risk of possible future litigation in relation to IP. However, less well-known is the availability of insurance which can be taken out after infringement has been identified, or even after legal proceedings have commenced.
This type of insurance, sometimes known as 'after-the-event' or 'ATE' insurance, covers the insured's legal costs in the event that the litigation is unsuccessful. In 'loser pays costs' jurisdictions, litigation insurance is frequently used to cover the risk of being ordered to pay the opponent's legal costs, however the cover can also potentially include own side's costs.
The policies are highly bespoke and the insurers offer a range of potential ways in which the premium can potentially be paid, depending upon the circumstances.
Where the insured party is not seeking a monetary recovery, for example in a revocation action or where the insured party is defending an infringement claim, the insurance premium will typically be paid upfront when the insurance is taken out. If the litigation is decided against the insured party, the insurance policy is called upon to cover the insured party's legal costs.
In cases where the insured party is asserting a patent with the aim of obtaining damages for past infringement or a license fee, the insurer may be willing to offer a 'contingent upon success' premium. This means that instead of charging an upfront premium, the insurer only charges a premium at the end of the case and only in the event of success, in which case the premium is paid out of the recovered damages or license fee obtained. If the insured party does not make a recovery, for example because the patent is declared invalid or the opponent is found not to infringe, the insurer pays a claim for the legal costs insured and does not receive a premium.
In all cases, the insurer is taking on the risk of the litigation being unsuccessful. As such, before providing a quote, the insurer will conduct due diligence to assure itself that there is a good likelihood of success.
Third party funding
Whilst IP litigation insurance can cover legal costs if the litigation is unsuccessful, it does not pay the costs as the case goes along. There is now an established and growing market for third party litigation funding, both in the UK and internationally. Third party funding is an arrangement with a financier (typically a professional litigation funding company) for the provision of funding for the legal costs involved in asserting one or more patents. In exchange for providing funding, the financier takes a share of any damages, license fee or future royalties obtained.
Once again, these agreements are highly bespoke. They may for example be restricted to a single litigation against a single infringer, or may be structured to support multi-jurisdictional litigation and licensing program against multiple targets.
In either case, the funding agreement typically does not involve the sale or transfer of the IP rights to the funder, nor does the funder look to take over control of the enforcement strategy. Instead, the funder will look to invest in the patentee and back the patentee's existing legal team to win the case.
Funding for revocation actions is more problematic, because there is no immediate monetary upside attached to success. However, a funder may be willing consider opportunities where the returns will be provided by a share of profits having cleared the way for sale of the infringing products.
Like insurers, funders are looking for cases with a good chance of success. Funders will also carefully scrutinise the ratio of the likely investment needed to the likely level of return.
Although many funders focus on very high value opportunities where the returns are likely to be in the millions or tens of millions, there are also a number of funders targeting more modest-sized cases, including cases being litigated in the Intellectual Property Enterprise Court (IPEC).
The market for alternative litigation financing has developed significantly in recent years and now caters for a wide range of situations.
Third party funding and insurance may enable a small business or individual to take on a major corporate infringer by levelling the playing fields.
These options are also highly relevant to corporates as a risk management tool to maximise litigation budgets, hedge risk or enable the cost of pursuing infringers to be taken off balance sheets.
James Blick is director of TheJudge Limited, litigation funding and insurance brokers.