Securing legal finance for patent monetisation

Owning intellectual property is costly.” Precis should end “even costlier undertaking when multiple jurisdictions are involved writes litigation financier Katherine Wolanyk.

As any patent owner knows, even after this, there are still more expensive hurdles to overcome, because the simple reality is that patent owners who seek to protect or recoup meaningful value from their IP rights frequently must do so by litigating, often against large, sophisticated entities with ample resources.

Given the significant cost and risk of litigation, we are increasingly seeing companies with valuable patent assets turning to legal finance to enforce their patents with the support of a cost- and risk-sharing partner.

A sophisticated legal finance provider can partner with a patent owner in a variety of ways, from advancing capital against the future value of IP assets to funding litigation costs and ensuring that companies do not leave money on the table. For many companies, patent enforcement supported by outside capital is a far preferable alternative to abandoning their patents or selling them at low prices.

Understanding how to use and obtain legal finance can be the key to waging a successful enforcement and litigation campaign. In the guide below, we explain how the process of securing legal finance works in practice and provide practical examples that illustrate how the maths work in a financed claim.

Business objectives drive strategy

The conversation with a funding partner typically begins with a discussion of the patent owner’s business objective. Are they seeking to protect the company’s business by asserting patents against a competitor? Is there a broader business dispute or negotiation in which asserting the patents will provide leverage? Is the patent owner seeking to exclude competing products or services from the market, or is the goal primarily to generate licensing revenue by monetising their patents?

Depending on the articulated business goal, the focus then turns to whether the patent owner plans to enforce the patents directly, as the named plaintiff in litigation or by running a licensing campaign itself. The most straight-forward case for litigation finance purposes is where the company will enforce its patents directly. It can also be the optimal approach to litigation, in that it provides for the clearest trial story and can support lost profits damages, as well as strengthen the case for an injunction. In the direct case, the patent owner would retain its preferred litigation counsel and have them prepare the materials addressed below in the litigation-ready checklist, for the finance provider to assess the opportunity.

For patent owners who have not recently (or ever) enforced their patents, evaluating and selecting litigation counsel can be unfamiliar territory. If so, most finance providers are happy to begin the conversation well before the litigation-ready stage and recommend skilled counsel options. Such introductions might consider whether the firm has previously litigated in the related technology area, which can be beneficial to the future strategy. Where the patent owner has sufficient time to do so, speaking with a few counsel options can be informative and allow the client to choose the firm that is the best fit for their strategy.

Outsourced patent monetisation

For many operating companies, however, directly enforcing patents can be challenging. The company may be rightfully concerned about potential litigation counterclaim risk, particularly when the prospective defendant might also own strong IP. There may be concerns about collateral impact to business relationships with customers, suppliers or industry peers. Further, litigation can be a distraction from the core business and a company may wish to avoid the distraction, even if they have a financing partner to manage the legal fees and expenses. Plus, the company might not have the necessary in-house expertise and thus prefers to outsource the IP monetisation.

As more operating companies explore patent monetisation, the above decision tree is increasingly leading to the financed divestiture option. In that case, the discussion would turn to which patent assets from the company’s broader portfolio are to be involved. Often, the company has exited a line of business and the related patents are no longer core to the portfolio. Other situations can be portfolio redundancy from M&A or a disparate portfolio due to an R&D-based business model. If the company needs assistance in identifying assets with monetisation potential, a funding partner might be able to introduce a team with the requisite expertise to assist. This phase of the process can be time-consuming, ranging from weeks to months. In the end, not all patents are good candidates for enforcement.

Once the assets are selected, the funding partner will work with the company to assess the divestiture options, ranging from a patent holding entity within the company’s corporate structure or a separate entity. Potential transaction economics can range from a fully upfront payment to a fully back-end revenue share, with variations in between. The company will guide the funding partner as to its preference, with the general rule of thumb that more risk-sharing (meaning more back-end) tends to permit higher potential return. An initial monetisation strategy will be developed, with the involvement of the company (if desired) and the future monetisation team. Then the funding partner’s evaluation of the investment potential of the overall strategy will largely proceed as it does with a direct enforcement strategy.

Qualification factors for financing

A variety of factors contribute to the overall risk profile of patent litigation, impacting the economic considerations faced by patent owners as they pursue their claims and evaluate whether to seek legal finance. With a focus on the US context, the best candidates for IP finance meet the following criteria:

• Counsel: The patent holder has retained legal counsel with a proven track record of success in patent matters, preferably in the same field as the patented technology. It makes no difference whether counsel is from a large or boutique firm, so long as they have the expertise and capacity to handle the contemplated campaign.
• Capital requirement: Although funders have varying investment minimums, given the complexity and duration risk associated with IP litigation, most funders focus on patent matters that require at least $5 million in financing. Financing typically covers some portion of legal fees as most funders to align interests require counsel to take part of their fees on contingent risk. Financing usually pays all the litigation expenses (although some clients elect to fund costs), with financing allowances for anticipated fees and costs of inter partes reviews (IPR) and ex parte reviews (EPRs). Where it is desired and the potential damages support it, financing may include some amount of working capital for the patent owner.
• Damages: There is a 1:10 rule of thumb for legal finance – in other words, for every $1 million sought to be financed, the analysis must support a clear path to 10 times that amount in damages at trial — the minimum amount required to satisfy the economics of funding. This ratio allows room for future settlements or adverse damages developments during the litigation, and ideally supports a good outcome for the patent owner, their counsel and the funder.
• Invention: The invention is in a field with high, established royalty rates or the patented technology has an easily quantifiable value. By way of illustration, Burford Capital frequently finances matters related to semiconductors, 5G/6G technology, life sciences and medical devices, energy, alternative fuels, robotics and more.
• Risk: The opportunity presents a compelling mix of risk and reward. In other words, high-risk, high-reward matters are best suited to legal finance, as they can be the hardest for a litigant to self-fund.

A matter that cannot meet the above criteria may not be well suited for legal finance or counsel may need to provide additional information before the matter can undergo diligence.

Preparing for the diligence process

Typically, legal finance capital is non-recourse: the capital is not a loan, and the finance partner is only repaid upon a case’s successful resolution. As a result, matters for which funding is sought will be the subject of rigorous diligence by the funder’s underwriting team, ideally in-house and composed of litigators with subject matter expertise. Underwriters determine the strength of the merits and damages claims as well as whether the economics of an investment are viable.

IP matters are subject to the following review:

• Technical analysis
• Infringement analysis
• Validity analysis and prior art search
• Damages analysis

The length of the diligence process varies depending on the case stage as well as the funder’s team and resources. At Burford:

• For yet-to-be-filed suits or patents that have not yet been tested, the diligence process generally takes 60 days.
• For matters that have already made it past the Patent Trial and Appeal Board or survived dispositive motion practice, the process is typically closer to 30 days.
• For matters on appeal, the diligence process can be as few as 10 days.

Once diligence has been completed, the funder works with the claimant and counsel to develop a term sheet that reflects the basic economic terms of the transaction.

Understanding the investment process

Every funder is different, and those seeking funding in the IP space will quickly learn that there may be a significant divide in resources and approach from one funder to the next. Ideally, each financing arrangement is customised to meet the specific needs of the strategy and to ensure the patent owner and counsel have the resources they need throughout the full duration. It is a best practice to structure the capital so that all parties’ interests are aligned.

After a funding deal is in place, the legal finance provider’s role is consultative. Typically, the legal finance provider will require periodic reporting on progress. However, the legal finance provider will have no control over case strategy or settlement, with those decisions remaining with the ultimate client. An experienced funding partner can often add strategic value to a case as it unfolds, having been involved with many other such cases.

Patent litigation can be unpredictable, with delay from parallel IPR and EPR proceedings increasingly common in high-stakes cases. The patent owner will want to seek out a funding arrangement that provides for those eventualities, as well as a funder with the long-term perspective to be there throughout. A trial win often is not the end of the road, as many cases proceed to appeal and potentially remand to the trial court for further proceedings. One option for patent owners and their funding partners in such situations is judgement preservation insurance, which can provide downside protection during the appeal process.

Assessing potential financiers

Commercial legal finance has seen explosive growth in the past few years. As new players emerge, it is important for patent owners and their counsel to consider prospective funders carefully on several points:

• Expertise: Partnering with an experienced finance provider with specialised in-house IP expertise provides access to an additional resource to help answer questions, add insight and serve as a second set of eyes.
• Experience: IP litigation is complicated. It pays to work with a finance provider that knows the space and has considerable appetite for risk.
• Longevity: Because most patent matters eventually continue through to appeal, it’s important to select an established partner that will have the capital to see the matter through to its conclusion. Among other reasons, this prevents parties from being pressured into an early settlement due to a lack of resources. As a general matter, legal finance providers that are publicly traded and therefore have their own permanent capital will be more reliable as long-term capital partners. Low-priced legal finance capital should be considered with great caution. Less established finance providers might underprice risk to win new business, leaving their smaller, younger, less diversified investment portfolios more vulnerable to shocks from adverse events in individual cases. Underpriced capital is particularly problematic for IP litigation. IP cases are often expensive, lengthy and full of interim twists and turns.
• Terms: Patent owners and their counsel should consider any terms that are onerous or create risk that funding will not be available through the duration of the matter. While some finance providers offer capital on a non-recourse basis, others require owners to give up an equity stake in their patent as collateral — a term that may be untenable for many patent owners. This is more common with recourse lenders than with non-recourse financiers but is something for the patent owner to consider with wariness.

Example of a funded patent matter

To illustrate how legal finance can help in practice, we share below a real-life example of a patent litigation matter that Burford funded.

Cardiologists Dr David Paniagua and Dr David Fish founded Colibri Heart Valve in hopes of finding a safer, less invasive treatment for heart disease. The company holds patents for artificial heart valve technology (called transcatheter aortic valve implantation, or TAVI) that date back to 2002. Medtronic chose to not partner with Colibri after meeting to learn about its research and patents. But by 2019, Colibri realised Medtronic was selling billions of dollars’ worth of its TAVI products without compensation. Colibri needed capital to pursue a patent infringement suit.

Burford committed several million dollars to fund counsel’s discounted fees and costs for the patent infringement litigation. Burford’s investment allowed Colibri to enforce its patent rights and protect its technology and continue to pursue vital ongoing clinical research and development as the case progressed.

A jury found Medtronic guilty of infringing Colibri’s TAVI patents and awarded Colibri $106 million in damages. From this successful trial, Colibri has had its intellectual property rights verified and now has an asset in the judgement. While Medtronic has indicated that it intends to appeal, the success at first instance is a strong indicator of the merits of Colibri’s claim.