The Unified Patent Court will revolutionise patent litigation funding
The new pan-European court and unitary patent resolve the key problems that have prevented many European patent owners from benefiting from third-party funding, writes IAM Deputy Editor Adam Houldsworth
The most radical shake-up of the European IP system in living memory, the creation of the Unified Patent Court and unitary patent system looks set to revolutionise the global patent litigation funding ecosystem.
This is the message of several industry professionals who have spoken to IAM about the UPC’s impact on third-party patent litigation funders and what the new system means for patentees seeking investment to support their enforcement efforts in Europe.
Increasing the market for litigation funding and expanding the strategic options open to patentees, the new system could also shift the centre of gravity away from the dominant US market, industry experts believe, with one funder speculating that the court could help Europe “usurp” the American legal system’s top position in global patent disputes.
At least one UPC case is already being funded by a third party, and investors are being presented with dozens of opportunities to finance litigation at the new court, IAM can reveal. Moreover, industry experts believe that the number of funded UPC cases will grow steeply over time.
But the extent of that growth will be determined by the nature of UPC decisions yet to be handed down, industry insiders believe. Funders and law firms will also need to adapt to maximise the availability of funding for European patent enforcement campaigns, they say.
Funding in a fragmented Europe
Prior to the establishment of the UPC and unitary patent, litigants in Europe attracted relatively little third-party funding while US legal actions absorbed the lion’s share of investment.
“It has been the case for many years now that our patent investments have generally focused on US litigation, because of the size of the market and the scale of the potential damages,” explains Katharine Wolanyk, managing director of IP finance at US-based litigation finance firm Burford Capital. “Sometimes this has gone alongside a German lawsuit as a complement to that strategy. But Europe has not been the main focus.”
This is echoed by Emily O’Neill, UK general counsel and IP specialist at Deminor, a global legal finance company based in Europe. “The European market is not as busy as the US,” she notes. “The bigger actions in the UK tend to be between bigger entities who are less likely to require funding, and the high costs of UK litigation make it harder to find cases that fit into litigation funding models.”
Germany has been the main European jurisdiction where there have been funded cases, O’Neill continues, saying: “In France, there haven’t been as much funded patent litigation because the costs of litigating are lower. In Spain and Italy, the time [it takes] to get a decision can be a problem when we are modelling our return.”
Most of the cases of funded patent litigation O’Neill has seen in Germany have had a US element, she adds.
“There has certainly been a market for funding in Europe,” states James Blick, director and co-founder of litigation finance group Erso Capital and director of litigation insurance company TheJudge. “Germany in particular has been a popular destination for asserting patents, because of the size of its market and the favourability of the German courts,” he comments. But “funding in Europe has not been as high as it should have been [given the size of the market], largely because of the state-by-state nature of the pre-UPC system”.
In contrast, Lionel Martin of August-Debouzy comments from the perspective of a French lawyer and UPC representative, that: “The litigation funding market in Europe prior to the UPC was practically non-existent”.
“In France, where I am a lawyer,” he continues, “damages have been relatively high compared to Germany and the UK, but nevertheless they were not sufficient to justify financial investment in patent litigation.” Martin has never been asked about potential litigation funding for the French market, he reveals.
This reflects the fragmented nature of the European patent litigation landscape, Lionel argues – a point reinforced by Blick.
“One of the challenges in Europe has always been the need to litigate state-by-state,” comments Blick. “As a funder, one of our most important considerations is the economics of the case. If we have to litigate in lots of different states, each addressing relatively small markets, that can be a problem.”
UPC a game-changer
However, the new system has transformed the situation in Europe. Covering 17 EU member states – including Germany, France and Italy – the UPC and unitary patent appear to resolve the key problems that have so far prevented significant numbers of European patent owners from benefitting from third-party funding.
“The fundamental question for us is ‘Does the math work?’,” Wolanyk emphasises. “The reason that most funding has focused on the US is that damages have been large enough to offset the investment and reward the risk taken.”
The size of the market the UPC covers is highly significant and can rival the US, she comments.
Martin echoes the sentiment about the scale of the UPC. “It covers an area of 350 million people… In general, it is difficult to have sufficient scale to justify funding in patent litigation,” he explains. “But with the UPC, things have changed because the market is much bigger.”
More attractive than the US?
Not only has the UPC increased the potential damages available for patentees in Europe and streamlined the process for obtaining these rewards, but it potentially offers important strategic advantages over US litigation for the funders and patentees.
The possibility of getting an injunction is a major advantage of UPC litigation from a funding point of view, comments Blick. In the US, by contrast, injunctions are possible but are quite rare in practice, he states. “From a strategic standpoint, [Europe-wide injunctions] can be really helpful. It could be especially useful where damages for past infringement are not very large, but the value of the future market is expected to be significant.”
Whereas funded US litigation revolves around damages, or the threat of damages, UPC litigation could provide a new strategic tool for patentees and their potential funders, he observes.
Martin agrees. “Injunctions are expected to be automatic in many European jurisdictions, except perhaps with SEPs, and this will be reflected in the UPC’s approach,” he believes. “I really expect UPC judges to issue injunctions. The fact that injunctions are handed out frequently in France and Germany reinforces this.”
The question about injunctions will be the size of the deposit necessary to enforce them, Martin adds.
The speed at which the UPC is expected to hand down its decisions will also be a significant draw, industry experts agree. Infringement cases are expected to be heard on the merits within 12 months of filing, and preliminary injunction requests have been heard three to five months after filing, with decisions handed down shortly thereafter.
“The time limits at the UPC are expected to be obeyed,” states Martin. “[The expected 12-month wait] is a much shorter timeframe than in US litigation,” he adds. “And it plays in favour of the claimant, who can get a result more quickly or apply pressure for a settlement.” It also gives the plaintiff and a potential funder a greater degree of certainty, he comments.
This is also an important consideration for Wolanyk. “Time-to-resolution has a big impact on investors’ decisions,” she explains, “because we have to factor in not only the risk of losing, but also how long our capital will be tied up in this litigation…The speed of the UPC could be a big advantage, when compared to US litigation.”
UPC litigation promises to be cheaper than US lawsuits too. “While the early indications are that it will cost more to litigate a UPC case than simply to litigate in Germany, it will still be significantly more cost-effective to litigate in the UPC compared to the US,” Blick emphasises.
The typical cost of US patent litigation, factoring in inter partes reviews and appeals, runs into the millions of dollars and sometimes exceeds $10 million, Blick notes. If the UPC addresses a similar-sized market for a smaller investment, “it may well become the case that the UPC in some instances may be more attractive [to funders] than the US”, he argues.
One downside with UPC fees, Martin states, is that if you lose there is a significant risk of being forced to reimburse the other party’s fees, unlike in the US. “There is also uncertainty as to the exact cost of UPC litigation,” he comments. “However, we are providing estimates to clients, and it seems to be lower than US litigation. I don’t see a case before the UPC where costs will exceed $1 million.”
In fact, according to Wolanyk: “The UPC could quickly usurp the US in terms of attractiveness for patent litigation and the funders of patent litigation.” US litigation has become “unpredictable” since the America Invents Act, she explains. “There are so many ways for a determined defendant to challenge patents and create increased costs. So far, the UPC looks like it could be a much better alternative in that respect.”
UPC cases already being funded
The UPC and unitary patent have already had a significant impact on the patent litigation ecosystem. Wolanyk reveals that Burford is already funding at least one UPC lawsuit: “We are beyond the conversation stage at this point,” she comments. “I see that continuing. UPC cases are becoming part of the natural flow of opportunities that are coming to us. As we speak to patent owners, we ask them if they have thought about the UPC. They are very keen on it.”
O’Neill cannot say whether Deminor has already invested in a UPC legal action. However, she continues, “I can tell you that we have seen double figures of UPC cases to review.”
Most of the UPC opportunities O’Neill is reviewing also have a US component. “What we are also seeing is US litigators looking at the UPC as an additional strategic option for their existing cases,” she comments. “A UPC action, especially if a decision is handed down within one year, can be used as leverage in US litigation or a US IPR.”
Blick has a similar view. “What will initially be most interesting to us is the UPC as part of a wider strategy, where there is a parallel US case,” he explains. “That is a good way of getting some exposure to the UPC, without being too heavily concentrated in terms of the risk.” But as time goes on, and more case law develops, Blick believes he is likely to be investing in pure UPC cases without any companion case.
“We haven’t invested in a UPC case yet, but we have one matter that we are currently in underwriting on, and we have looked at several opportunities,” Blick reveals. “We have a couple more cases in the early stages of consideration.”
In Wolanyk’s experience, however, the UPC is already playing an important role in the proposed strategies of patentees seeking funding. “We are hearing more and more opportunities to provide finance for UPC-led strategies,” Wolanyk comments. “In fact, we have had patent owners approach us to discuss potential UPC-oriented strategies for at least a couple of years now, since before the court’s launch.”
UPC funding will grow
The availability and use of third-party funding for UPC litigation is likely to grow significantly over time, experts agree. The extent of UPC funding will be determined by decisions handed down by the new and largely untested court.
The UPC will be “of huge significance” going forward, Blick comments. “But it’s currently early days, so there is an element of waiting and seeing what happens in early cases with certain procedural and legal questions.”
There are questions of how the UPC will approach costs or injunction bonds, Blick emphasises. “All of those issues can be very important to us as a funder in terms of underwriting a potential investment,” he explains. “We are not concerned there will be erratic decision-making by the court. The system is well set-up and there are very good judges. But precedent will help us to have a higher degree of certainty.”
Because there are so many cases currently passing through the system, many of the uncertainties should be cleared up quickly, Blick believes.
Martin has a similar view. “I think some litigation funders may want more predictability before getting involved in UPC actions. This is a new system, with little certainty,” he states. “We have no outcomes on the merits yet. Funders need to see these kinds of decisions before they can judge whether this will be a favourable venue for patent owners or not.”
Some of the first decisions on the merits will emerge this summer, Martin emphasises, “and I think we will see the litigation funding market develop a greater interest in the UPC after that”.
Burford is also studying developments at the new court closely. “We are watching what happens at the new court; what types of decisions are handed down,” says Wolanyk. “We are seeing who is filing cases; how the court will be used. We are actively having conversations with companies who are using the UPC,” she comments.
The critical factor is the value of damages awards there, she says.
Wolanyk adds: “The other part of it is the value of the settlements obtained by UPC litigation. These are not usually public, but as we make more investments, this will become clearer.” Burford is also interested to see how a growing caseload affects the timeframe of UPC lawsuits.
However, she stresses “This doesn’t mean that we are waiting to see how it all plays out before getting involved. We are open to being early and helping patent owners to test the UPC.”
O’Neill has a similarly positive outlook. “Hard data is always better than prediction,” she says, expressing caution. “Investment analysts love to have actual numbers.” We are as confident in the court as we can be without full decisions having been handed down. The statements that have come out so far make it seem like a sensible place to litigate.”
But O’Neill believes third-party funding will not fully take off until more unitary patents are granted. “[Then] there will be more patents that can be enforced across all the UPC states and across the whole market,” she emphasises. Most of the existing opted-in European bundle patents are not in force in all 17 countries, O’Neill argues, “so UPC litigation may not produce the amount of damages needed to justify litigation funding”.
The current level of third-party funding at the new court may also be suppressed by the eagerness of law firms to win UPC business, O’Neill adds. “Firms are being quite competitive on budgets at the UPC,” she observes. “Law firms are keen to get UPC experience under their belts and are coming to [fee] arrangements with their clients that don’t involve funding.”
Need for education
The growth rate in funding will also be influenced by the attitude of European law firms and their level of knowledge. It will depend on the efforts of funders to educate European lawyers and potential UPC complainants.
“Outside Europe, there is a lot of education still to be done,” remarks Blick. “Many US companies have European patents in their portfolios but have never enforced those patents and have taken a very US-centric approach.” Many of these companies will be aware of the UPC but still have questions about how it works and what its benefits are, he comments.
Most law firms around the world have some awareness of litigation finance in principle, he continues. “But US law firms tend to have more experience with using it,” Blick comments, adding that some European law firms lack this experience and are not in the habit of thinking about when finance could be useful to their clients. “I think European law firms could be more proactive in thinking about whether a client might benefit from alternative funding, even if the client has not asked for it or is not a small company.”
These thoughts are shared by O’Neill, who thinks that litigation funding is “still a relatively new concept” in Europe. “The conversations I have with law firms in continental Europe are very different from the conversations I have with US law firms, who are much more familiar with funding models,” she states. “So there is an evangelisation process.”
Funders adapting their approach
Litigation funders must also forge new connections with European law firms to ensure that they can use the best litigators when fighting cases at the UPC.
Though Burford has a strong presence in London and on the ground in Germany and Switzerland, its patent team consists only of US-based lawyers, Wolanyk points out. “We have historically been very US-centric. We are now very keen to get to know the firms that have been practicing in Germany for a very long time.” Burford is working hard to build those new connections. “We like to have a deep bench of prospective counsel.”
This is crucial, she continues, because having a good litigation team is one of the most important conditions for investing, alongside the strength of patents and the value of the market protected by the IP rights. “The litigators have to be top-notch,” Wolanyk states. “We have worked with a very high percentage of the big US law firms. But now we are also getting to know the German lawyers very well. They seem to be taking the lead at the UPC. That’s such an important piece of it.”
Working with German firms means that Burford and other funders will have to adapt their approach somewhat. This is because German lawyers are largely prevented from working on a contingency fee basis by the German Lawyers Act which governs their professional conduct. “We are figuring out how to make that work in the context of the overall financing,” Wolanyk reveals. “We usually like US firms to take some fee risk alongside us, because it aligns interests among the client, firm and us.” But if the German law doesn’t permit that approach, “we have to work differently”, she adds.
The multi-national, multi-venue nature of the UPC will also influence the strategic calculations of litigation funders, O’Neill explains. “We assess cases before the UPC in the same way we assess other cases,” she comments. “However, we will look at how a firm is going to run a case at the UPC. Will they have different offices from the same firm getting involved, for example? Do they have the bandwidth to match the multi-national panel that might exist at the UPC? How are they structuring their UPC cases?”
Another important difference in terms of how the UPC will work, according to Blick, is greater need for litigation insurance. “The insurance market goes hand in glove with the litigation funding market, especially in Europe, because the cases will have adverse costs risk, which is often best dealt with through insurance,” he comments.
“The availability of insurance could become an important piece of the picture in terms of the overall economics of the deal,” he explains. “If there is no insurance, and the funder is just providing indemnities, that will drive up the cost of funding and make it less efficient.”
Some US funders will need to forge stronger relationships with insurance providers. “European funders will have this experience already. But US funders that have not funded in Europe may not have experience of using litigation insurance,” he states. “They will have a learning curve if they are starting to fund at the UPC.”
So, while the UPC opens myriad new funding opportunities for finance companies and law firms, both will need to adapt to take full advantage of those opportunities.
