Patent litigation in the United States is expensive. This has led some cybersecurity companies over the years to shy away from enforcing their patents when they are being infringed by competitors – especially large competitors who may potentially owe large amounts in damages for their infringement, but who are likely to fight a litigation vigorously. Even worse, some cybersecurity companies have foregone obtaining patents in the first place, fearing that patents are not worth the investment if they cannot be enforced. One emerging trend in the patent litigation industry is increasingly proving these ideas false: litigation funding.
In essence, litigation funding represents a three-way sharing of risk. The funder pays for attorneys’ fees and litigation costs, in exchange for a portion of any recovery obtained in the litigation. The law firm agrees to a discount on its fees in exchange for a similar portion of the recovery. The patent owner may or may not contribute capital, but agrees to share the recovery with the funder and the law firm. If all three sides are able to meet in the middle, the parties are off to the races and may begin enforcing the patent.
What makes patents, and their owners, especially suited for litigation funding? When is litigation funding not a good fit? Several key factors provide the answers.
Large Infringement Targets and High Potential Damages
While a large, deep-pocketed infringer is a concern for a patent owner without litigation funding, it is a plus when litigation funding is involved. Funders like to see a strong multiple of return on their investment. The larger the defendant and the revenue associated with their infringement, the better. Still better (in some situations): multiple large infringers.
Litigation funding makes the most sense when the patent owner has purely monetary incentives. If they are primarily concerned with obtaining the maximum dollar amount for their patent, as quickly as reasonably possible, then their incentives are aligned with those of the funder. By contrast, if the patent owner has primarily business-oriented goals (e.g., increasing market share, obtaining new business, etc.), then their goals may diverge from those of the funder, and litigation funding may not make sense.
Not all patents are strong enough for litigation. Patent quality is a function of many factors: how well the patent specification is written, how broad the claims are while still avoiding prior art, how easily infringement can be observed and proven, whether ambiguous or indefinite terms appear in the claims, whether the prosecution history of the patent is clean or riddled with careless remarks, and many more. Before a patent is considered for litigation, it will undergo a meticulous pre-suit diligence. Many patents are weeded out here and do not pass the test for assertion in litigation.
Many Arrows in the Quiver
While one strong patent is good, a portfolio of several patents is great. The reason is simple: increasing the odds of victory for the patent owner in litigation. By having a portfolio of several patents – each with differing claim scope – a patent owner can attack an infringer from multiple angles. This drives up the potential damages base. It also increases the number of patents (and claims) that the accused infringer needs to defend against, which can be resource-intensive for the accused infringer and reduces the likelihood of the accused infringer completely avoiding liability.
A Good Story to Tell
Patents that derive from impressive inventors or interesting companies can be a big plus. At the end of a patent case – if the case makes it far without settling or being dismissed – a jury will decide whether or not there is infringement, whether the patent is valid or invalid, and (assuming infringement and validity) the quantum of damages. Being able to tell the jury a tale of innovation, hard work, risk-taking, and personal integrity can be compelling on a “human” level. The absence of these features is not a dead-end, but if they are present they can significantly enhance the value of a patent in a jury trial.
The availability of litigation funding is changing the way cybersecurity companies think about their investments in patents. Many companies are investing in patents who previously thought they were an unwise use of resources. Companies are also paying closer attention to patent quality, knowing that patents are only worth having if they are carefully prepared by sophisticated attorneys who specialize in both patent litigation and prosecution. These changes in thinking will only continue, given the relative newness of litigation funding in the world of patents.