Key Considerations in Patent Funding and Insurance

The most consistently satisfied lawyers I know, whether at a firm or in house, are patent lawyers. In Big Law, their world seems to involve a constant stream of high-impact litigations and transactions between corporate titans.  On the boutique side, they pursue significant, often sprawling campaigns on contingency.  In house, they get to do both, liaising with senior management, while directing the efforts of outside counsel.  In other words, regardless of where they sit within the legal ecosystem, patent lawyers work at the unique intersection of law and commerce—where they help companies change corporate legal departments from cost to profit centers.

As I have moved from private practice to litigation finance, it has become increasingly clear that this service—helping companies make money from (rather than spend money on) legal risk—is exactly what litigation funders and insurers do. This article provides a high-level overview of the key considerations that we have learned to look for in deciding whether to fund or insure IP deals. 

When dealing with intellectual property litigation, which requires specialized knowledge that most lawyers do not have, quality counsel is critical.  To significantly increase your chances of securing funding or insurance, hire a strong team of proven IP counsel with substantive prior experience actually diligencing and litigating similar IP disputes.  We regularly work with topflight IP counsel and are always happy to provide a recommendation. 

Whether a funder or insurer wants to get involved with a patent portfolio or litigation often turns on questions relating to the history of the invention and its inventor(s). Accordingly, we generally look for operating companies with strong businesses that have innovated in areas of significant import to our economy. The inventor’s continuing presence in the business is usually a significant plus, particularly given the importance of telling a persuasive and compelling story to the trier of fact. Ideally, we also like to see successful licensing efforts in the past, which provides additional indicia of the patents’ strength.

To prevail in a patent case, you need to establish both validity and infringement. For validity, there are a number of indicia that we look to when assessing strength. They include, among others, the prosecution history and key pieces of prior art, the objections (if any) from the examiner, and how prosecution counsel overcame those objections. Remember, it is important to be upfront about any 101/ Alice concerns, and you will need to be able to explain why the invention was novel, non-obvious, and not anticipated by the prior art. Showing up to a funding discussion with a prior art search is always helpful.  Other issues we look for and we will need your help understanding are whether there are questions of indirect or induced infringement, and whether the defendant might raise defenses like the on-sale bar (which prevents patenting of products that have been sold for over a year prior to the application) or inequitable conduct (which asks whether the patent was fraudulently obtained). 

Once you have established that you have a protected patent interest, the question invariably becomes whether that valid patent interest has been infringed, thereby entitling you to a recovery.  Generally, that question requires an infringement analysis that outlines the specific ways that specific patents are being or have been infringed. To show this, you need to present litigation-ready claim charts that demonstrate infringement. If infringement needs to be shown through a tear-down analysis, you should try to do that tear-down, unless it is prohibitively expensive.

One of the unique aspects of the patent space is the possibility of inter partes review (“IPR”), which boils down to a challenge to the patentability of a patent in front of the United States Patent and Trademark Office (“USPTO”). Interestingly, IPR proceedings can and do occur in parallel with federal litigation, creating issues relating to whether and when to stay the litigation in favor of the IPR process.  Moreover, the simple existence and use of the IPR process naturally has a number of collateral effects, most notably relating to cost (because you need more and different lawyers litigating in multiple fora) and duration (because you potentially have two related proceedings). 

At the end of the day, many funding and insurance decisions come down to the ultimate strength of the collateral— i.e., how much do we reasonably expect to collect from the licensing or litigating of the patent or portfolio. The patent space is unique in that the value of any given portfolio is a function not only of the damages that you can secure in court, but also of the revenue you can secure in licensing. The cumulative effect of multiple revenue streams on the value of a portfolio can be quite large. An oft-overlooked part of this process is determining whether there are any potential counterclaims that could decrease the value of any recovery.

All told, the patent space is a unique and dynamic environment that implicates analyses and governmental processes not seen in most commercial litigation. Should you find yourself in need of patent funding or insurance to protect an IP judgment or counsel’s WIP for patent litigation, the best thing you can do is find an experienced team that knows what they are doing in this complicated—but fascinating—space. And we are always happy to help.  

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