Litigation Finance Gains Traction in Patent Infringement Cases

VLSI Technology LLC and Intel Corp. were called this week to appear at an upcoming federal district court hearing to probe whether VLSI was sufficiently forthcoming with its financial disclosures—the latest judicial response to the growing prevalence of third-party funding in patent disputes.

Patent infringement lawsuits represent one of the fastest-growing sectors for the burgeoning litigation finance industry, as high costs and potentially much higher pay-outs put patent owners and lawsuit funders into alignment.

The ballooning industry hasn’t gone unnoticed by courts: Parties like VLSI that accept litigation funding increasingly find themselves the targets of court orders and hearings seeking to clarify the arrangements. But for many patent owners, the added red tape is a small trade-off for the financial backing that makes potentially lucrative infringement cases possible.

“Patent cases are very expensive. They’re also fairly risky when compared with other types of commercial litigation,” said Charles Agee, managing partner of litigation finance advisory firm Westfleet Advisors.

The unpredictable nature of patent litigation, coupled with the dynamic of small inventors suing large corporations to enforce their patents, has given rise to business relationships in which patent holders team up with legal counsel as well as an investment firm to back the case.

While patent owners are never guaranteed a win in federal court, they can sometimes secure millions or billions of dollars in jury verdict payouts, which has proved attractive to funders looking for underwriting opportunities. Patent owners can also find themselves the targets of parallel invalidity probes—or inter partes reviews—at the Patent Trial and Appeal Board that become expensive to defend.

“There are many ways for a plaintiff to lose a patent case, whether it’s IPR, whether it’s at trial level or even on appeal,” Agee said. “Defendants have many bites at the apple.”

Big Wins, Growing Business

The calculus has paid off for funders like Fortress Investment Group, which backed VLSI’s infringement suit against Intel that resulted in a blockbuster $2.18 billion verdict in 2021.

The patents underlying that suit are at the center of a validity review saga at the US Patent and Trademark Office, in which director Kathi Vidal most recently decided to reexamine the PTAB’s institution of review for one of the patents, even after Vidal cut the company that initiated the challenge from the proceeding due to misconduct.

The approach also panned out this summer for inventor Michael Kaufman, who secured a $10 million award from Microsoft Corp. for infringing his computer database interface patent. Kaufman’s lawyers teamed up with Woodsford, a UK-based legal finance provider that was comfortable taking on a major technology company in the face of new validity challenges for software patents, and their bet ultimately paid off.

The litigation finance industry at large manages more than $12.4 billion in assets, according to Westfleet’s 2021 industry report, and patent disputes represented nearly one-third of roughly $2.8 billion in litigation capital committed last year. A majority of those deals involved investments in a portfolio of cases or patents.

Patent litigation funding is on the rise, too. Westfleet last year noted a 61% increase in patent cases receiving litigation funding since 2020.

Burford Capital Ltd. managing director Katharine Wolanyk said patent owners are starting the conversation about securing financing earlier in the litigation process. Burford gets more IP-related inquiries than any other area they finance, she said, noting the minimum investment the firm will underwrite is $5 million.

Patent owners are “earlier in the thinking, trying to understand what kind of case would be financeable,” she said. “That is an interesting trend and one that we welcome because it gives us an opportunity to have a broader conversation with the company and get a sense of their business goals.”

Blowback Brewing?

Beyond the PTAB challenges, Intel has challenged VLSI’s big verdict by targeting the funding arrangement backing it up, arguing unsuccessfully in Texas federal court that VLSI used an “unconscionable scheme with its corporate allies” to “pursue patent litigation without significant risk to itself or its partners.”

Delaware District Judge Colm F. Conolly in a separate dispute appears sympathetic to that concern. In calling VLSI and Intel before him for the hearing—scheduled for Dec. 14—Connolly asked the parties, “Without knowing the identity of the true owners of VLSI, how can the Court assure itself that it does not have a conflict of interest that precludes it from presiding over the case?”

Connolly also asks whether he should “dismiss the case because of VLSI’s failure to provide” information responsive to his standing order that requires disclosures “proceeding up the chain of ownership until the name of every individual and corporation with a direct or indirect interest in the party has been identified.”

He’s also called a handful of other patent-infringement plaintiffs that appear to be backed by unusual funding arrangements with personal injury attorney Jimmy Chong and law firm Ramey LLP to testify in a series of evidentiary hearings in November and December.

Connolly and VLSI aren’t the only ones questioning the virtue of patent litigation backed by third parties. Critics suggest that third-party capital changes the incentives in a lawsuit so that the plaintiff and its backer are more interested in extracting large sums of money at trial than in simply righting a wrong by agreeing to a licensing deal or settlement.

Jeremy Bock, an IP law professor at Tulane University, said patent litigation funding can be useful in some circumstances, but it can also have the effect of “aggravating the patent trolling problem,” in which non-practicing entities “shake out settlements or go toe-to-toe and try to get the big judgments, the ones that are hundreds of millions of dollars,” regardless of the merits of the case.

The Government Accountability Office is currently studying the litigation finance industry at the request of lawmakers including Sen. Chuck Grassley (R-Iowa), who want to know how many funding requests firms receive, how many cases they’ve have backed, and what types of returns they generated. Past efforts to introduce transparency into the space, however, have flopped.

Some federal courts have also begun requiring parties to disclose litigation funding arrangements, including the Northern District of California and the District of New Jersey as well as Connolly in Delaware.

Those disclosures can have repercussions for plaintiffs backed by financiers, said Honigman LLP IP partner Dennis Abdelnour.

“It changes the narrative around a potential David versus Goliath lawsuit,” he said. “The defendants can try to use that in a way that suggests this is all about the underlying money, that it’s driven by greed.”