Money Behind Patent Suits Gets New Layer With Insurance Products

The insurance industry wants a piece of patent fights, already a popular target for outside investors.

New policies offer to set the floor value for patents and pay out if they don’t reach that mark. Insurers guarantee a portion of what patent holders expect to get through infringement lawsuits and other efforts.

Patent monetization insurance promises to bring down the cost of outside funding that is often behind those suits by reducing the risk. Some funders may not be able to invest at the lower rates, creating a new layer of competition in the space.

“Nothing against funders, but their capital is really expensive,” said Gaston Kroub, a partner at patent consultancy Markman Advisors. “There’s a wider network of institutional investors that will dabble in litigation funding if there’s insurance involved because it becomes less binary.”

Litigation funders pour money into lawsuits in exchange for a piece of any judgments or settlements. They invested about $513 million in patent cases last year, according to a report by Westfleet Advisors.

The new insurance products are expected to make it easier for patent holders to get funding, not to eliminate the deals. Still, they are likely to irk some funders whose own investors want the high profits that often come with financing lawsuits.

“You have funders that can’t, and especially in litigation finance, they can’t do an insured deal because the insured cost of capital is much lower than what they need to return to their investors,” said Michael Gulliford, managing partner and co-founder of Soryn IP Capital Management. “That’s the dynamic that’s at play.”

How it Works

Litigation funders flock to patent cases because of the potential for big verdicts and the relatively low cost of cases that lose early, according to Kroub. Defendants in the cases are usually large corporations, which have the money to pay judgments and settlements, he said.

Critics of litigation finance, including business groups and a growing number of lawmakers, have cited outside funding in certain patent cases in their calls for regulation. A Delaware federal judge said these cases are “ripe for abuse” by lenders because of the potential for huge damages awards and the rise of patent trolls seeking payouts.

“In third party litigation financing, funders provide loans in a case or a portfolio of cases in exchange for an equity stake in the financial outcome,” said Rhonda Hurtwitz, senior director, liability and counsel, at insurance trade group APCIA. “Legal system abuse and conflict of interest tend to then arise because the focus is on ROI for the funders based on the amount of the settlement, verdict, or judgment.”

Patent monetization insurance is a relatively new product offering, said Megan Easley, senior vice president, contingent risk insurance at CAC Specialty, a specialty insurance brokerage firm. CAC placed its first patent monetization structure last year.

“This serves as a really good alternative for folks with valuable intellectual property who are looking for lower cost financing and using insurance to bring down the cost of borrowing is just a very attractive solution,” said Easley.

Brokers like Easley review and curate patent portfolios with patent holders to make them attractive to insurance providers. The patent holders can be large operating companies, non-practicing entities, or even funders and other groups that are part of intellectual property campaigns, she said. Easley declined to specify which insurers are offering the policies.

Insurance policies cover the monetization of the patents, including by filing lawsuits accusing others of infringement. They often require insurers to pay out for covered patents that don’t reach specific monetization targets within certain time ranges.

A patent holder who obtains monetization insurance can then seek outside investment—typically from litigation funders or hedge funds—at lower rates because of the reduced risk.

Liberty Lesson

Brokers are pushing the new products as insurers have cooled on another type of policy targeting court fights, judgment preservation insurance. Those policies, once the bread and butter of the contingent risk insurance industry, underwrite large court judgments that have already been awarded to plaintiffs in cases that may still be tied up on appeal.

Liberty Mutual’s massive loss on a policy covering part of a $1.6 billion judgment against IBM in May sent shock waves through the industry. Liberty and others had insured between $500 million and $750 million of the award, which was overturned by an appeals court. The company backed out of at least two future litigation insurance deals after the case went bust.

Insurers are now focusing on portfolios, rather than individual cases, to reduce their risk. That’s a trend already seen among litigation funders. Portfolio deals comprised two-thirds of funders’ commitments in 2023, according to Westfleet.

“We’ve been seeing and frankly pushing for the last couple years portfolios to become a bigger and bigger part of the contingent risk market,” said Easley. “Portfolios offer you many ways to win and they also enable settlement in a way that other products don’t necessarily.”

Kroub, the New York IP lawyer, explored insurance policies in 2022 to cover a portfolio of patent cases that already had outside funding.

His firm looked into leveraging a policy to borrow more money to fund additional cases, he said. They didn’t end up pulling the trigger on secondary funding, but Kroub says the experience changed how he factors insurance into his strategy for IP cases.

“There’s a lot of potential benefits to this type of approach to the point where I would think that if you are in a position where you could explore insurance and you aren’t, you might be doing a disservice to your clients,” Kroub said.