Understanding Patent Litigation Funding

Patents are a form of intellectual property – an asset. However, the value of that asset can be uncertain.

As the European Patent Office (EPO) explains,

Methods of evaluating patents for business purposes can be divided into quantitative and qualitative. Quantitative ways of assessing the value of a patent or patent portfolio attempt to calculate the monetary value of the patent. They fall into three basic categories:

1. Cost method: Cost theory looks at the costs necessary to develop and patent a similar invention, in-house or externally. This approach is generally used in accounting and bookkeeping.

2. Market method: Market-based methods value patents by comparing prices achieved in recent comparable transactions. These methods require an active market, a comparable exchange of IP between two independent parties, and sufficient access to transaction price information.

3. Income method: Income-based methods measure the potential income that can be derived from a patent; the calculation of the present value of the patent on the basis of anticipated future income (less interest).

Also, no matter how valuable a patent is in theory, it may come to have limited or zero value if:

• it’s invalidated due to an inter partes review (IPR) or other legal action or

• the patent owner can’t afford to enforce its rights against infringers.

According to the American Intellectual Property Law Association, the cost of an average patent case, with $1 million to $25 million at stake, is $1.6 million through the completion of discovery and $2.8 million through final disposition.

Spending this money is a gamble since the patent owner may end up losing its case against an alleged infringer.

Worse, suppose the patent at issue is invalidated in the course of such litigation. In that case, the patent owner may no longer be able to collect licensing revenues from others for the now-invalid patent.

Small patent owners, in particular, may be unable or unwilling to take such risks.

Using third-party patent litigation financing is one-way patent owners can enforce their rights against alleged infringers.

Burford Capital is said to be the first litigation financing firm in the United States. It made its first loan for a patent infringement case in 2013. It is still considered the top patent litigation funding company in the US and UK, but other firms have also entered the market.

Sixty-one percent of the patent infringement lawsuits filed since 2020 are believed to have been backed by litigation funding companies.

Rather than making traditional loans, litigation funders often make non-recourse investments, i.e., if a patent case is unsuccessful, they don’t get their money back.

These high-risk investments can be lucrative. Patent financing firms can earn from 200% to more than 400% on their initial investments.

Of course, patent owners also benefit from successful lawsuits in the form of damages or licensing fees. Damages for patent infringement determined to be willful can be trebled by a court.

Many patent litigation funders work with patent owners who do not manufacture objects (or use processes) based on the patents they hold. Sometimes, these patents have been acquired at a steep discount when their original owners go out of business or abandon a line of business.

A patent owner that doesn’t use its own patents (other than to sell or license them) is sometimes called a “non-practicing entity,” or NPE. An NPE may also disparagingly be called a “patent troll.”

In December 2024, the Government Accountability Office (GAO) published the results of a study into the impacts of third-party funding for patent infringement litigation.

The report on the study notes that

most courts do not require disclosure of such [patent litigation] funding arrangements. Thus, publicly available data on litigation funders and third-party financing arrangements remain limited. Some stakeholders have raised questions about how this limited disclosure affects transparency in the judicial process.

The GAO reviewed 12 patent litigation cases suspected of being third-party funded. Through a search of publicly available information, it identified challenges in “determining whether these cases were indeed third-party funded.”

According to the report,

Patent litigation funders GAO interviewed identified multiple factors that inform their decision on whether to invest in a particular patent lawsuit. One funder told GAO they prefer cases in which a patent owner shared information about an invention with another company that then used the invention without permission, as this scenario can be compelling to a jury. Funders also said they look to fund lawsuits with strong patents that are not likely to be invalidated during the litigation. Funders use various arrangements to fund patent litigation (see figure). According to stakeholders and GAO’s analysis of funding agreements, some funders require that they receive two to three times their investment before the patent owner receives any proceeds from a successful lawsuit.

The GAO noted that

funders and other stakeholders GAO spoke with said third-party funding allows resource-constrained patent owners, such as small companies, to file patent infringement lawsuits that they otherwise could not have filed.

Also,

University officials and inventors told GAO this funding option is important because, from their perspective, fewer law firms are taking cases under a contingency fee arrangement due to the unique costs and risks of patent litigation.

Major technology companies typically have dozens of patent infringement lawsuits filed against them each year.

According to these tech companies,

the patents associated with many of these third-party-funded cases have weak infringement claims, and … the companies must incur legal defense costs even though they say these patents are likely to be invalidated.

According to the GAO,

Many stakeholders…, including some funders, were open to some requirements that would mandate that plaintiffs disclose to parties involved in a lawsuit whether the plaintiffs have received third-party funding, given the limited public data on third-party funding.

Benefits of requiring such disclosures might include (according to stakeholders):

• Identifying conflicts of interest

• Identifying foreign involvement in litigation

• Facilitating case resolution

However, others noted that requiring such disclosures could be irrelevant, lead to potential bias, and impose an additional burden on the court system to review such disclosures.