A Thomas Miller Company
The legal press over the last 12 months has been dominated by commentary and speculation about how the forthcoming reforms to the legal costs system will affect the cost of civil litigation and access to justice in England & Wales.
For those who have not followed the debate, Sir Rupert Jackson undertook a wide-ranging review of the civil costs system, making a series of recommendations, largely aimed at controlling costs in personal injury litigation. At the heart of the report was a recommendation that after the event (ATE) insurance premiums (and conditions fee agreement (CFA) success fees) should cease to be recoverable from the losing party in the litigation.
Amongst those that stand to benefit most from the proposed reforms are the NHS and other public bodies which face large numbers of injury claims. However, the proposed reforms will potentially affect all commercially contentious areas, including IP litigation, where the use of alternative funding options has boomed in recent years. So what do the forthcoming changes to the rules on CFAs and ATE insurance mean for the way in which IP litigation will be funded in the future?
HERE AND NOW
ATE insurance provides litigants with an indemnity for legal costs (both the policyholder’s own costs and the costs of the opponent) if the litigation is unsuccessful. Put simply, the insurer speculates on the litigation outcome where if the case wins, they collect a premium and if it loses they pay a claim for costs and don’t receive a premium. Under the current rules, the ATE premium can also be recovered from the losing party under a costs award, meaning that ATE insurance can often cost the policyholder nothing, whilst increasing the financial pressure on the opponent. Indeed, it is this financial pressure on the opponent which is cited as a key justification for removing recoverability of the premium.
The insurance marker for IP litigation is currently in a state of growth and evolution. The large A-rates insurers will now comfortably write £10m plus limits of indemnity on a single case and the risk assessment process is now highly sophisticated, meaning that everything from a modest breach of licence to the most complex multi-jurisdictional patent dispute can potentially be underwritten.
Although ATE insurance manages risk, it generally does not assist with litigation cash flow. However, ATE insurance can be complemented by the buoyant third-party funding market. Under such agreements, an investor will provide cash to finance litigation in exchange for a share of any “spoils” recovered. Generally this will take the form of a direct monetary upside (e.g. a share of damages recovered) but increasingly funders are adopting more creative ways of sharing in the commercial value attached to the enforcement of IP rights.
TODAY’S HEADLINES
First and foremost, some law firms have embraced alternative funding; many have been slow to understand fully what options exist and how the available products can be used to their clients’ advantage. This is especially true in patent litigation, where historically it has been assumed that the amounts at stake and complexities would make this type of work unattractive to any third party.
However, one of the most exciting developments of the last 24 months is the increasing use of ATE insurance in relation to heavyweight patent disputes. In a recent High Court battle between Nokia and IPCom over a patent relating to a mechanism for controlling access to the ‘random access channel’ (a channel used by mobile devices when accessing the mobile telephone network), IPCom, represented by Bristows, took out an ATE insurance policy to hedge its costs exposure. The case was a major victory for IPCom and demonstrates how far the market for these types of insurance products has developed in recent years.
Secondly, many lawyer still only actively consider these options where the client is financially distressed and has no alternative funding options, whereas in reality corporate clients are every bit as interested in hedging risk. I have yet to come across an in-house legal team with an unlimited litigation budget. On the contrary, the clear message is that general counsel is under real pressure to deliver results within budget. Effective risk management with ATE insurance can be a key method of achieving this in relation to the protection and enforcement of IP rights, or the defence of infringement claims.
Thirdly, the ATE insurance market is characterised by diversity. There is no such thing as a standard ATE insurance policy. There are numerous providers offering a range of different products with radically different pricing structures, which are often individually negotiated and highly bespoke. In relation to IP litigation, the possibilities are endless. Provided that a reasonably clear notion of “success” can be defined and that some reasoned analysis can be given about the chances of achieving such “success”, ATE insurance is potentially available. The fact that the premium cab be recovered as part of costs, means that ATE insurance can be used by claimants or defendants, by large corporates or impecunious individuals and in relation to any type of dispute, including where non-monetary or declaratory remedies are sought.
HERE TODAY, GONE TOMORROW?
A key question facing the ATE insurance market is whether it can survive implementation of Jackson’s proposals.
Although it is probably inevitable that certain sectors of the market will dwindle, on the whole it is likely that ATE insurance (or indeed other forms of litigation insurance) will endure in relation to IP. Whilst some cases may only be insurable if the premium can be recovered (for example non-monetary disputes where the client would not have sufficient means to pay the premium in the event of a win). In the majority of cases, clients recognise that there may be a range of circumstances where the premium is not in fact recovered, even though it is technically recoverable.
For example, in practice the majority of IP disputes will settle and often on terms which do not include agreement to pay costs. Assuming the settlement meets the definition of “success”, the policyholder will have to pay the premium itself, either out of the global sum received or from its own pocket.
However, far from making ATE unworkable, this scenario is well-understood by well-advised litigants and it simply becomes a commercial factor in consideration of settlement terms.
In fact, in relation to corporate clients, removing recoverability may enable ATE insurance to become a more grown-up product. Those that take out insurance will do so on the understanding that if the case succeeds, there will be a premium to pay. Provided that the premium pricing is transparent and represents commercial value given the risks insured, the purchasing decisions will be no different to the purchasing decisions for any other class of insurance.
Taking things a step further, for a large corporate with an ongoing anti-counterfeiting litigation portfolio or a business pursuing a global patent enforcement strategy, ATE insurance can already be “block purchased” in order to reduce cost and increase efficiency. Looking to the future, one can see numerous opportunities for wide-ranging litigation insurance wrappers, with insurer and policyholder free to agree any structure or pricing without the need to fit within the confines of what may be allowed by the courts on assessment of costs.
In relation to third-party funding, the market is largely unaffected by Jackson’s proposed reforms. However, that is not to say that third-party funding is immune from change. Market forces are hard at work and are driving some really interesting developments. It is likely that over the medium term, the cost of funding will reduce as new and creative funding structures become available. Once ATE premiums cease to be recoverable, the need to have a clear boundary between insurance and funding fades and we are likely to see products merging to deliver as a single risk transfer package.
As funding becomes more cost-effective, we are likely to see an increasing take-up by well-capitalised clients. The early signs are that general counsel are interested in ways of keeping the costs associated with the litigation completely off balance sheet, meaning that in-house legal ceases to be a cost centre and on the contrary becomes a self-funding profit centre in relation to litigation.
It is therefore clear that whilst certain litigants in certain types of cases will lose out when the proposed reforms are implemented, on a broader level it is likely that the market and options available (especially for corporate firms) will continue to flourish. The cost of litigation will not necessarily reduce per se, however, effective risk management and a proactive approach to alternative funding can produce significant long-term savings to the litigation budget.
