A Thomas Miller Company
It is a common misconception that once patent litigation has commenced or is being contemplated, it is too late to manage and offset the associated legal costs risks. It is certainly true that it would be too late to consider traditional insurance options – insurance taken out against the risk of patent litigation arising would exclude any pre-existing dispute or issue which the policyholder is aware of.
However, in reality, there are a range of insurance and funding solutions which can help to manage the financial risk and inherent uncertainties for a party facing the prospect of patent litigation, or a party aware of one or more infringers and wishing to sue.
1. DEFENSE OPTIONS
For those operating in the bio tech, high tech and in particular mobile communications sectors, the risk of being sued for infringement of a patent is an ever present threat. Many deal with this threat in different ways, either through insurance or other risk management arrangements. But what if it is too late? What if you are already being sued for infringement? What if you believe that your defense is strong, either because of some prior art potentially invalidating the patent or because your technology doesn’t infringe, but the cost of being locked into litigation for three years is potentially damaging to the business or at the very least an unwanted headache?
To be realistic, there is probably no perfect solution. Litigtaion is an inherently risky and uncertain exercise and no one can offer to remove those risks altogether.
A. Legal Expenses Insurance
Although it is not widely known outside of the UK, the London insurance markets have developed an interesting insurance solution to deal with the “post-event” question. These policies do not cover the risk of litigation arising – that has already occurred. Instead, they insure the risk (in terms of legal costs) of the litigation being unsuccessful – in this case, the risk that the patent being asserted against the policyholder is found to be both valid and infringed by the policyholder.
If the insured loses the case, the insurer will pay out in relation to some or all of the insured’s legal costs. This can include both the own side’s legal costs and the risk of being ordered to pay the other side’s costs where appropriate. In jurisdictions with a “loser pays costs” system, such as the UK, it is often the latter which is the most useful. Many businesses can get comfortable with their own legal costs, as these can be budgeted, planned and controlled by the business. However, they may view the risk of having to pay the opponent’s costs very differently as they will have no control (and often very little knowledge) about the exposure to these costs. Therefore the possibility of hedging this risk through insurance can be very attractive.
For a party defending an infringement claim, this will clearly only ever provide a partial hedge. If the patent is valid and infringed, the party will potentially have a substantial liability for damages or an injunction causing significant damage to the business. In the context of such outcomes, the issue of legal costs may not be a major driver and the availability of insurance may be a useful but non-essential hedge.
This solution may however become far more interesting for a party, say, in the pharmaceutical sector that is holding off a product launch because of the risk of patent assertion. It may be commercially attractive to commence revocation proceedings, where the primary downside risk is legal costs as there is currently no infringing activity. Even if the risk of losing is relatively low, the financial risk and uncertainty can often be a major deterrent for the financial controllers of the business. However, in such circumstances, the potential availability of an insurance policy taken out specifically in relation to the revocation action, which will indemnify the policyholder’s costs if the case fails, can be a potential game-changer.
One of the most interesting aspects of this class of insurance is the potential flexibility of premium payment options. The starting point is that it is inherently difficult to assess the risk of a single piece of litigation. Litigation is by its very nature an uncertain and fluid process, the outcome of which can be determined by a vast range of factors, both objective and subjective. For insurers to take on such a risk, the chances of the litigation being resolved in the insured’s favour must of course be “good”, as assessed by the policyholder’s legal team. Nevertheless, the premium will generally be substantial given the one-off and high risk nature of the insured risk. However, the premium can potentially be structured in a number of different ways depending upon the circumstances, insurer’s risk assessment and the insured’s preferences.
Many policies are structured on a fairly typical basis – the insured pays a one off premium when the policy is taken out and the insurer provides an indemnity if the case is lost. However, many insurers will offer a success-based premium. In such a case, the insured may pay little or no premium at the outset and will pay no premium if they lose. However, if the case is won, a substantial premium is triggered. This model closely aligns the interests of the insurer and insured and can work extremely well where a “win” in the case will trigger significant commercial value for the insured, such that paying a large premium in exchange for achieving that outcome (paying nothing if that outcome is not achieved), becomes commercially attractive.
The premium payment can often also be staged in a range of ways. For example, where a success-based premium applies, the insurer may provide staged premium discounts if the case is settled out of court.
These policies originate from London and are still most commonly used in UK litigation. However, as the industry develops, it is increasingly common for these policies to be used outside of the UK, in Europe and in the US.
B. Outcome Hedging
The main limitation on the insurance option outlined above is the fact that the cover typically does not extend to damages, which may be the most significant component of the overall litigation risk. There are policies available in certain circumstances which can provide a risk hedge for damages and legal defense costs. This would typically be on the basis of a one-off upfront premium payment and will include a significant excess of loss. However, to hedge the worst case catastrophic outcome risk, this may still be an important option to consider.
2. PATENT ASSERTION
For parties wishing to assert a patent in relation to potential infringers the range of risk management options is wider still.
Many law firms (especially in the US) may be willing to take on the case on a contingency fee basis. However, there are also a range of third party options which may be relevant.
Firstly, the legal expenses insurance option outlined above may be attractive. In cases where the policyholder is suing one or more third parties for substantial damages, a success-based premium can be especially interesting, as the premium can be paid from the damages recovered, with little or no premium to pay if the case is lost. The only downside is that this type of insurance will only indemnify costs if the case is lost. It will not fund the legal costs as the case progresses. It will therefore require the policyholder to find another way of funding the litigation on an interim basis. If the insured has a reasonable litigation budget, this can be be a highly efficient and cost effective way of hedging risk. However, where liquidity is an issue, alternative solutions may be needed.
In the UK and internationally, there is now an established and growing third party litigation funding market. There are a range of funders that will offer to fund litigation in exchange for a share of any recoveries achieved. In many ways, this type of arrangement resembles a contingency fee arrangement with a law firm, the difference being that the capital at risk belongs to a third party investor, as opposed to the lawyer.
A third party funding arrangement can be a highly effective tool for managing risk in a patent assertion project. The funder provides cash flow and takes (or shares) the patentee’s litigation risk, enabling the patentee the freedom to engage a law firm that would not take the case on a contingency basis, or alternatively to enable a wider multi-jurisdictional enforcement project using multiple local law firms to be managed, funded and coordinated centrally.
An immediate distinction should be drawn between this type of funding arrangement and an agreement with a Non-Practicing-Entity or “patent troll”. Under the third party funding model, the funder will typically not require the patent owner to transfer the patent or relinquish control of the patent enforcement project to the third party. The ownership of the patent, control over litigation strategy and ultimate decision-making will rest with the patentee. The litigation funder will invest in the patentee and the patentee’s legal team’s ability to win the case. The funder will not require the patentee to instruct a new law firm (and in fact many applications for this type of funding are often driven by the instructed law firm that wishes to assist its client in securing investment to run its case).
The UK market in particular has seen an explosion in the number of professional and well-capitalized litigation funders in the past five years. There is now an Association of Litigation Funders, which is part regulator, part trade association, working to promote best practice in the UK litigation funding market. We are increasingly seeing examples of international parties involved in litigation around the world coming to the UK to source a litigation funding arrangement and the UK litigation funding market is fast becoming the most developed and diverse of its kind.
James Blick, Director, TheJudge Limited
James joined TheJudge in 2008 where he specialises in arranging bespoke insurance and funding solutions for complex commercial disputes, as well as portfolio arrangements for law firms. James has a particular interest in intellectual property litigation and has a reputation as the “go to” contact for hedging risk in patent disputes.
James regularly provides CPD accredited presentations to leading law firms and has spoken at numerous conferences and events, including the R3 Conferences, No 5 Chambers Commercial Litigation Funding Conference and Central Law Training. James has also contributed to various legal publications, including the Law Society’s Litigation Funding Magazine, the Commercial Litigation Journal and Patent World Magazine. To find out more about how your clients can benefit from litigation funding or insurance, in relation to their IP disputes, do not hesitate to contact us.
