AIPPI Congress (Report 2): Ethics in Funding IP Litigation

While the AmeriKat was working through amendments to the trades secrets resolution in her capacity of Vice Chair, the panel sessions were steaming ahead.  One panel session she was unable to get to was on the Ethics in Funding IP Litigation moderated by Gustavo de Freitas Morais (Managing Partner at Dannemann Siemsen).  But IPKat readers were in luck as Emily O'Neill (Deminor), one of the panel speakers, was on hand to summarize the key takeaways from the panel and the contributions of her fellow panelists which included Mohsin Patel (Director, Factor Risk Management) and Abha Divine (Managing Director, Techuity).  

Over to Emily:  

"The panel started by introducing the different structures for financing litigation.  These include company balance sheet, law firm contingency such as conditional fee arrangements (CFAs) or damages -based agreements (DBAs), litigation finance and also insurance structures.  Litigation finance is non-recourse off balance sheet financing where a third party pays the costs of the litigation in exchange for a share of the damages; the client does not pay anything directly to the funder.   The panelists discussed how companies can share or transfer their litigation risk through different structures, as well as the different insurance structures available such as before the event insurance (BTE), after the event insurance (ATE), own costs cover, contingent fee insurance and capital protection insurance.  These structures recognize litigation as an asset class that can attract investment, insurance and has a value to the business.

On the ethics, the panel discussed whether funders are fueling an increase in non-practicing entity (NPE) litigation. The panel examined the funding business model.  It was noted that funders do not invest in meritless cases given that the funding is non-recourse and where a case fails, the funder's investment is lost. Emily noted that based on the IAM 300 report, this year 70% of patents for sale on the secondary market are being sold by operating entities and that some funders and insurers establish a rigorous due diligence process in reviewing cases to decide on which cases to invest in.

The panel also discussed ethics around law firm conflict of interest including considering whether the firm who will litigate a case on behalf of their client has any conflict in negotiating the funding agreement for that case which will ultimately be the mechanism by which their fees are paid. One attendee asked about potential conflict if the funder is financing the law firm behind a CFA or DBA where the client would not see the terms. The panel concluded that financing the law firm upstream would be a separate transaction to the CFA downstream and that how the law firm chooses to finance itself would likely not be relevant to its relationship with the client.

The session then engaged in some experiential learning where the attendees were divided into groups of 6 and engaged in a case study role play where they assumed all of the key roles in a litigation finance transaction which included the company’s in-house counsel, commercial lead and CFO together with the outside counsel, litigation funder and insurance broker (see the playing cards above). The teams discussed and agreed how an SME would best finance a patent enforcement against a large competitor and the different groups came up with different financing recommendations and structures. All of the groups struggled in making an assessment of the economic viability of a case as no damages model was provided in the case study which was designed to reflect the reality of many cases presented for funding following legal review. The groups exercised their creativity and came up with a range of structures from full law firm contingency with litigation finance covering disbursements to shared risk models with BTE covering initial costs and then risk sharing between law firm contingency, funder and ATE insurer. They discussed law firm risk appetite for contingency arrangements (as well as the legality of this in their respective jurisdictions) as well as how that appetite can be influenced by successes or failures in contingent cases. Thank you to all the participants who engaged in the role play and for the interesting business and risk discussions as well as the creative financing structures for the SME that resulted."