Thursday 25 October 2012
Patent Litigation Funding: What About the Underfunded Defendant?
The thrust of the article is that "many small and medium-sized enterprises (SMEs) find themselves between the devil and the deep blue sea when they believe that their patents are being infringed." Thus, if the infringer is a well-heeled competitor with past experience in patent litigation, the SME may simply threw up its hands and allow the infringement to continue to take place. Alternatively, the SME can seek to find a partner to challenge the infringer. However, the price is often that the partner demands ownership of the patent, a problematic step when the patent is central to the SME's activities.
If the patentee deems either of these two outcomes to be too high a price to pay, there is yet another option -- litigation finance. Whether the patentee's motivation is simply a shortage of cash to fund the litigation on its own, or a wish to spend free company cash on something else within the company (e.g., R&D), an increasing number of finance companies are prepared to fund the litigation. The ultimate goal is not an charitable exercise. As the article bluntly notes, "[c]learly, the main attraction of litigation investment is the possibility of big returns", apparently from 20%-50% of the damage award, if any. As well, there may also be the possibility of earning a revenue stream from the continuing payment of royalties.
The article devotes some discussion to the question of whether such patent litigation funding is a good or bad thing for patent litigation and the patent system, especially in light of the already existing contingency fee arrangements. All of this discussion overlooks a fundamental question, however: what about the under-resourced potential patent litigation defendant? For every SME that I encounter that agonizes about where to find the necessary funds to pursue litigation, I encounter an under-resourced SME that is at the receiving end of a filed or threatened infringement action.
After all, every patent litigation case has both a plaintiff and a defendant. What about the interests of the actual or potential defendant? After all, no one seems to treat such an SME in terms of an asset class. Where does such a defendant obtain the funds to defend an action, especially where the SME is convinced that it has committed no infringement of the patent at issue? Even if no material patent litigation funding may be required by the plaintiff in such a situation, the result is still that there is a structural asymmetry between the position of the plaintiff and defendant, whereby a non-infringing defendant may still find itself unnecessarily settling the dispute, or more.
For those who live and breathe the search for the next best asset class, the defendant's funding problem is not theirs. Fair enough -- but then, whose problem is it exactly? And is the public interest in maintaining a patent system being well-served by the funding asymmetry? Or no matter -- after all, the funding of patent litigation "is such a great asset class".