Third-Party Funding

Third-party litigation funding (TPLF), also called litigation finance or patent litigation funding, is an arrangement where a professional funder — typically a specialized litigation finance company — provides capital to finance a patent case in exchange for a portion of any recovery (damages award, settlement, or licensing revenue). HOW IT WORKS: the funder advances: attorney fees and expert witness costs; court filing fees; e-discovery costs; travel and deposition expenses; in exchange, the funder receives: (a) a share of the recovery (typically 20–40% depending on the case's risk profile and stage); or (b) a multiple of the capital invested (e.g., 2x–3x invested capital from proceeds); NON-RECOURSE: most litigation funding is non-recourse to the plaintiff — if the case loses, the funder bears the loss; the plaintiff owes nothing beyond the funded case; WHO USES IT: (1) individual inventors and small NPEs (non-practicing entities) who lack capital to pursue litigation against large infringers; (2) universities and research institutions asserting patents without in-house litigation resources; (3) operating companies who want to free up capital for operations rather than funding patent litigation; (4) law firms handling contingency cases who need additional capital; MAJOR FUNDERS: Burford Capital (largest public litigation funder), Bentham IMF, Validity Finance, Parabellum Capital, Woodsford Litigation Funding, Longford Capital, and many others; THE PATENT CASE PROFILE: patent cases are among the most funder-friendly disputes because: (1) recovery amounts can be very large (treble damages, reasonable royalties on high-revenue products); (2) outcomes are binary (win/lose often hinges on a single claim construction or validity issue); (3) timelines are long (2–4 years) but eventually resolve.

Litigation funders apply rigorous due diligence criteria before committing capital: (1) MERIT OF THE CASE: infringement analysis — does the patent clearly read on the accused product?; validity analysis — is the patent likely to survive an IPR or district court validity challenge?; claim construction — which claim construction would a court likely adopt and does it favor the plaintiff?; funders often engage independent patent counsel for technical due diligence; (2) DAMAGES POTENTIAL: expected recovery must significantly exceed the funding amount; funders typically require projected damages of at least 5–10x the expected funding amount; a case seeking $100M in reasonable royalties from a defendant with clear infringement is more attractive than a $5M case; (3) COLLECTABILITY: is the defendant financially capable of paying a judgment?; are the defendant's assets accessible in the jurisdiction?; (4) TIMING AND CASE STAGE: funders evaluate expected time to recovery; fully funded cases from case initiation are more expensive capital-wise than cases funded at an advanced stage (after Markman, near trial) — the risk profile changes at different stages; (5) LEGAL TEAM QUALITY: the quality and experience of plaintiff's counsel matters significantly; experienced IP litigators with a track record of winning are strong indicators; law firm stability (no risk of firm dissolution mid-case) is important; (6) PORTFOLIO vs. SINGLE CASE: some funders prefer to fund portfolios (multiple cases) rather than single cases — portfolio funding spreads risk; portfolio funding often comes with better economic terms for the plaintiff; (7) REGULATORY AND DISCLOSURE RISK: funders assess whether disclosure of the funding relationship could harm the case (e.g., real-party-in-interest issues in IPR proceedings).

Disclosure of litigation funding arrangements has become a significant and contested issue in patent litigation: FEDERAL CIRCUIT AND DISTRICT COURTS: there is no universal federal rule requiring disclosure; individual districts have adopted varying approaches; DISTRICT COURT LOCAL RULES AND STANDING ORDERS: several districts require disclosure of third-party funding: (a) Northern District of California (NDCA), Middle District of North Carolina, and others have standing orders or local rules requiring parties to disclose if a third-party funder is financing the case; (b) disclosure typically requires identifying: whether third-party funding exists; the identity of the funder; whether the funder has approval or control over settlement or case strategy decisions; RULE 7.1 FINANCIAL INTEREST DISCLOSURES: FRCP Rule 7.1 requires disclosure of corporate affiliates with financial interest; some courts interpret this broadly to include litigation funders; IPR PROCEEDINGS — REAL PARTY IN INTEREST: the most significant disclosure obligation for patent cases is in IPR proceedings; if a litigation funder is financing an IPR petition, there is a risk that the funder qualifies as a 'real party in interest' (RPI) under § 312(a)(2); failure to disclose an RPI can void the IPR petition; funders who have significant control over the IPR strategy (selecting grounds, controlling briefing decisions) are more likely to be RPIs; purely passive funders (providing capital without control) are less likely to be RPIs under the Applications in Internet Time standard; DISCLOSURE STRATEGY: when entering into a funding agreement, patent owners should: (1) minimize funder control over litigation strategy and settlement decisions in the contract; (2) consult with IPR counsel before filing an IPR if funding is in place; (3) check local rules and standing orders in the chosen district; (4) consider whether voluntary disclosure is appropriate to avoid later credibility issues.

Litigation funding raises several professional responsibility issues for attorneys: CHAMPERTOUS AGREEMENTS: historically, champerty (supporting another's lawsuit in exchange for a share of recovery) was illegal; most U.S. states have abolished champerty restrictions or narrowed them significantly; litigation funding is legal in all major patent litigation jurisdictions; attorneys should confirm the relevant state bar's position; ATTORNEY-CLIENT PRIVILEGE DISCLOSURE: sharing case analysis and attorney work product with a funder is a risk — it may waive privilege; courts are divided on whether the common-interest doctrine extends to funders; BEST PRACTICE: use NDAs with funders; structure the disclosure of privileged material as an arms-length business transaction under the common-interest doctrine; avoid sharing documents that are not necessary for due diligence; CONTROL OVER LITIGATION: Model Rules of Professional Conduct Rule 5.4 prohibits sharing legal fees with non-lawyers and prohibits non-lawyers from controlling a lawyer's professional judgment; funding agreements must preserve the attorney's independent professional judgment on legal strategy; funders who contractually control litigation decisions (settlement authority, case strategy, expert selection) risk violating Rule 5.4 through the attorney; BEST PRACTICE: funding agreements should give funders consent rights over settlement above a threshold (to protect their investment) but should not give operational control over litigation strategy; CONFLICTS: attorneys representing funders in other matters should not also receive funding in cases against the same parties; conflicts checks must include the funder; FEE DISCLOSURE: in contingency cases (no third-party funder), contingency fees must be in writing; third-party funding is distinct from contingency fees but serves a similar economic function.

The presence of a litigation funder significantly affects settlement dynamics: FUNDER'S ROLE IN SETTLEMENT: most funding agreements give the funder either: (a) CONSENT RIGHT: the funder must approve settlements above (or below) a certain threshold; prevents the plaintiff from accepting an under-valued settlement; (b) INFORMATION RIGHT: the funder is informed of settlement offers but lacks formal veto; MINIMUM SETTLEMENT THRESHOLDS: some agreements specify that if a settlement is offered above a threshold (e.g., 3x the funded amount), the plaintiff must seriously consider it; FUNDER'S INCENTIVES: funders are motivated by the highest possible recovery; they may oppose settlements that the plaintiff (who wants certainty and to move on) might otherwise accept; this creates potential misalignment between plaintiff and funder; PLAINTIFF'S INCENTIVES: with litigation funding, the plaintiff has less financial pressure to settle early — the funder is bearing the costs; this can increase the defendant's litigation costs and delay resolution; DEFENDANT'S AWARENESS OF FUNDING: defendants may learn of third-party funding through discovery, disclosure requirements, or investigation; a funded plaintiff signals a well-resourced litigation opponent with staying power — defendants may assess this as reducing the likelihood of an early cheap settlement; LICENSED MONETIZATION STRUCTURES: some funders take equity interests in patent licensing campaigns rather than case-by-case funding; in these structures, the funder effectively becomes a co-owner of the licensing revenue stream; this can create RPI issues and affect the funder's disclosure obligations; COST OF CAPITAL: litigation funding is expensive — 20–40% of recovery is a high cost of capital; in cases where the plaintiff has resources and strong counsel, funding may not be necessary; funders compete for the best cases, making terms negotiable for high-quality patent assertions.