Third-Party Funding

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

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.

(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

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.

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

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.

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

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.