Surge in Third-Party Financing Transforms Patent Litigation Landscape in the U.S.

Third-party funding of litigation in the United States has undergone significant growth in recent years. Once considered an anomaly, the industry now involves hundreds of millions of dollars invested annually to support business disputes, including breach of contract, antitrust, and notably, intellectual property litigation.

Litigation funding generally entails a third-party funder providing capital to cover at least part of a plaintiff’s litigation expenses. This funding is typically non-recourse, meaning the funder recovers nothing if the case is unsuccessful. Funding arrangements may apply to individual cases or portfolios of cases held by a company or law firm.

Although funding for defense-side litigation is legally permissible, the vast majority of litigation funding supports plaintiffs. This preference stems from the funders’ model of sharing in the settlement or verdict proceeds, which is more straightforward on the plaintiff side. Structuring funding agreements for defense cases presents greater challenges.

Similar to venture capital, litigation funders conduct extensive due diligence before investing. They often retain their own legal counsel to assess the merits of the case and financial analysts to estimate potential recoveries. This rigorous evaluation helps funders manage the inherent risks of non-recourse investments.

Because of the risk involved, funders seek cases with the potential for substantial recoveries. For example, a funder investing $1 million—the typical minimum—would generally look for cases that could yield at least $10 million in damages if successful. This risk-reward calculus drives the selection of cases with high damage potential.

While comprehensive statistics on the distribution of funded cases are unavailable, major litigation funding firms actively promote patent and other intellectual property cases. Patent litigation often involves high damages, making it attractive to funders. Vorys attorneys specializing in patent infringement report frequent inquiries from litigation funding firms.

Plaintiffs pursuing litigation funding must navigate certain risks. Courts that have addressed discovery requests for communications between plaintiffs and funders generally protect such communications under work product immunity. However, preserving this immunity requires careful measures, such as executing appropriate nondisclosure agreements between plaintiffs and funders.

Additionally, some states impose statutory disclosure requirements. For instance, Ohio mandates that counsel for parties receiving litigation funding disclose specific information. Lawyers advising clients on funding must also consider applicable ethical obligations.

Third-party litigation funding is not suitable for every patent infringement case. Funders typically require a significant portion of any recovery, which may reduce net proceeds to the patent owner. Nonetheless, for patent owners with meritorious claims who lack the resources or willingness to self-fund litigation, third-party funding represents a practical financing alternative.

As the litigation funding market continues to mature, patent owners and their counsel should carefully evaluate the benefits and risks of third-party funding. Properly structured funding agreements and adherence to legal and ethical standards are essential to maximizing the advantages of this evolving financing mechanism.