As I’ve discussed previously, patent litigation can be extremely expensive. Protecting your patent in court is pricey enough that it’s often advisable to take out a patent infringement insurance policy to cover any legal costs.
However, there’s an alternative way to cover these costs: patent litigation financing. Essentially, this involves investment firms and hedge funds that are willing to finance the cost of litigating a patent in return for a percentage of any legal damages that are awarded. Investors are particularly willing to fund patent infringement cases, because in some instances, enhanced damages are awarded for infringement, potentially up to treble (three times) the financial damage inflicted on the patent holder. In addition, attorneys’ fees can also be recovered, providing an even larger financial windfall for an inventor and his or her financial backers.
There are some law firms that operate on a contingency basis for these kinds of situations. The law firm fronts you the money for the cost of litigation. Then, these costs are paid for out of the recovery, and what remains is split with the patent holder. The business model is the same as that used by investment firms and hedge funds, but is more heavily regulated.
Patent litigation financers are drawn to patent infringement cases with quantifiable evidence of damages.
It’s important to keep in mind: patent litigation financing is not the same thing as patent trolling. Patent trolls rely on the use of weak, overly broad patents in an attempt to extort money out of companies large and small. On the other hand, firms interested in financing patent litigation are on the lookout for patent holders who can show that their IP has been infringed upon in a demonstrable manner that warrants financial compensation.
Generally speaking, financers look for infringement cases that have a potential return on investment of 10:1. This means that for every dollar invested into a case, it’s feasible that damages of $10 will be awarded. Typically, this boils down to a minimum $1 million investment, which will cover the cost of discovery, in return for potential awards of at least $10 million.
To draw the attention of litigation financers, there needs to be quantifiable evidence of damages. In some courts, you have to include this damages assessment in your initial filing with a court. But in most cases, you don’t have to do this until well into the legal process.
However, to qualify for patent litigation financing, being able to provide an estimate of potential damages is critical to getting your case off the ground.
Examining patent infringement damages with the Panduit test.
This is a complex process that generally requires the services of an experienced patent lawyer. However, damages boil down to two factors: the profits that were lost due to lost sales, as well as profits lost due to price erosion (a monopoly keeps prices high, competition pushes them down). If it’s not possible to demonstrate profit losses, then “a reasonable royalty” is considered the minimum for compensation.
The usual benchmark for identifying any lost profits is the so-called Panduit test. The Panduit test identifies 4 factors that an investor must show as existing in order to establish that profits were lost:
- That there was demand for the infringed upon product.
- Whether or not there were non-infringing alternatives for customers to choose from. (This would establish that the inventor had a monopoly, or not.)
- The inventor had the capacity to manufacture and market their product in order to meet demand.
- How much profit was lost due to infringement.
To calculate patent infringement damages, you have to consider what profits would have been realized sans infringement.
Once the Panduit test has been applied, it is then appropriate to begin calculating lost profits. To do so, it’s necessary to imagine an environment in which the infringement never happened, and then calculate the inventor’s profits in this hypothetical scenario. These hypothetical profits are then compared to the profits that were actually generated.
If there no non-infringing technologies that the infringer could have used to create a substitute, then it would be reasonable to assume that they never would have made any sales at all. Thus, the patent holder is entitled to a hefty settlement. But, if there were reasonably similar alternative products available for sale at a similar cost, then the infringer likely had little impact on the sales of the patent holder’s product and thus minimal damages will be awarded.
This is just the bare bone basis of rationale for calculating damages. The methodology is very complex, and can vary between one court and the next. As noted above, if you are attempting to draw the interest of patent litigation financers, it’s strongly advised that you secure the services of a patent attorney. In addition, the services of a professional assessor will be necessary to accurately calculate potential damages.
The other consideration that you’ll have to take into account—and which will be of interest to potential financers—is the potential cost of litigating your case. There are metrics for estimating patent court costs, based upon factors such as estimated damages, the size of the legal firms involved, the type of patent involved, and so on. Depending on these factors, litigation through the end of discovery could cost a couple hundred thousand dollars, or exceed 10 million or even 20 million dollars.
You will need to have these two figures—the expected litigation budget and the damages assessment—on hand in order to secure litigation financing.
If you have further questions about this topic and how it applies to potential infringement on one or more of your patents, please contact patent attorney Michael O’Brien at 916-760-8265, or use our convenient contact form.