Third-Party funding in intellectual property (IP) protection

August 15, 2019

One of the distinguishing features of modern litigation is the concept of Third-Party Funding, also known as Legal Funding. In recent years, the attention of the world of litigation and arbitration has focused on financial entities that extend Professional Third-Party Funding (TPF).

What is Third-Party Funding?

Third Party Funding (TPF) is an arrangement where a financier funds all or part of the costs associated with legal proceedings in exchange for either a share in the outcome or normal finance charges. TPF enables claims to be brought without immediately paying legal costs. A TPF institution grants financing to cover expenses such as legal representation fees, fees of the arbitral tribunal, the cost of expert opinions, among others.

TPF is a $3 billion industry in the United States (alone, not including the big markets of the United Kingdom, Europe and Australia) and is growing extraordinarily fast. TPF institutions have become important stakeholders in the international legal industry offering its increasingly sophisticated financial instruments and services. Today, there are more than 50 institutions dedicated to this activity: Bentham IMF, Burford Capital Limited, Harbor Litigation Funding, Vannin Capital, Woodsford Litigation Funding, Calunius Capital, to name a few which are majorly based in Europe and the United States.

The amount involved in the case is primarily the factor for TPF institutions whether to invest in a case or not. Mostly, TPF institutions are inclined to invest in cases involving amounts that are at least 6 times higher than the costs of the procedure. They are also likely to fund class cases (or collective cases) that individually are not large, but once consolidated, can earn interesting amounts.

TPF institutions, for example, may invest between CLP 3 to 10 million in a case whose value fluctuates between CLP 25 to 100 million, in exchange for a percentage that corresponds to 2.5 to 4 times the investment or 10% to 45% of the damages awarded.

If the demand is successful, it receives a lucrative return, that may vary depending on the fund, between CLP 1 up to 25 million. If the demand fails, however, the TPF institution loses its investment.

Because the risks are high, a thorough prior analysis of the case to be financed is carried out. As such, TPF institutions have in-house lawyers with vast experience in litigation and arbitration and use "investment committees" which include leading experts in the arbitral world. During this due diligence process, the case goes through different levels of internal and external review and is analyzed from a legal and financial perspective, evaluating the case as objective as possible.

What are the advantages of Third-Party Funding?

TPF is primarily designed to facilitate access to the court system. The fact is many legal cases with a strong foundation in law would never be brought to courts were it not for the existence of a funder who is willing to assume all the costs of the legal proceedings.

TPF also gives a leverage position for the plaintiff in courts. TPF institutions do not only provide economic resources, but also psychological support from the legal advisors and experts who take part in the evaluation of the case for funding. Once funding is approved there is an assumption of high probabilities of success.

On a corporate point of view, on another hand, TPF has been transformed as a management tool to curb financial risks associated with litigation and arbitration. As such, it is also used by parties who, do not necessarily have cash flow problems but prefer to reduce their exposure to the expenses and risks that highly complex litigation might bring.

Correspondingly, the legal service industry is also benefiting from this trend since TPF brings more clients and companies who can now pursue their rights in courts.

Why is Third-Party Funding so appealing to IP Litigants?

IP is one of the most active areas of practice in legal funding. Because of the substantial costs and risk inherent in IP litigation, it is a natural fit for litigation funding—in particular for smaller, entrepreneurial inventors and IP right owners who find themselves pitted against larger, more well- resourced defendants. By taking advantage of litigation funding, the IP right owner can shift the cost of pursuing claims off their balance sheets and onto their funders’ books and achieve equal footing.