Beyond Hourly Podcast

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The following episode of Beyond Hourly was recorded before the merger of IMF Bentham and Omni Bridgeway.

Jim Batson:
Hello and thank you for tuning into the Beyond Hourly podcast, hosted by Bentham IMF (now known as Omni Bridgeway). As one of the world's most experienced commercial litigation funders, Bentham IMF has invested nearly two decades into providing litigation finance and investment capital to plaintiffs and law firms. We offer law firms and their clients a risk-sharing partnership and a proven record of success, as a leading global litigation funder.

Episodes of this podcast can be found on our website, www.benthamimf.com (now at www.omnibridgeway.com). I'm your host today, Jim Batson. I'm the head of Bentham's New York office, where I've been an investment manager and legal counsel since joining the company in 2014. Before joining Bentham, I spent 20 years as a trial lawyer. My role at Bentham involves assessing investment opportunities and serving as a strategic resource for the parties we fund, throughout the funding relationship.

We're back here today with another short episode featuring a member of our team, Sarah Tsou. Like me, Sarah is an investment manager and legal counsel at Bentham. Sarah, welcome to the Beyond Hourly podcast. Thank you for joining us today.

Sarah Tsou:    
Thanks Jim.

Jim Batson: 
Sarah, you joined Bentham in January. Could you tell our listeners a little bit about what you did before coming here?

Sarah Tsou:
Sure. Prior to joining Bentham, I was at Kirkland and Ellis for about 12 years in their New York office. During that time, I focused on IP litigation with a particular focus on patent litigation.

Jim Batson:
Did you focus on patents of a particular type?

Sarah Tsou:
Really all different types. I think it depended on what time in my practice you're talking about. I think I started off in medical devices, which sort of made sense, with my biology background. Then, I transitioned into more high-tech around the middle of my time at Kirkland. Then by the end, I was working in continuing diverse technologies, but maybe more focused on medical devices and pharmaceuticals again. Coming full circle, back to the beginning, if you will.

Jim Batson:
I'm sure you're seeing an even broader array of patents in your new role here.

Sarah Tsou: 
Absolutely.

Jim Batson: 
How did you become aware of litigation finance? Once you became aware, what made you decide to join the industry?

Sarah Tsou: 
Well, it's funny, because it's something I heard about a lot during my practice and I met with some vendors, as well. In fact, I think the first vendor I met with was Bentham. Of course, the name recognition was always on my radar. It feels a little bit like coming full circle to me. I think the reason why it was always part of the conversation is because patent cases are just really amenable to funding. They're often notoriously long and notoriously complex.

It takes a lot of patience to get you a good recovery, but once you get there, the recovery can be enormous. I think that's one reason why it was sort of always in the background for me. When I got really serious about it is when I'd seen that many of my former partners had gone into funding, either starting their own shops or going to other funders. I really started thinking about that as my next step. The thing I liked about it the most was, as a longer-term practitioner, I found myself going to trial less and less, being in charge of matters and it just takes time to get to trial.  

I was really starting to get impatient, trying to get to the merits faster. What I liked about funding is, that I knew that I could continue on, in some ways, using my experience. In a way, assisting and guiding clients, but seeing a much higher volume of cases and seeing them at a much higher level. Really getting to those merits much faster.

Jim Batson: 
Terrific. You know, it's funny, when you say about patent cases and their suitability for funding, people used to ask me when I first started in this role, "Do you focus on certain kinds of cases? Are you looking at certain industries and so forth?" What I always told people was, "It's much more about the economics than it is about the type of case."

Sarah Tsou: 
Right.

Jim Batson: 
We're looking for strong cases, but what we also need are cases that require a sizable investment. We're looking for at least a million dollars and in many of our cases, our investment is much more than that. To do that, we're looking for damages at a certain level. Then, I explain certain types of cases are more suited to that model than others. It strikes me that patents are ideal for that, because you've got really expensive experts, sometimes very fact intensive, heavy analytics in just understanding the underlying technology. If you're successful, the impact of a patent infringement win can be enormous and the damages can be high.

Sarah Tsou: 
Yes, I agree. In patent cases, you definitely are hitting both sides of the equation there, or both sides of the ratio, if you will. On the one hand, you have potentially enormous costs associated with the long-term litigation. It can take, in district court, three-plus years to recover, maybe more. On the other hand, once you have a case and you can take it all the way through, if you have the resources to get to the end, the recoveries can be enormous. I think if you view—which I think it makes sense now that I've spent some time here,--if you view funding as very simplistically an economic proposition where you have a ratio of expense to reward, is there enough room there for sharing on both ends? I think patent cases are a perfect model for that.

Jim Batson: 
Since becoming an investment manager, and, it's only been six months, but I think that's long enough to ask the question, “What's become the most rewarding aspect of the job for you?”

Sarah Tsou: 
I think it’s sort of transitioning from an advocacy role to more of a transactional role in the sense that, on a day-to-day basis, I feel that all my efforts are going towards something positive. You're bringing a client and claim and a good law firm and funding all together in one package so that a good claim can either be enabled or progress forward. To me, it's really rewarding. It's like, "Every minute I spend on this is going towards a greater goal" That's just a different type of feeling than in my prior role, though there are some similarities. 

Another rewarding thing is sort of knowing that my efforts are going to building a company I really believe in and that it's also very different. When you're representing clients you're sort of representing the interests of numerous companies and stakes and interests, but here, after doing my due diligence and looking all over the industry, I decided that Bentham was where I wanted to be and to grow this new practice. Knowing that my efforts are going towards that goal and a company I really believe in, is also obviously very rewarding.

Jim Batson: 
I hope it stays that way. I have every expectation that it will. In that vein, what are you able to do now as an investment manager at a funder that you feel like you weren't able to do in private practice?

Sarah Tsou: 
I think the first thing that comes to mind is just the sheer volume and a diversity of cases I'm looking at. You mentioned at the beginning, that I'm looking at more technology, more diverse technology than I ever saw in my practice. That's absolutely true and that's just a function of having the bandwidth to look at so many different matters on a near daily basis and seeing something new and evaluating something new. 

As a company, we look at probably thousands of matters annually. Just having the bandwidth to see that sort of diversity is very different and something that simply isn't possible to do as a petitioner, nor are petitioners expected to do that. I found what exactly I was looking for, in the sense that, if what I was looking for was getting to those merits faster, I've found this is the way to do it and it's working.

Jim Batson:  
I experienced a similar sense as I got more and more into this role. I was a commercial litigator with a relatively niche practice and as an investment manager here, I'm always struck by the broad array of matters that we see. The matters that we tend to delve into are ones where we're dealing with really smart counsel and I find that intellectually satisfying, to be talking about a variety of different types of cases with really smart people. Really, even though we're playing a critical role, our interests are aligned in that we're trying to see, is this something that can work out?

Sarah Tsou: 
Right, absolutely.

Jim Batson: 
As you know, patent litigators have embraced funding more readily than litigators focusing on other areas. If I had to say, I would say patent litigation and international arbitration are probably the two areas where litigation funding has, I won't say become entrenched, but become far more common and more broadly understood within those practice areas. What do you think is the driving force behind that and what do you think other litigators stand to gain by following suit?

Sarah Tsou: 
I mentioned the long and expensive road to recovery that you often see in a patent or IP case. That certainly has contributed, I think, to the popularity of funding in that industry. A related driver, I think, is the idea of unlocking value. Some patents and other IP can be incredibly valuable, but you have to assert those rights to realize the value.

Take, for example, a company that has a patent sitting in their portfolio somewhere that every major player in the industry, all of their competitors are practicing, and could be worth hundreds of millions of dollars or more. That patent is not going to do anything sitting in that portfolio by itself. Someone has to analyze it, put it in resources, find the right attorneys and assert that patent to enforce the property right and to realize the value of that.

Of course, that takes a lot of resources and potentially years and years. Some companies either aren't in the position to do that, or if they are, they're focusing those resources on something else, building their Fortune 100 company or building their small startup. They're presented with a dilemma, "Do I funnel my resources that I need for my operations into litigation? But now, I've left my operations in the lurch. Or, do I keep the resources where they are and where they need to be for the business? Now, I've left this value sitting there, not doing anything for me."

The nice thing about funding, I think, is that it's a natural way that clients can very clearly understand that funding can unlock that value and sort of release you from that dilemma. You don't have to make a decision, but you can still unlock the value. The things I've described, the long road to recovery, the costs and the idea of hidden value that's being unlocked by funding, is certainly not unique to the IP context. To respond to your question of how other litigators, or how other industries can stand to follow suit, I think is recognizing that these are pretty common things. You can imagine other types of commercial litigation where you have a lot of these similarities and where funding can be equally useful.

Jim Batson: 
I find when people that have no understanding of litigation finance ask me, "What makes it unique?" Or, "What's the magic behind it?" to use a phrase, I know you've used sometimes, asking inventors about their inventions and patents and product. I really think that, at a core, it's that litigation is an asset. You touched on it when you described unlocking assets and I was thinking, it's sort of intuitively obvious that patent litigators, and I suspect patent holders, they're already used to the idea that they hold an asset. That the patent is an asset.

As you're saying, I guess you unlock the value of that asset by pursuing it. Whether it's trying to license it without going to litigation, or in many instances, having to use litigation to unlock it. It occurs to me, hearing you give that answer, that really, other people can appreciate that their claims, whatever those claims might be, breach of contract, antitrust, who knows? That their claims are an asset. Then, the wheel starts spinning of the different ways that you can unlock the value of that asset. What types of claims could you bring? Who should you bring them against? How should you pursue them?

Sarah Tsou:
Absolutely.

Jim Batson: 
I've been at Bentham for over five years now, one of the reasons we wanted to bring somebody on with your expertise in patent litigation is we recognized that there was this growing demand for funding in the patent space, but that patent cases are a unique breed. They have a lot of unique attributes to them. I started hearing things like IPRs and Markman hearings and infringement and the PTAB. All these concepts that we didn't really understand, not having somebody on staff with a high level of expertise in that area. Nonetheless, we didn't want to turn away those cases, because we knew there were great opportunities there.

We spent a lot of time vetting cases that ultimately turned out not to be as good a value as we had thought they would be. More so than we might have in other cases, where we had a greater degree of understanding. I felt like, when I was talking to patent litigators and so forth, I didn't really speak their language. I didn't feel like we were being as effective, but now, having someone with your area of expertise, not only are we better able to evaluate those opportunities, we're also better able to speak to other patent litigators. That's a long buildup for me to say, can you walk our listeners through the rationale that you look at, or the criteria that you look at when you're evaluating a patent case that might be a little different from the criteria than one would generally apply in in any commercial litigation?

Sarah Tsou: 
Sure, but I will say, you are definitely underselling yourself. We've been on calls together and I've seen you hold up just as well as any other patent litigator when it comes to these calls. Maybe before I answer your question, I'll share a related thought, which is the idea that it's important as a litigator or as a client pursuing litigation to talk to somebody who speaks their own language is so key. That's one of the reasons I actually joined Bentham and just sort of pursued Bentham, versus other funders, because something that really made Bentham stick out in my mind was that every investment manager has at least 10 years of litigation experience. 

After spending 12 years in practice myself, I couldn't imagine myself working in a group where that wasn't the case and I couldn't continue to surround myself with experienced litigators. Of course, it's also true that, in some specialties, you want to have some special expertise, which is why it's so great that I'm on board now and we have our bankruptcy specialists, our insurance specialists, and our international arbitration specialists. 

To answer your question, I think, first and foremost, we're looking for markers of success. The thing about patents is, you can have a lot of patents, but you don't have to practice them. They may not be valuable, or you have patents that are incredibly valuable. They all sort of look the same, they're a patent that's issued by the U.S. government. To really understand which patents are valuable and which are not, you have to look to the impact on the market.  

One thing we look to is patents that have been practiced by companies with success. Patents that have non-nominal licenses in the marketplace is another indicator of success. You don't need both but having one or the other is great. We also look to prior litigation history as an indicator of success in the market. We see a lot of cases where the client or the firm has had some substantial success already. They've overcome IPRs; they've litigated a patent against other defendants; they've obtained good licenses through litigation against other parties. Those are great cases, because we're not really testing something that's untested. We're on territory that we know. There is some significant value here, there's market value here.

Jim Batson: 
Sarah, one thing I've learned from you since you've been on board, one of many things I've learned, but one that stuck with me, is that in a patent litigation you could have a great case, a good set of patents, you could bring that case. Then, one of the things that the defendants recognize, "Ooh, we've got exposure here." One of the first things they'll look at, among others, is, "Can we work around the patent that we're asserting against you?" As I understand it, and correct me if I'm wrong, if they're able to work around it, then you could still win the case, but the damages are going to be limited to prior infringement. You'll lose sort of the ability for damages forward-looking, which many times are the A) more valuable damages and B) the incentive that the defendant might have to settle the case. If I've got it right, have I got it right so far?

Sarah Tsou: 
Yes. Perfect.

Jim Batson: 
Okay, great.

Sarah Tsou: 
I taught you well.

Jim Batson:
Indeed. Then, taking it the next step, can you talk to our listeners a little bit about, generically speaking, are there certain types of industries where that's a greater vulnerability? Again, we're talking in the abstract, versus other types of industries or products where that would be harder for the defendant to pull off?

Sarah Tsou: 
Sure, absolutely. First and foremost, when I'm looking at a patent opportunity, one of the first questions that comes to mind is, "What is the alternative to infringement? What are some non-infringing alternatives that the defendant can argue would avoid the patent?" There's a couple of reasons that we need to know this. One is exactly the point you hit on, which is, if somebody can design around the patent and enjoy it in a commercially acceptable way, there is that risk that they'll do that as soon as the complaint is filed, or they believe that they may be on the hook for future damages.

That wipes out all future damages and you're left with any pre-filing damages that you may have available to you. That's potentially a bad outcome, but another reason why alternatives are important is because there's, in the patent damages law, a concept of a hypothetical negotiation. That's the way that you arrive at what a reasonable royalty would have been to license the patent. That's a measure of damages in patent cases. One of those factors is, well, if at the time of the first infringement, even if it's pre-filing, there is a hypothetical alternative that the defendant could have used instead of infringing. 

If they'd only known that you would be asking for damages today and instead of going forward with that infringement, they instead adopt another alternative. Maybe it's an older method of doing things, maybe it's a new design-around that their engineers could come up with. Well, that has the potential to cap the cost of your damages, to cap the amount of your damages and whatever it costs it would have taken for them to use that alternative instead. If the cost is simply flipping a switch and changing one part of the software code, your damages can be pretty limited to just that cost, because why would they pay you millions of dollars, if they could have paid some engineers $500,000 or less and spent one month on changing that software and customers see no difference whatsoever? 

Alternatives are very important, and my best experiences are when I'm on the phone with really sophisticated clients and firms that already have the answers to this. I ask the question only to confirm to myself that they've already thought it through. In terms of what industries this is particularly relevant to, I've mentioned, software is one where we're always thinking about how easy it would be to design around that feature. In particular, because software and other high tech is often part of a really, multi-component type of final product. Even turning it off might be an option and maybe the customer doesn't see a difference, or they don't really notice. 

That's an industry where I think it's more important for us to really understand the alternatives. It doesn't mean that they're less valuable patents by any means. It's just an important question and potentially a hurdle for us and we have to understand. On the flip side, something that comes to mind would be medical devices or the types of potentially infringing products where you have less risk of design-around. That's for a number of reasons. Usually, there's fewer other components that you can rely upon to sort of solve the problem if you take out the infringing feature. Probably more importantly, there's more regulatory hurdles to getting those products approved. 

Once you see a product on the market, it's already gone through a very long process to get there and there's less risk of them immediately changing the product in a way that makes it non-infringing and getting around the patent, I should say.

Jim Batson: 
That's just yet another example of something that, without having a patent expert on staff, I would have never appreciated. We wouldn't have appreciated. Part of our process here, as I know you know but for the benefit of our listeners, is when we decide we like a case internally, sort of at a preliminary level, we have to, we don't have to, but we typically engage external counsel to give us an opinion with their level of expertise.  

Having somebody that understands the issues that you're raising just enables us to cull down to the best cases to look at and spend the time and money on external counsel on those cases and not the others. Quite honestly, that's to the benefit of people who are bringing cases that we don't ultimately fund because one of the things we pride ourselves in is a quick turnaround. We want to get them a quick answer, whether it's positive or negative.

Sarah Tsou: 
Yes, exactly.

Jim Batson: 
What do you foresee as the potential impact of litigation funding on the IP space in the long term? Do you think it will change the way lawyers structure their retention agreements? Will we see more contingency arrangements, more hybrids, or not? Do you think it'll sort of continue at pace?

Sarah Tsou: 
Well, I think a number of changes come to mind as potentially occurring in the future. On the contingency front, I do think patent cases and patent funding may drive more and more contingency, because it's one of those types of cases that is sort of a natural fit for that. Whether it's from a funding perspective or a law firm perspective, you have this really potential, high recovery, where there's plenty to share. Often, clients that either cannot or do not want to spend their own money to get to that point.

Jim Batson: 
Isn't it the case too, for patent cases particularly, the ratio between attorney time cost and out-of-pocket cost is greater? What I mean by that is, in commercial litigation, maybe the ratio is something like 10 to 1. You spend a million in fees, you're probably going to have about a hundred thousand dollars in out-of-pocket expenses. I'm kind of making that number up, making the ratio up, to make the point.

What I see in patent cases is, if you have $10 million in fees, it wouldn't surprise me at all that you've got $4 million in out-of-pocket expenses. It's one thing to say to patent firms, as you're suggesting, and I tend to agree, "Okay, they're going to take on more contingency." But I think it's another thing to say, "And we're going to fund the out-of-pocket expenses." Do you see a synergy there?

Sarah Tsou: 
Yes, absolutely. I agree the cost can be, as I'm finding out, relatively higher in patent cases than in other types of commercial litigation. I only had my own experience prior to joining Bentham, so I thought it'd be normal to have a $4 million cost tab for a $10 million litigation. In fact, it's not. The reason is because patent cases are so driven by expert analysis.

Jim Batson:
Multiple, right?

Sarah Tsou:
Multiple proceedings, IPRs, potentially parallel ITC cases with their own costs. Multiple hearings and, of course, ultimately a long jury trial at the end of the day if that's where you're trying the case. The costs go up very quickly. In that situation, one of our major value adds is even for firms that are able to take on case simple contingency, they may not be willing to pay the cost. That's where we can come in and sort of fill in the rest for them and cover all the significant parts of the litigation expense, including those costs which the firm may not be able to take on their own.

In terms of other changes, I think a really important one is funding is going to enable better and better claims to be brought. On the flip side, serve as a gatekeeper function to prevent those less than meritorious patent cases that we've all heard about and all understand. Prevent those cases from seeing the courthouse. We are basically an added level of diligence that, in my experience, is often much more rigorous than a firm might undertake on its own. It's only after the case survives both the firm's diligence and our diligence that it is able to access the litigation system. I think that's how it should work, because ultimately, it's more meritorious claims that are able to proceed and that benefits everybody.

Jim Batson: 
Hear, hear. All right, last question. What is something interesting or unique about you that our listeners might not know and that you'd be willing to share with them?

Sarah Tsou: 
Thanks for that. Thanks for that caveat. I write short stories. Yes, I haven't for a long time, but since I was a kid I was very interested in writing short fiction and took classes in high school and college. I hope to just start that up as a hobby again, but I have a little stack of stories back home.

Jim Batson: 
Well, hopefully all the unique and interesting cases you see, maybe it will spark some short stories.

Sarah Tsou: 
I'm sure they will.

Jim Batson: 
Let me thank you again for appearing on Bentham's Beyond Hourly podcast Sarah, and for sharing your knowledge and expertise with us. As I mentioned at the outset, episodes of the Bentham Hourly podcast can be found on our website, www.benthamimf.com (now at www.omnibridgeway.com) and on iTunes, Spotify, Stitcher, and SoundCloud.  

We'll be back soon with another episode focused on advancements in legal services that drive economic value for law firms and the clients they serve. Until then, I'd like to thank our audience for listening in and invite you to follow up with us with any questions or comments you may have at [email protected] (contact [email protected] or [email protected]), or to provide any feedback, ideas, or insights you have on topics you think we should cover on the next podcast. Thank you and be well.