Do operating companies have a better shot at IP litigation funding? The answer may surprise you.
By: Sarah Tsou, Investment Manager, Legal Counsel
In the IP litigation world, there is a perceived great divide between two types of claimants: operating companies that produce innovative products, and so-called non-practicing entities (NPEs) that own IP but do not practice it themselves.
Compared to NPEs, operating companies often have a better story to tell in court and can more readily seek valuable remedies such as injunctive relief and lost profits damages. NPEs, on the other hand, may find it more difficult to establish a trial story and may face stigma and unfair comparisons to maligned “patent trolls” whose aim is to extract settlements from defendants who wish to avoid the cost of litigation. It should be a given, then, that operating companies have better litigation prospects and, by extension, are better positioned to secure litigation funding, right? Not so fast.
It is certainly the case that many operating companies have valuable claims and are strong candidates for non-recourse litigation funding. But operating companies face their own challenges too. Consider the litigation battle that erupted earlier this year between Google and Sonos, a wireless speaker developer and manufacturer. Sonos sued Google in January, alleging the search engine giant had copied its technology during a joint partnership and then undercut it with consumers. Google itself has stated that it rarely asserts its own patents, but in June, the company countered with its own patent infringement claim against Sonos.
The unpredictable but ever-present risk of a retaliatory claim is just one of the dangers faced by operating companies who wish to bring suit to enforce their IP. Indeed, such companies often have voluminous documents and many relevant witnesses, and can incur significant costs to produce such information and defend against potentially disruptive discovery tactics by the other side. Companies that produce a patent-practicing product are also subject to obligations to mark their products which, if not met, could eliminate their entitlement to pre-suit damages.
NPEs, on the other hand, can largely avoid these risks. And for many NPEs, the absence of a practicing product does not take away from their ability to bring a meritorious claim and tell a rich and compelling story in court.
Consider the following scenario: An inventor forms a small company to develop and market innovative new technology. The inventor teams up with a large company, but during the course of the project, the bigger company takes the patented technology for itself and begins to sell a similar, infringing product. With significant resources on hand, the larger company is able to quickly dominate the market, making it impossible for the inventor to compete. While unable to operate, the inventor does possess a very valuable asset: the intellectual property.
Whether it’s an innovative company that has left the market, a university or other research institution that licenses out groundbreaking inventions, or an individual inventor who has developed a useful invention practiced by others, many NPEs possess valuable IP that can be monetized through litigation. For such entities, the mere fact that they are not themselves practicing the IP does not diminish the merit of their claims or their ability to secure an investment from a litigation funder.
Experienced funders make a nuanced assessment
The reality is that no clear divide exists between operating and non-operating IP claimants. Both may have highly meritorious claims with a strong possibility of success and a large potential recovery, factors that would make them prime candidates for funding. And both have their advantages and challenges in litigation.
An experienced litigation funder considers each opportunity on its individual merits and knows the right questions to ask to help both operating and non-operating claimants gauge the strength of their claims and prepare for potential pitfalls. For instance, a funder can work with claimants and their counsel to identify potential counterclaims, analyze the merits and relative value of those claims, and create a funding plan to account for the expected risk. A funder can also spot issues such as potential marking defenses, and help claimants develop their trial story. And of course, a funder can provide non-recourse capital to cover litigation expenses in what is likely to be a long and costly proceeding.
With so much at stake, IP claimants of all kinds should consider partnering with an experienced funder such as Omni Bridgeway who can help them develop tailored strategies to maximize the value of their claims.
To learn more about how litigation finance can help venture funds and portfolio companies, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.