What Investors Need to Know About the ABA's Litigation Finance Guidance...

Gaston Kroub

Thanks to the American Bar Association’s release of “Best Practices for Third-Party Litigation Funding,” investors already into, or contemplating getting into, litigation funding have some further guidance from one of America’s leading bar associations to consider. While the guidance on best practices doesn’t specifically touch on the challenges and opportunities presented by funding patent disputes, the general guidance on offer is very much relevant to investors, IP owners, and their lawyers.

At the outset, the ABA’s report makes plain that the suggestions contained therein are just that, suggestions. Acknowledging that the rules around litigation finance is very much jurisdiction-dependent, the report aim to identify “issues that should be considered before entering into a litigation funding arrangement.” At the heart of the ABA’s suggestions are four concrete suggestions for “best practices” — practices that are applicable irrespective of the type of dispute being funded or the funding structure used.

First, ad hoc arrangements are disfavored. As with any investment, a written contract setting forth the terms and responsibilities of each side of the transaction is recommended. Second, despite the temptation for a sophisticated investor to take an activist approach to managing the litigation, “the litigation funding arrangement should assure that the client remains in control of the case.” Third, the parties should contract on what happens if things go sideways — as they are wont to do in litigation. Fourth, everyone is asked to understand, and act, as if the deal documents will ultimately see the light of day.

Remembering that these are just recommendations for “best practices,” and not binding, does little to assuage those whose regular approach to the diligence and handling of patent-focused litigation finance may differ from the ABA’s apparent preferences. For one, investors in patent disputes may be as — or even more — sophisticated about patent litigation strategy and settlement tactics than the IP owner. Such investors would clearly be hampered by any bright-line rules against involvement in settlement. To be fair, the ABA’s report does contemplate the possibility that a funder will assume a settlement role — but never at the expense of the client’s ability to determine what is in the client’s best interest. Likewise, funders in patent cases are keen to know that the law firm litigating on behalf of the patent owner believes in the case. Even if that means that the law firm supplements its guidance on the case’s prospects as the case unfolds. Because so much of patent litigation is responsive to arguments made by defendants — arguments that sometimes, but not always, can be anticipated and discussed beforehand — there really is no way for the relationship to operate otherwise. At least if the funder wants to keep track of their investment at even a minimum level.

Ultimately, the true best practices when it comes to litigation funding of patent cases are those that best align interests between all the parties to the deal, while also respecting the boundaries of the attorney-client relationship and the ethical obligations of the lawyers involved. Moreover, interests must be aligned to prevent the litigation finance arrangement from hampering the prosecution of the case on the merits, or from serving as a hindrance (rather than aid) to settlement. Done right, litigation finance can be a critical component for a successful patent enforcement case or campaign. But investors must be savvy and commit their attention and resources to a robust diligence process, engaging shadow counsel (where appropriate,) and open communication with the lawyers and client. As the ABA reminds us, litigation finance can present “issues” — issues that command the thoughtful attention of all stakeholders.