The Future: A Question of Trust
It’s often said that as a sector, litigation finance is in the third inning of a ballgame. That’s a way of saying there’s still a lot of change in the offing. Fred Fabricant, founder of the patent litigation firm Fabricant LLP, does not fully agree with that characterization.
“I think it’s pretty mature myself,” he says. “There are a lot of players, lots of money, which is all positive. We’ve seen some players in the litigation funding business decide they didn’t want to be in the business anymore. Particularly over the past year or so, they just disappeared.”
That owes to the reality that litigation finance is not an easy business, he says. It’s difficult to raise the capital, because it’s high risk, and it’s not simple to do the necessary diligence on each case. If several of a funder’s cases were to fail at the same time, it could break the business.
“Diversity is the key to this business for a funder,” Fabricant says. “If they diversify across different technologies, across different kinds of patents in different forums — some in Europe, some in South America, some in the new unified patent court, some in the ITC, some in the district courts — it increases the chances that they’re not going to blow up.”
“The trust between the funder and the law firm is critical.”
Managing Partner
Fabricant LLP
Risk Tolerance
Some cases will inevitably fail — that’s the nature of law. But the inherent risk in litigation investment has separated the speculators from the funders who are in the business for the long haul, Fabricant says. As a lawyer who has been involved with litigation finance since its inception, he’s seen many players come and go. And for every one that has shown staying power, there have been more who couldn’t stomach the risk.
Every funding agreement has material adverse event clauses. If such an event occurs during the course of a litigation, the funder usually has a right to stop funding. Material adverse events are well defined, as are the rights and obligations of the funder. But regardless of the terms, it’s not a given that everyone is on the same page.
Fabricant recounts a case in the Eastern District of Texas. A month before trial, the defendant filed a long-shot motion for summary judgment. The plaintiff’s team had the opportunity to oppose it, and the chances of avoiding trial were slim for the defendant, particularly at the eleventh hour. But there were suddenly cold feet in the room.
“The funder called up and said, ‘We’re not going to fund anymore until that motion is decided,’” Fabricant says. “I said to the head of the fund, ‘You can’t do that. There has been no material adverse event. The fact that they filed a motion for summary judgment is something that happens all the time — that’s anticipated. And we don’t think there’s any chance that they could win. If you stop funding now, we can’t prepare for trial.’”
The war room was ready, the technical experts were prepped, all the groundwork was laid for a solid trial, but the funder balked, and a tense dialogue ensued.
“There were some difficult communications back and forth,” Fabricant says. “They finally changed their mind and decided they’d continue to fund the case. Of course, the motion was not granted. The case went to trial, and we won against a major tech company. But that funder was essentially willing to blow up the litigation a month before trial. I didn’t understand it. They were going to blow up their own investment and destroy the ability of the law firm and the client to take this case to its conclusion, for no logical, rational reason.”
Relationship Integrity
As the litigation finance space grows and matures, the quality of relationships is the real premium. Funders and litigators need to have mutual trust for strategies and tactics to be effective. Without that understanding — without a common perspective of what success looks like — any litigation becomes a war fought on many fronts.
“The trust between the funder and the law firm is critical,” Fabricant says.
Smart, committed funders and other market participants are the key to the next phase in litigation finance. A deep understanding of the space, including the duration and nature of trials, is requisite to continued success.
“Clearly the insurance business is coming in with products that didn’t exist five years ago,” Fabricant says. “Those can only aid in getting more quality cases, and getting more cases filed. The risks have gotten more severe because of Federal Circuit decisions, because of venue decisions, because of inter partes review.
“The fact that someone’s willing to wrap an insurance policy around this to protect the downside will give funders more comfort and allow more cases that deserve to be brought,” he says. “It’s more difficult today without these insurance products, just as it is more difficult today to get a case funded than it was two years ago. The risks have increased.”
With rising interest rates and a more uncertain rate of return, the risk analysis weeds out the less serious market participants. Not everyone who has entered the litigation finance space in recent years may have the countenance to weather a rough spell.
“It’s harder today than it was two years ago to just get cases funded, and I think insurance could help that,” Fabricant says. “The secondary market is also a major player. I know that funds that have invested in a lot of cases are now in the process of selling off some of their investments to secondary markets.”
The question then becomes whether that might interfere with the trust relationship between the law firm, the plaintiff, and the funder.
Fabricant notes that he’s had too few cases transferred to a new investor during the course of litigation to know whether such scenarios would significantly impact his decisions on whom to trust. “But I can see that it could,” he says.
“I like the fact that there’s so much interest in this space — that’s positive,” he continues. But he’s not ready to predict how it would play out to replace some or all of the funders in the middle of a campaign. “People who originally purchased this investment, who met the inventor, who were comfortable with the people involved, who liked the law firm — now all of a sudden it’s some stranger I’ve never heard of?” Fabricant muses. “Hopefully it works.”
At the end of the day, he views the increased visibility of litigation finance as largely positive, but the open question is whether there may soon be too many cooks in the kitchen.