Case Study: Using Funding to Convert an IP Divestment Strategy into an IP Assertion Strategy

November 28, 2018

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As companies move towards putting their litigation claims to work as assets, they are reevaluating their asset optimization strategies. The below case study, one of several we’ve published to help our readers understand litigation finance in context, explores a hypothetical scenario in which a company weighs how to best optimize the value of a patent portfolio.

The company is weighing whether to divest or assert a portfolio of ten patents, five of which have survived Inter Partes Review petitions brought by competitors seeking to invalidate the patents. The patents are being infringed by a leading manufacturer in the same industry, which uses them in the production of a component part for a technology product sold by the three other major players in the industry.  

The company has performed an analysis into the realistic damages it could win if it were to sue the manufacturer creating the infringing component part. It believes it could prove infringement of the entire portfolio and could realistically win $200M in damages. While the company’s Litigation Counsel is advocating for assertion of the portfolio, its Chief Financial Officer is cautioning against the strategy, pointing to costs the company paid to defend a counter-suit it faced five years ago when it asserted a different portfolio against the same manufacturer. 

The Earlier Scenario

In the earlier scenario, the company paid $15M in legal fees and $5M in costs to assert a portfolio, plus $5M in legal fees and $2.5M in costs to defend against the counter-suit, bringing the total portfolio assertion and defense campaign cost to $27.5M. In the end, only three of the patents were found to be infringed, with the company winning $50M in damages from the plaintiff suits and defeating the counter-suits without any losses.

Though successful on its face, the assertion campaign was perceived to be a loss for the company because it was pursued in lieu of a divestment strategy that would have involved selling all rights to the portfolio for $35M.

By the time the hard-fought litigation battle was over, innovation had rendered the technology supported by the patents nearly obsolete. The patents had little utility to the company and were of no interest to previously interested purchasers, making the $22.5M the company recovered from the trials after all expenses were paid seem like a $12.5M mistake.

Following the loss, the company’s board capped the company’s plaintiff-side litigation spend budget at $10M per year.

In the current scenario, the company does not have an offer on the table for the portfolio it is considering for divestment or assertion, but it believes it could expect a $25M buy-out if it pursues divestment. While earning $25M from the buy-out would be a significant revenue-generating opportunity for the company, its projections indicate that the patents will retain their utility for at least ten more years, which will allow them to retain long-term revenue generation potential of $100M or more.

The company’s $10M cap on plaintiff-side litigation spend impedes its ability to assert the portfolio. At most, it could assert four of the patents in the portfolio. This course of action will exhaust its entire $10M budget for plaintiff-side litigation ($8M in legal fees + $2M in costs). The gross recovery the company could earn is $80M. The net recovery (gross less legal fees and costs) would be $70M. Pursuing this course of action would expose the company to the risk of a counter-suit, which could cost at least $6.5M ($5M in legal fees + $1.5M in costs). The opposing party’s litigation history makes clear that a counter-suit is highly probable. A complete victory in the suit and counter-suit would leave the company with a net recovery of $63.5M, but a complete loss could cost at least $16.5M, plus potential damages from the counter-suit.

The company decides that the long-term revenue generating potential of the portfolio justifies asserting the portfolio, rather than divesting it. However, they decide to seek funding to mitigate the risks they face in pursuing the campaign.

The Funding Proposal

The company approaches Bentham IMF seeking the $20M needed to hire outside counsel to pursue the litigation.

While returns vary by the deal, assume here that Bentham commits to provide the capital in exchange for a 3x return on its investment, to be paid from the recoveries the company wins in the cases. Bentham wants the company to have “skin in the game” to appropriately align incentives. It decides the best way to do so is to ask the company to pay the costs, which are projected at $4M. Bentham also offers to use the potential recoveries in the plaintiff-side suits as collateral for funding the company can use to cover $10M in legal fees it may incur for any counter-suits it faces in the litigation. Should those cases arise, the company will cover the costs, which they project at up to $2.5M.

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The Upside of Using Funding

Bentham’s funding positions the company to hire the firm of its choosing to handle the assertion campaign, plus any counter-suits brought in response, protect and maximize the value of the portfolio, as well as potentially earn $200M in gross recoveries. The net recoveries the company could earn are $136M ($200M gross recovery, less $4M investment for costs and a $60M return to the funder). 

Should the company face counter-suits and exercise its option to take an additional $10M in funding from Bentham, complete success could yield the company $103.5M in net recoveries ($200M gross recovery, less $6.5M investment for costs and a $90M return to the funder).

In either scenario, the company saves millions of dollars it would have otherwise paid in legal fees, insulating itself from the risk of failing to prove infringement of any of the patents. Without funding, such a loss could cost the company $24M if there is no counter-suit and up to $36.5M if there is a counter-suit.

Conclusion

To learn more about the inventive ways Bentham can help companies develop asset optimization strategies that maximize revenues and profits, contact us for a consultation.

See more examples about how litigation finance benefits companies and firms by visiting our previously published four-part case study series:

Part One: Generating Multi-Million Dollar Revenues with Litigation Funding
Part Two: How Litigation Funding Can Preserve Corporate Solvency During a Bet-the-Company Battle
Part Three: How Law Firms Can Use Portfolio Financing to Broaden Fee Arrangement Options for Clients
Part Four: How a Hybrid Portfolio Can Help Firms Extend Discounts on Defense-Side Cases