Litigation funding has emerged as a significant tool for plaintiffs in patent infringement cases, providing them with the necessary financial resources to pursue their claims. This type of funding is particularly beneficial for smaller entities or individuals who may not have the means to sustain a prolonged legal battle against larger, well-funded defendants. The process typically involves a third-party funder who agrees to finance the litigation costs in exchange for a portion of the settlement or judgment award. The legal arrangements for litigation funding can be complex, and such arrangement can be significantly complicated by the regulations of the Israeli Innovation Authority.
Legal Arrangements and Considerations
The legal arrangements accompanying litigation funding are complex. These arrangements often include terms regarding the allocation of the recovery amount, the funder’s involvement in the litigation process, and ownership of the patent asset.
A central issue in litigation funding arrangements is the waterfall of payments, which dictates the order in which proceeds from a successful litigation are distributed between the funder and the patentee. Typically, payment waterfalls allocate any litigation proceeds to repay litigation costs, provide the funder with a return on investment, and allocate remaining profits between the funder and the patentee. Payment waterfalls can also include incentive structures, such as bonuses for receipts that exceed a certain threshold or additional payments if litigation concludes within a shorter timeframe. Of course, the details of any payment waterfall can be the subject of significant negotiation.
In addition, in some litigation funding arrangements, it may be advantageous to transfer the patent assets to a Special Purpose Vehicle (SPV). An SPV is a subsidiary company created for a specific purpose, such as holding and managing patent assets separately from the parent company. Transferring patent assets to an SPV may allow for the isolation of risk and may facilitate financing, but may also involve significant issues including tax considerations and the control and management of the SPV.
Lastly, thought needs to be given to how security interests in funded intellectual property assets should be registered and perfected under Israeli law. Israeli law does allow for security interests in patents and patent applications, but multijurisdictional questions can arise regarding the perfection of such security at intellectual property offices outside of Israel.
Israeli Innovation Authority Funding
The complexities of structuring patent litigation funding arrangements are further heightened when the patent assets have been developed through Israeli government funding. The Israeli government will often allocate research and development funding, especially to startup companies, through the Israeli Innovation Authority (IIA). At the same time, IIA funding can come with significant strings attached, such as restrictions on the transfer, pledging or licensing of intellectual property assets, and certain obligations to make payments to the IIA. Such payments may reflect a multiple of the original amount of the IIA funding.
A patentee’s obligation to the IIA may conflict with the terms of a litigation funding arrangement. For example, payment obligations to the IIA may complicate any agreed waterfall structure, with the IIA demanding receipt of royalty or grant amounts before any amounts can be paid out according to the waterfall. These demands may also complicate potential litigation and settlement strategies, since they may necessitate that patentees demand higher settlement amounts than would otherwise be necessary to payout funding arrangements. IIA restrictions on transfer, pledging and licensing may also complicate funding arrangements. For example, IIA transfer restrictions may rule out transfers to separate SPVs. In addition, IIA licensing restrictions may complicate certain settlement arrangements that involve forward looking licenses to defendants. In conclusion, while litigation funding offers a valuable avenue for plaintiffs in patent infringement litigation, it is accompanied by a myriad of legal and commercial considerations. These complexities are further heightened when the patent assets are funded by entities like the Israeli Innovation Authority, necessitating a thorough understanding of the interplay between funding arrangements and local Israeli regulations.
This publication is provided as a service to our clients and colleagues, with explicit clarification that each specific case requires individual examination and discussion in writing.
The information presented here is of a general nature and is not intended to answer the unique circumstances of any individual or entity. Although we strive to provide accurate and available information, we cannot guarantee the accuracy of the information on the day it is received, nor that the information will continue to be accurate in the future. Do not act on the information presented without appropriate professional advice after a comprehensive and thorough examination of the specific situation.
