June 10th, 2009 - 2 Comments
The New York Times recently reported on an area of investment that has remained lucrative even during the economic downturn: investing in lawsuits in exchange for a share of the winnings.
According to Smeal’s Anthony Warren, this is not a new investment trend. Law firms often accept cases on contingency and now some smaller companies are realizing the benefits that come with investor-backed suits.
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Originally, the concept was a way for small, undercapitalized companies to fight legal battles against large companies, which have a propensity to outspend small companies that file patent infringement suits. There are a number of law firms that take such cases on a “contingency basis,” whereby the legal work is not charged to the client. The law firm then typically takes 50 percent of any settlement that is reached with the large corporation.
For example, lawyer Morgan Chu took on a case against Microsoft on behalf of Stac Electronics. It was alleged that Microsoft had used Stac code for data compression embedded in a version of the MS-DOS operating system. Eventually the case was settled for more than $80 million in favor of Stac. Ron Chasteen, an entrepreneur in Minnesota did not have the $1.5 million dollars to fight an alleged technology theft case against Polaris Industries. Law firm Niro, Scavone, Haller & Niro took on the case contingently. The settlement was for $70 million—not a bad return for the law firm taking on the case.
Smaller companies are now realizing that raising funds to fight a law suit against a large company may be a better strategy than sharing 50 percent of the proceeds with a contingent law firm. For example, venture capital-funded AmberWave Systems raised additional equity funds of $15 million to fill its cash war chest when it filed a lawsuit for patent infringement against Intel Corp. Once Intel realized that there were sufficient funds available to AmberWave and that outspending the small firm in legal fees was no longer an option, a fair settlement was promptly reached, meeting the requirements of both parties.
Thus paradoxically, once a large company realizes that a smaller firm has the wherewithal either through investors willing to fund litigation, or an aggressive law firm with a strong litigation department as a partner, a settlement can usually be reached without a long drawn-out battle, or the need to spend a lot of money.
Small companies should therefore choose their patent law firm carefully, seeking a large practice with a record of winning in infringement cases and a willingness to take on contingent work. Such a choice may well avoid any litigation in the future.