ARE LEGAL FINANCING COMPANIES ENCOURAGING TROLLING? One of the reasons that patent litigation has increased dramatically over the last 5 years is that patentees have begun to really appreciate the importance (and power) of their patent portfolios. Companies that formerly viewed patents as supplements to their main product lines have now turned patents into a main financial staple through licensing and enforcement. Holding companies rely exclusively on patents to provide profits for the business.

However, enforcing patents is an expensive process. Previously, smaller entities were not financially capable to take an infringement action to trial. In such cases, patentees turned to a small cadre of lawyers and law firms that developed effective ways to represent patentees on contingency or other alternate billing arrangements.

But contingency cases are huge risks. For every multi-million dollar judgment that makes the headlines, there are at least 10 other cases that either provide marginal returns to the patentee or are complete disasters. Most of the larger firms are very reticent to take on smaller patentees for this exact reason - without some kind of guarantee that billable time will be compensated, the risk of representing a new client on contingency is too great.

Enter legal financing corporations.

Such companies, like Oasis Legal Finance, have begun to bridge the gap between smaller patentees and law firms that wouldn't normally consider taking them as clients. They are part of the growing business of financing commercial lawsuits, such as patent and contract disputes. Under a typical arrangement, if the litigant wins, the financing company gets a return on its loan of 20 to 50 percent, plus sometimes a percent of the final judgment. But since the loan is non- recourse, if the case is lost, the plaintiff doesn't have to pay back the money.

As a side note, the legal finance industry has been criticized as a form of predatory lending, because financing costs are so high. In an effort to raise standards and improve their image, industry players such as Oasis Legal Finance and LawCash organized a trade group earlier this year called the American Legal Finance Association.

To take a case, the potential damages in a case must be substantial -- generally more than $500,000 -- and the defendant must be big enough or have good enough insurance to pay out. Obviously, the facts of the case also must be strong enough for an investment. Under a typical contingency arrangement, the litigant doesn't have to pay the lawyer unless the litigant wins. But expenses like expert witnesses, deposition transcripts and travel often have to come out of a litigant's pocket.

One recent example of such financing is the case of Solomon Technologies, Inc. who brought suit against Toyota Motor Corporation, Toyota Motor Sales U.S.A. Inc. and Toyota Motor Manufacturing North America in the United States District Court for the Middle District of Florida, Tampa Division, on September 12, 2005, claiming infringement of a number of claims in Solomon's patent number 5,067,932, primarily relating to Toyota's use of the technology in its Prius and Highlander Hybrid vehicles.

It is likely that more of these arrangements will be made once patentees, law firms and financing companies become more sophisticated in handling such transactions. In a way, these arrangements will, in effect, validate claims of patent infringement once they are filed, since the case will be vetted by multiple sets of eyes prior to moving forward. A result of this may be that settlements will come more quickly, since larger companies can't necessarily engage in "ground 'n pound" tactics against smaller plaintiffs. And if this becomes routine for a particular company or industry, you can bet that they will become easy targets, especially for "emerging" holding companies.