Litigation Finance in ITC Investigations

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Litigation Finance in ITC Investigations

Part court and part administrative agency, the International Trade Commission (“ITC”) offers attractive differentiations from US federal district court to claimholders looking to enforce intellectual property rights. Patent infringement investigations before the ITC are more expensive and have additional diligence hurdles compared with district court cases. Success therefore requires understanding the pros and cons and partnering with lawyers and/or litigation financiers who specialize in Section 337 Investigations.

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Litigation Finance in ITC Investigations

Woodsford Litigation Funding Insight

Part court and part administrative agency, the International Trade Commission (“ITC”) offers attractive differentiations from US federal district court to claimholders looking to enforce intellectual property rights. Patent infringement investigations before the ITC are more expensive and have additional diligence hurdles compared with district court cases. Success therefore requires understanding the pros and cons and partnering with lawyers and/or litigation financiers who specialize in Section 337 Investigations.

The ITC:

The ITC is a quasi-judicial, non-Article III forum functioning as part of the executive branch of the United States federal government. The ITC provides independent analysis on tariffs, trade and competitiveness to the federal government, but more relevant to this discussion, under Section 337 of the 1930 Tariff Act the agency determines the impact of imports on U.S. industries and directs actions against unfair trade practices such as patent, trademark and copyright infringement as well as subsidies and dumping. The agency has the power to issue exclusion orders through Customs, halting infringing products at the border.

Process:

Although the ITC is not a court, its administrative law judges (“ALJ”s) conduct trial-type administrative hearings. The six Commissioners, nominated by the President and confirmed by the Senate, vote on whether to investigate a Section 337 complaint. If three or more of the six Commissioners vote to do so, an official investigation is opened and assigned to an ALJ. Any related district court litigation is mandatorily stayed during the Investigation. After the parties have had the opportunity to conduct fact and expert discovery to develop their respective legal positions, the ALJ holds a formal, evidentiary hearing, which is the ITC equivalent of a trial.

In Section 337 actions the Office of Unfair Import Investigations (the “Commission Investigative Staff” or “OUII”) serves as an independent third party representing the public interest and participating in briefings and hearings. There is no jury in the ITC. About three months after hearing the arguments of the parties at the evidentiary hearing, the ALJ renders an initial determination (“ID”) regarding the key disputed issues. The Commission then reviews and may adopt, modify or reverse the ALJ’s initial determination about four months after the ALJ’s ID. Judicial review is exercised by the United States Court of Appeals for the Federal Circuit.

The ITC is a powerful forum to consider for claim holders. There are a number of important advantages and disadvantages to consider before filing:

Advantages:

• Injunctive relief:

Following eBay v. MercExchange, injunctive relief in intellectual property cases is all but impossible to obtain in US federal district court. The ITC can render exclusion orders requiring that certain sellers or infringing articles are to be halted at the border, leveraging the threat of losing the US as a market in settlement discussions.

• Multi-party action:

Numerous parties can be litigated against in a single ITC investigation, as opposed to district court which requires discrete cases, saving in legal fees and other litigation associated transaction costs.

• IPR:

ITC Investigations are not halted for filing or institution of inter-partes review (“IPR”) proceedings in the Patent and Trademark Appeal Board of the USPTO. Further, due to the speed of the ITC process, final decisions are usually rendered faster than the PTAB can rule.

• Jurisdiction:

Jurisdiction in the ITC is in rem, meaning the article itself is the subject of the investigation, alleviating needs to navigate the Hague Convention to bring a foreign company to court to account for its infringement.

Disadvantages

• Access:

The ITC requires that a claimant establish that it has “domestic industry”, meaning the claimant must domestically manufacture and sell products covered by the intellectual property in question or make other substantial investments in the IP.

• Cost:

As mentioned above, ITC investigations are significantly more expensive than cases in a district court. Claimants need to be prepared to spend at least another third more. And if a case does not receive the relief desired because of domestic industry or the public interest, it might be necessary to re-litigate in district court. Further, the spend is largely compressed into 12 months instead of spread over years.

• Damages:

The ITC does not consider or award damages. This can make the discovery of valuation information such as units sold, prices and royalties more convoluted and settlement discussions more difficult.

• Specialization:

Few firms practice regularly before the ITC. The complexities of the forum require specialization- meaning fewer law firms for claimants to choose from and fewer options for contingency counsel if needed.

• Design around:

Since the ITC does not award damages, but just injunctive relief, it is possible that even a successful case will not result in monetary proceeds. The ability to design around the asserted intellectual property can immunize an importer from the sting of an exclusion order.

Litigation Finance Generally:

Litigation financing is, broadly, how pursuing a legal claim is paid. All litigations are financed, whether by the claimant paying lawyers hourly and costs out of pocket, by a law firm in return for a portion of recovery, or by a litigation financier.

Third party financing is when an unrelated third party pays part or all of the legal fees and costs of litigation. Similar to a contingency financing by a law firm, a third-party financier, like Woodsford, provides capital to plaintiffs with good claims to offset litigation costs in return receives a portion of the recovery in a successful case. The funder does not have the right or ability to influence the strategy of a litigation or dictate settlement decisions. A funder does not interfere with the attorney client relationship. Funding is typically provided on a non-recourse basis, i.e., the funder’s return depends on a successful outcome in the litigation. If the claim is not successful, nothing needs to be paid to the funder.

There are further benefits to working with a financier over those from self-financing or working with a law firm on a contingency.

Preservation of capital:

With a financier covering some or all of the costs of litigation, a company can direct capital into growth opportunities, while ensuring that the cost of litigation won’t be a consideration when considering settlement.

War Chest:

A company backed by a litigation financier may reach a higher and faster settlement than an unfinanced claimant because defendants are less likely to attempt to drive up legal costs to force the plaintiff’s hand.

Signaling:

Further, the support of a sophisticated professional funder signals to a tribunal and defendant that a sophisticated and experienced third party has objectively determined that the merits and return of the case justify the investment of capital.

Strategy Resources:

While passive investors, a litigation funder like Woodsford provides access to a backroom of experienced litigators as a resource.

Litigation Finance in the ITC:

In fact, litigation funding agreements have already been contemplated by the Commission, who has held that they do not interfere with standing so long as the financier does not control the litigation. See In Certain Audio Processing Hardware, Software, and Products Containing the Same, Inv. No. 337-TA-1026. But ITC matters offer unique challenges to litigation financiers, which is why few will consider financing 337 investigations. For claimants and law firms, its critical to work with a financier with understanding and experience in the ITC for the following reasons:

• Litigation Costs:

As above, in the ITC, a financier needs to be prepared to invest considerably more to achieve the same potential settlement. Further, ITC cases move extremely quickly. While district court litigation often lasts for three or more years, the ITC completes its Investigation and review in just 18 months, compressing investment capital spend. Is your financier comfortable with the budgets, timelines and returns?

• Additional legal hurdles:

In addition to validity and infringement, financiers need to underwrite for domestic industry – an evolving area of law not best handled by a generalist. Since domestic industry is decided at the end of the case, it is even possible to have a valid infringed patent and no enforcement if domestic industry isn’t found, which means beginning again in district court. Further ALJs also consider how the public interest might be impacted by an exclusion order – an uncertain principle that may lead to the rejection of relief on grounds related to the impact, rather than the merit, of the case. Has the financier performed diligence on domestic industry and the public interest and does it understand the risks?

• Familiarity:

The personalities in the ITC, from ALJs, to staff attorneys and practitioners, are different from the district court world. Litigation financiers without in-house experience are going to be at a disadvantage. Has your financier backed ITC cases in the past? Did their in-house litigators practice before the ITC?

• Damages:

The ITC does not hear or award damages, but in nearly all cases financiers are depending on a financial result to make a return on their investment. Settlements often occur, but underwriting is challenging, damage theories are less mature and price discovery is informal. Discovery will be limited in crucial areas. Is the financier on the same page as your client and comfortable with the potential outcomes?

The ITC is a formidable venue for enforcing intellectual property rights. But it is different and in some ways significantly more risky than pursuing the same claim in US district courts. As a claimant develops a strategy it should endeavor to engage with experienced firms and financiers such as Woodsford who can navigate the differences. When it comes to the unique challenges and opportunities of the ITC, the right partners can make all the difference between success and failure.

About the author

Michael Kallus is a Senior Investment Manager for Woodsford based in San Francisco with a background in complex IP litigation and finance. He joined Woodsford from international alternative investment manager Fortress Investment Group, where, as Vice President, he supported the IP finance group in sourcing IP backed litigation finance, debt and private equity investment opportunities, maintaining relationships with law firms and claims owners, aiding in asset valuations, directing drafting of transactional documents and managing investments post financing.

Prior to Fortress, Michael was a director in the Client Development and Acquisitions teams at RPX Corporation maintaining relationships with in-house legal teams, tracking and analyzing market patent risk and negotiating litigation buy outs with plaintiff’s counsel of claims on behalf of RPX clients.

As a litigator, after clerking for the Honorable Chief Judge Roger Vinson in the Northern District of Florida, Michael practiced in the Boston office of Fish & Richardson. Michael also worked for the Palo Alto office of Morgan Lewis and later helped found fixed fee litigation boutique, Confluence Law Partners. In addition to IP litigation, Michael has handled trade secret and antitrust claims, drafted technology transfer licenses, and provided M&A support to multi-billion dollar acquisitions. Michael has practiced before a variety of federal and state courts as well as the International Trade Commission and the US Court of Claims.

Michael earned a BA in political science from the University of California Berkeley in 1997 and a juris doctorate from the University of Virginia School of Law in 2003. He is a member of the California and Massachusetts bars.

For further information email Michael directly: mkallus@woodsfordlf.com