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Swapping shares for support in litigation

Editorial Staff

When a court in Texas found in favour of a small Toronto based software company against Microsoft, the success was shared by the owners of the company - owners which include a specialist VC fund that buys into companies engaged in litigation.

Legal expenses insurance is a long-standing tool in the corporate armoury but it's becoming very, very expensive. Even contingency fees, often running to as much as one-third of the amount recovered are beginning to look like a duff deal for businesses that need the proceeds of litigation to run themselves. And costs awards against losing opponents are a very uncertain means of funding litigation. So all too often, businesses have to fund the running of litigation themselves.

So when i4i started the long haul to prove that Microsoft had infringed its US patent over the use of custom XML ( story ) one of the primary fears of the company and its backers was whether the costs of litigation would drive them out of business.

Enter Northwater Intellectual Property Fund. It's a specialist fund that brings both capital and expertise in managing patent litigation to companies with a demonstrable claim that their patent has been infringed.

Large companies litigate against small companies in one basic way - and it has little or nothing to do with the merits of the case. It's called "document bombing" and it involves delivering vast quantities of documents to the other party's law firm so as to overwhelm it and cause massive costs increase. Often vital evidence which would support the other party is buried in the document bomb or there might be evidence harmful to the other party's case which the party delivering the document bomb will refer to later claiming that the other party failed to disclose it. In extreme cases, the document bombs have been delivered in several large lorries, usually right on deadline, so as to defeat any time-frame that the Court might have set for discovery.

Companies that know that tactic know they need "leverage" i.e. the power to handle document bombs and, if necessary, to produce their own although, generally, the best tactic against a document bomb is to adopt a rapier technique, attacking specific weak spots in the documents thereby turning the document bomb back on its sender who has to defend it.

All of this costs a lot of time and, in litigation, time is money for fees and also the opportunity cost of the business which loses at least part of its operations and management staff to the litigation.

Northwater Intellectual Property Fund is an example of how that leverage might be provided. By taking shares in the company, the Fund takes a direct interest in the litigation but is not a third party financing litigation: in some jurisdictions that is unlawful, or at least places that person at risk as to costs. So the Fund is protected against costs orders and its contribution is known and limited.

For the company, it knows what it has to spend - and has assistance in spending it wisely.