The Art and Science of Diligence in Funded Patent Litigation: A Guide to Selecting Diligence Counsel

Patent litigation is widely acknowledged as one of the most expensive and complex areas of dispute resolution. With stakes frequently running into the tens and hundreds of millions of dollars, the question of whether a patent enforcement action is viable depends on much more than a cursory glance at a patent’s face page and a few hopeful conversations with patent counsel. In today's litigation finance landscape, where insurers and funders play crucial roles, confirming that a case is meritorious and has a viable path to success is essential. The risk of financial missteps or misguided underwriting is substantial, and the penalty is immense. Diligence, therefore, has become both an art and a science, orchestrated to maximize the likelihood of a favorable return on investment.

This article provides an analysis of the diligence process for funding of patent litigation for both third-party funders and insurers. It touches upon everything from confirming the validity of the patent claims to evaluating the qualifications of the personnel conducting diligence. If you can’t trust a lawyer to try the case successfully, why would you trust them to conduct the diligence? 

I. Understanding the High Stakes of Patent Litigation

Patent litigation is like the “championship tournament” of civil litigation. It can be long, messy and unpredictable, often requiring extensive technical expertise, the unraveling of complex prior art, and trial counsel skilled in the minutiae of claim construction. On top of that, the complicated interplay between legal questions of validity, infringement, damages and enforceability imposes additional stress on both plaintiffs and defendants. For funders and insurers, the bill for all this can be jaw-dropping.

The weight of these cases—financially and strategically—is precisely why thorough diligence has become non-negotiable. Patent-litigation funders often commit multimillion-dollar sums on a single bet. In such a high-stakes environment, “winging it” is ill-advised. Effective diligence ensures that every aspect of a potential case is vetted before the check is written or the policy is issued.

II. Scope of the Diligence Process

At its core, diligence aims to peel back the layers of the proposed litigation to assess its likelihood of success and financial attractiveness. The diligence process should encompass:

1. The Patent(s): Examination of the patent family, its claim scope, its prosecution history, and how it might stand up to invalidity arguments.

2. Infringement Analysis: A close look at the accused products or processes to determine whether (and how) they read on the asserted patent claims.

3. Damages Potential: An assessment of potential remedies, from reasonable royalties to lost profits, and whether the defendant(s) has the resources or impetus to pay a judgment.

4. Litigation Strategy: A blueprint for how the case might be prosecuted from filing through trial—or settlement.

5. Commercial Realities: A realistic projection of time-to-payout, cost of litigation and intangible factors, such as the reliability of witnesses and the level of cooperation from the patent owner.

Funders, insurers and counsel who confine themselves to just a superficial read of a high-level claim charts and a brief prior-art review risk missing critical pitfalls. Diligence is a multifaceted, ongoing process that often continues throughout the life of the case.

III. The Importance of Engaging Quality Outside Diligence Counsel

Having a strong attorney who can litigate the case is crucial; having someone who can help you identify the strengths and weaknesses of the case before the “real” fight begins is just as important. This begs the question: Who should perform the diligence?

- Technical Expertise: Diligence counsel should have in-depth understanding of the technology at issue—whether it’s software, semiconductors, pharmaceuticals or mechanical systems. There is no substitute for an experienced litigator who knows the technology as well as any in-house engineer.

- Trial-Ready Savvy: Diligence counsel should be capable of trying the case themselves. If you wouldn’t let them handle Markman proceedings or cross-examine the star technical expert, then they probably shouldn’t be the ones to evaluate the likelihood of success. Diligence is, at its heart, litigation prep work.

- Conflicts of Interest: It is crucial that your outside diligence counsel has no conflicts—subtle or otherwise—that might color their opinion. That means no pre-existing ties to the defendant, plaintiff and patents, and no stake in any patent licensing entity that might compromise objectivity.

Why this focus on experience? Patent litigation is a specialized discipline, and the best patent litigators tend to spot weaknesses quickly. They’ve lived through enough depositions and cross examinations (not to mention IPRs) to know when a piece of prior art is a mere red herring versus a crippling blow. They also won’t sugarcoat your chances. Indeed, the best diligence advice often hurts to hear. But an honest assessment can save a funder millions of dollars and months (if not years) of headaches.

IV. Core Components of Patent Diligence

1. Claim Construction Analysis
Infringement and validity both turn on how the claims are construed. A thorough diligence process demands analyzing the patent’s prosecution history, prior litigation rulings (if any), and the typical arguments used during Markman proceedings. The problem is that Markman can be a “wild card” in certain jurisdictions—one judge’s “plain and ordinary meaning” might be another’s “requires special structure.” Venue, as with most issues in today’s patent cases, must be considered. The diligence team must parse the language meticulously and anticipate possible arguments from both sides.

2. Validity and Prior Art Investigations
A robust prior art search is non-negotiable. This is not something you want performed by a fresh-faced junior associate who just discovered Google Patents. It requires targeted knowledge of the relevant field, specialized prior art databases, foreign patent literature, and sometimes non-patent literature. Preferably the search should be conducted and analyzed by the same level of lawyer that will be trying the case. Again, if you wouldn’t hire the lawyer or firm to try the case, you should think twice about relying on them for determining the likelihood of success of the case. The diligence counsel should also thoroughly evaluate the prosecution history to see if the patentee made disclaimers or if the examiner ever raised a killer reference that was later dismissed without good reason. If the patent has been through an inter partes review (IPR) or post-grant proceeding, analyzing the Patent Trial and Appeal Board’s (PTAB) reasoning (and the parties’ arguments – especially the patentee’s) is crucial.

3. Enforceability Issues
Inequitable conduct can destroy a case instantly, so it’s vital to check if the patentee (or their counsel) withheld material references or misrepresented facts to the United States Patent and Trademark Office (USPTO). Additionally, certain patent misuse or exhaustion arguments can derail a well-structured case. If these issues are lurking in the background, a good diligence team should be the first to flag them—long before the defendant does. 

4. Infringement Analysis
The big question: do the defendant’s products or processes actually practice each and every element of at least one valid claim? Patent law is unyielding on this point—if even one element is missing or not met, the plaintiff loses. And there can be no indirect infringement without direct infringement. Also, divided infringement issues abound, and the claim language must be analyzed for infringement by a single party, or at least a party under control of the defendant. Diligence requires reviewing public technical documentation, product manuals, and even source code if it is available. Getting an expert’s preliminary opinion on infringement can be invaluable, but that expert should also be “trial grade,” because the last thing you want is an academic who folds under cross-examination.

5. Damages Assessment
Not every patent—even an infringed one—is a golden goose. Some are valuable in theory but in practice produce a modest licensing revenue stream. Diligence counsel should perform a realistic damages assessment, factoring in the target markets, comparable license agreements, royalty rates, the potential for lost profits claims, and the defendant’s potential ability to pay. It’s a major red flag if the projected damages exceed, say, the total revenue of the defendant’s entire product line. This can only be done by attorneys that have litigated and tried damages cases. So the diligence attorney should not only be an excellent litigator and trial lawyer, as well as a technical authority, but also an experienced damages specialist.

6. Litigation Budget and Timeline
Patent cases can run two to five years—or longer if appeals ensue. A candid conversation about litigation costs (especially attorney’s fees, expert fees, travel, e-discovery) must happen early. Funders and insurers must have a sense of how the litigation might evolve over time. Early settlement might be a possibility if the defendant is risk-averse, but that’s no guarantee in a world without injunctions. A thorough diligence process projects multiple outcomes and estimates costs for each stage.

V. The Preferred Qualifications for Outside Diligence Counsel

Let’s be blunt: If you wouldn’t trust a particular attorney to deliver a killer closing argument in front of a hot bench or an unpredictable jury, you probably shouldn’t hand them the keys to your multimillion-dollar diligence process. Diligence counsel serves as your “sheriff” in a new, dusty frontier. Their experience and connections can make or break the expedition. So, what qualifications matter?

1. Litigation Track Record: How many patent cases have they handled through trial? It’s not enough to have a fancy resume with Ivy League credentials. Ask how many Markman hearings they’ve handled, whether they’ve gone through summary judgment, or if they’ve second-chaired or first-chaired a patent trial (and how many and the results).

2. Technical Prowess: Does counsel have an engineering or scientific background? Patent bar membership is a plus, but it’s not everything. Some of the best trial lawyers do not have a technical degree, yet they’ve mastered biotech or software cases. The key is real-world experience litigating similar patents.

3. Transparent Communication: The best diligence counsel can deliver a high-level briefing to a funder’s executives, underwriters and claims managers without making them feel incompetent. They also know how to craft an understandable but thorough deep-dive that stands up to the scrutiny of your in-house experts. Communication and honesty matter immensely.

4. Understanding of Litigation Funding Mechanics: If diligence counsel has never worked on a funded case or has no idea how litigation insurance underwriting works, you may end up spending half the time explaining the business model. Find someone who’s done this before. They’ll know how to structure an agreement, forecast budgets and work collaboratively with third-party funders or insurers. Also ask them about any losses or other problems they have had in funded cases. You don’t want folks that have screwed up cases for other funders to be the arbiter of the value and efficacy of your case.

5. Ethical Fortitude: The entire point of diligence is to get an unbiased, comprehensive snapshot of risk. You want an attorney with strong moral fiber who will not shy away from telling you that your “slam dunk” might just be an airball. Honesty and forthrightness is paramount. If a prospective attorney’s marketing materials or conversation is a perpetual sales pitch of guaranteed success, run.

VI. Overlooked Yet Crucial Diligence Factors

1. Venue Specifics
The likelihood of success for patent cases can vary significantly by jurisdiction. Every district and every judge each have their own rules, inclinations, and tendencies. Time to trial varies, as does the approach to allowing cases to trial. Some courts see their purpose as protecting the jury from cases the judge does not like. Other courts take a more constitutional approach and believe in the jury system. A thorough diligence evaluates the local patent “climate,” judge assignment, and possible timeline differences. A judge notorious for quick Markman and trial schedules can significantly alter case strategy.

2. Corporate Structure of the Defendant
Sometimes the real treasure is not in the main corporate entity but in subsidiaries or overseas affiliates. If you’re looking to enforce a judgment, you need to ensure the defendant has assets within reach. This also applies to who owns the infringing aspects. The best patent case in the world won’t matter if the defendant can’t (or won’t) pay, or if the ultimate infringer is a party you didn’t sue.

3. Inter Partes Review (IPR) Risk
These days, the Patent Trial and Appeal Board has become a significant hurdle. The threat of IPR—leading to a stay of the district court proceedings in many courts—needs to be a major part of the initial analysis. Diligence counsel should evaluate the likelihood of an IPR being instituted and the prospects of success or failure if it is.

4. Counterclaims
If the plaintiff is an operating entity with business to protect, the defendant may counterclaim with antitrust allegations or an infringement suit of their own. The potential for a messy back-and-forth must be taken into account. This is often overlooked in initial diligence but can dramatically shift the litigation dynamic.

5. Potential for Enhanced Damages or Attorneys’ Fees
Willful infringement or particularly egregious litigation behavior can lead to enhanced damages. Conversely, the defendant could push to characterize the plaintiff’s litigation as frivolous, seeking attorneys’ fees under 35 U.S.C. § 285. A skilled diligence counsel will weigh these possibilities carefully.

VII. Common Pitfalls and How to Avoid Them

1. Relying on Incomplete Information
Occasionally, funders receive a polished “litigation pitch deck” from the plaintiff. It looks great—lots of bullet points, some technical diagrams, and statements like “Infringement is clear; damages are large.” Resist the temptation to rely on these marketing materials without independent verification. Invest the time and resources in thorough investigations by experienced third-party patent litigators.

2. Ignoring Settlement Dynamics
Some funders only focus on the question “Can we win at trial?” But the majority of civil cases, including patent disputes, settle before trial. Diligence should incorporate an understanding of settlement positions, potential licensing revenue and willingness of the defendant to come to the table. Timing is key. A balanced litigation strategy and accurate damages modeling can significantly influence settlement negotiations.

3. Using Diligence Counsel You Wouldn’t Trust for Trial
This is critical enough to warrant repetition (again): Don’t choose a separate set of attorneys for diligence if they lack the skill to try the case. The synergy—and knowledge continuity—between diligence and trial counsel is invaluable. If your diligence counsel is not good enough to litigate and try a case, they may miss key issues that only a trial-focused mind can spot. Further, they may resent lead counsel and create an underlying current of mistrust and false assumptions. An error on either side is bad: taking a case that is likely a dog, or not taking a case that someone else ends up funding that ends up ringing the proverbial bell (or at least earn the other funder a tidy profit).  Both of these happen all the time, and inexperienced diligence counsel are often a foundational cause. 

4. Underestimating the Value of Technical Experts
A specialized expert can sometimes provide the “aha!” moment that sets your case up for success—or reveals a fatal flaw that saves you from a disastrous investment. Skimping on a preliminary expert analysis—on both technical and damages issues—is a gamble that rarely pays off.

VIII. Insights: Thinking Beyond the Basics

1. Jury Profile Analytics
Some advanced litigation analytics firms offer data regarding how local juries have decided patent cases. Understanding the community’s temperament toward patent plaintiffs can provide valuable insight into how sympathetic (or skeptical) a jury might be. For instance, my firm has internal jury experts that we are blessed to be able to use.

2. Reputation of Key Players
Does the plaintiff’s lead counsel have a track record of strong trial performance and creating fear for defendants, or do they often fold early and often? Savvy funders pay attention to these intangibles, which can make or break a case. Diligence counsel should be able to inform funders and insurers in a meaningful and helpful way.

3. Post-Trial Realities
Winning a judgment is only half the battle. Enforcing that judgment—through appeals or post-trial motions—can stretch the timeline further. Evaluating the appellate history of similar patent cases in the relevant district and before the same judge offers insight into the possible twists and turns ahead. 

4. Licensing and Market Alternatives
Some litigations morph into licensing deals or partial acquisitions. A thorough diligence process might uncover potential synergy or product pipelines that make a quick settlement highly likely. Conversely, you might discover that the defendant could design around the patent in a matter of months, slashing the eventual damages or forcing a worthless settlement.

5. Litigation Funding Agreements and Insurance Policies
Finally, the structure of the litigation funding itself can drastically influence the progression of the case. Having diligence counsel who understands these nuances is crucial.

IX. Collaborating with Insurers and Funders

The relationship between lead counsel, diligence counsel and insurers/funders must be cooperative, honest, transparent and respectful of privileges. Although certain communications must remain confidential, insurers and funders have legitimate needs to understand the case’s strengths, weaknesses and strategic plan. Diligence counsel often finds itself serving as a bridge between the insurer/funder and the plaintiff’s litigation team, ensuring that the coverage or funding arrangement aligns with the realities on the ground.

Insurers, in particular, may have additional underwriting requirements, such as specialized risk assessments, second-opinion analyses or minimum thresholds for claim value. They might also demand an early damages analysis that, while somewhat speculative, should be based on reasonable assumptions—preferably with input from a damages expert.

X. Final Recommendations and Conclusion

For insurers and funders in the patent litigation arena, the key to minimizing risk and maximizing returns lies in a holistic, rigorous diligence process. Below are the parting recommendations:

1. Hire Counsel You Would Trust in Court: Again, if they can’t handle cross-examination in front of a jury, and cannot execute best-in-class case strategy, they probably shouldn’t be leading your diligence.

2. Invest in Technical Expertise: Patent litigation rises and falls on the technical merits. Don’t shortchange your prior art review or your infringement analysis.

3. Insist on Candor and Integrity: Demand real talk. Over-optimistic projections or falsely negative opinions can lose millions.

4. Look Beyond the Single Patent: Evaluate the entire portfolio, licensing history, potential design-arounds and the broader competitive landscape.

5. Anticipate IPR and Other Proceeding Risks: The best offense is a good defense. Diligence counsel must have deep expertise in how to handle parallel or subsequent USPTO proceedings.

In the end, patent litigation is a realm of high drama: multimillion-dollar claims, specialized legal arguments, and the unpredictability of judges and juries. Adding a third-party funding or insurance layer can be extremely advantageous when done correctly—reducing the risk to the claimant and diversifying the litigation portfolio of the funder or insurer. But it also increases the importance of accurate and thorough diligence. Cutting corners in diligence may save a few thousand dollars upfront, but it can result in paying millions in regret later. And having rock star diligence counsel is important. 

When it comes to funded patent litigation, success isn’t a game of chance. It’s about methodical, hard-nosed evaluation carried out by experienced attorneys and informed by credible expertise. Diligence is the bedrock of this entire enterprise.