Patent Litigation Weekly: Secret Details of Litigation Financing Deal Emerge in Breach of Contract Case

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That lack of transparency makes Joe Mullin's latest Patent Litigation Weekly column at IP Law & Business a journalistic coup. Mullin found court records of an ongoing breach of contract case between a small, Texas-based network-security company called DeepNines and the $250 million IP litigation financing veteran Altitude Capital Partners, which backed DeepNines's patent infringement litigation against McAfee. It's a fascinating story and a truly rare glimpse into the mechanics of a third-party litigation financing deal.

As Mullin reports, in 2007 Altitude loaned DeepNines $8 million to fund its case against McAfee in the Eastern District of Texas. DeepNines's lawyers at Fish & Richardson won an $18 million jury verdict. Facing additional exposure, McAfee eventually agreed to a settlement that Mullin has calculated to be about $25 million.

Of that $25 million, guess how much DeepNines pocketed? Less than $1 million, according to Mullin. Fish & Richardson collected more than $11 million in hourly and contingent fees. Altitude got back its $8 million, plus 10 percent interest and a $700,000 "participation fee." The fund's total take, Mullin reports, was $10.8 million, a more than 30 percent return on its $8 million investment.

But considering that Altitude's pretrial models predicted damages of $200 million against McAfee--which would have kicked off $50 million for Altitude--$10.8 million wasn't enough to satisfy the investment fund's CEO, Robert Kramer. He demanded another $5 million from DeepNines, which refused to pay. (Mullin's reporting suggests the 40-employee start-up didn't have that kind of cash.) Altitude then hired Akin Gump Strauss Hauer & Feld and sued DeepNines for breach of contract.

That case is now going hot and heavy. Altitude lost its attempt to force DeepNines, which is represented by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, to set aside several million dollars in the event Altitude prevails. Principals from both companies were scheduled for deposition in October.

In the meantime, DeepNines has two more patent suits underway. But this time around, the cases are being handled by Fulbright & Jaworski. And we're guessing they're not funded by Altitude.