Guest post by Jonathan Stroud and Sam Korte. Mr. Stroud is the General Counsel of Unified Patents and Mr. Korte is Senior Principal Counsel – IP at Garmin.
An exotic insurance product has recently taken the litigation world by storm. Judgment preservation insurance, or JPI, was neither offered nor widely discussed, at least publicly, as recently as five years ago.[1] Now, it’s hard to avoid; a brief Internet search will turn up hundreds of hits and dozens of explainer articles by insurance brokers, law firms, and litigation funders extolling the benefits and pitching such policies to appellants. In IP lit, panels, presentations, and brand-new conferences, insurers and lawyers extol the virtues of these “bespoke” policies. They now undergird some of the biggest eye-popping judgments on appeal to the Federal Circuit.
Briefly, JPI is a when a civil litigant (or funder) who has won a money judgment—let’s say, $100m—purchases an insurance policy guaranteeing some percentage of the judgment.[2] In this example—taken from a pitch—a $12.5m policy premium might offer a guarantee of 80% recovery, or $80m, if the appeal results in a settlement, or if full recovery is otherwise stymied—remand, lack of collectability, or another adverse intervening event. Here the plaintiff-appellant, while out the immediate $12.5m, now has a policy worth at least $80m, against which they can borrow or otherwise book the judgment at some predictable gain; perhaps to continue the appeal or offset recovery costs. Sellers promote policies alongside litigation financing portfolios to de-risk and otherwise encourage litigation. And litigation financiers are bundling these verdicts (with their other litigations) and selling shares in the result. Thus, JPI provides them a floor for these bundled “securities” and allows them a way to assure gains.
Developer Appian secured a $2 billion judgment in a trade secret case, and publicly disclosed to the Wall Street Journal they insured it, including the terms. There, the $47.5m policy ($57.3m including fees) guaranteed 25% (at least $500m) of the judgment. A policy that large held by a publicly traded company whose total revenue in 2022 was, by comparison, $468 million, turned heads. It has been explained as a smart (if expensive) way to hedge against the high risk of reversal of these supersized judgments.
The policies themselves, at the guaranteed rates currently offered, seem terribly risky. We have heard experienced insurers complain of competing brokers offering guarantees of 50%-80%, and in one case, 96%; clearly, actuarial tables don’t exist for judgment collection, but the reversal rate in appeals from the District Courts was 57% in 2022—and there can be remands and other appeals.
Now, to spread risk and reduce the harm when policies are called, insurance underwriters employ tranches and towers—multiple insurers—and will often sell off insurance liability. But the incentive to compete to sell policies and earn premiums is likely driving these guarantees higher than reasonable. Given reversal and recovery rates, maybe a 25% policy is sensibly balanced in the patent context based on known reversal rates and settlements; case-specific issues, like preexisting judgments or bad facts, might push it higher. But anything much higher than that seems, to most in the field, foolish. Perhaps there’s a sales volume that justifies that risk, and many more policies than estimated are being written; or perhaps we are riding an insurance bubble in this niche market. Either way, if JPI insurers write policies for Federal Circuit damages appeals at higher rates, plaintiff-appellants will take them—if offered at such eye-catching terms, they have rational attraction.
In-house counsel told us that within hours of receiving patent mega-judgments—which we arbitrarily peg as above $100m—multiple insurance brokers reached out, some directly by phone within hours, to discuss JPI policies. We have been told by many that the $2.2 billion Intel v. VLSI judgment was insured, though for how much and by who hasn’t been publicly disclosed, as far as we know.
Federal Circuit district court reversal rates and recovery being what they are—as high as 43%, depending on the year—if insurers are willing to offer 80% (or more) at reasonable premiums, why wouldn’t most plaintiff-appellants take them? Even cash-rich plaintiff-appellants could likely further monetize the guarantee. Plaintiff-appellants could borrow against that policy, calm investors, or incentivize holding out through the length of an appeal, which currently average 418 days.[3]
But are JPIs good policies for the insurers? The math suggests not, at least at these high rates of guarantee. To be sure, insurers and underwriters are not generally reckless. It’s likely at least some of the risks have been analyzed and justified or accounted for. There are many ways insurers de-risk alternative insurance products—through “insurance towers,” by drafting agreements that give them some control over the appeal, or to include terms to continue incentives for the appealing party not to settle at a loss to the insurer. One would imagine that insurers in some appeals can and might need to subrogate, stepping into the shoes of the appellant when necessary to defend their risk—or writing policies that set a settlement floor to collect.
Nonetheless, analysts, insurers, and reinsurers may not truly understand how volatile and persnickety patent appellate recovery can be—particularly given the trend of nuclear judgments being reversed on appeal. Maybe they do; maybe they don’t care; maybe this is such a (relatively) small slice of the alternative insurance market, and it’s been analyzed and de-risked so well, that it won’t matter. It is a brand-new “bespoke” insurance product with a brand-new market, no oversight, and is yet little understood. While we’re not sure those broker incentives mentioned earlier don’t naturally tilt toward overselling of risky policies unlikely to pay off in the long run, we’re also not sure it matters, if the policies have been de-risked. But they remain, on their face, incredibly risky.
And then there is the disclosure gap problem. Since the 1970s, all Federal litigants have been required to disclose insurance agreements under Federal Rule of Civil Procedure 26, for myriad compelling reasons explained in the comment to the rule.[4] (One reason being that it is possible both sides are insured by the same or related insurers, and the parties might be unaware of the obvious conflict.) No similar rule exists in the Federal Rules of Appellate Procedure—understandable given insurance purchased after judgment and targeting appeals—JPI—did not exist at the time. There’s an argument that those policies must be disclosed on any remand, though docket searches suggest that’s not happening.
The disclosure gap affects other rules, too—for instance, FRAP and local Federal Circuit Rule 33 address the Federal Circuit’s Mediation Program (link). While the Federal Circuit loosened its language earlier this year and no longer requires mandatory settlement discussions between the parties (link to this year’s amendments), JPI certainly changes, and in some cases may frustrate or eliminate entirely, the possibility of settlement, contrary to the intent of those rules. It may also change the real party in interest on appeal, if the insurance company holding the policy subrogates the claim or the policy is written such that they are the real appellant. And it could introduce conflicts if related insurers are on both sides of a dispute. At a minimum, FCR 33 should be amended to require disclosure of JPI and to include insurers in the mediation program.
Regardless of whether the Court and the Judicial Conference yet realize it, though, JPI is here in force, and is being offered widely, at terms both attractive and likely to alter settlement dynamics. It is affecting appeals. And while it seems likely that at least some of these policies are riding an insurance bubble and will pop, that moment has yet to come. Perhaps we are entering a phase where available insurance coverage is the rule, and not the exception. It would be a shame if premature overselling of risky policies or settlement disputes led to a bubble popping and a painful contraction.
[1] See Aviva Will & David M. Perla, United States: Litigation Funding Comparative Guide, Burford Capital, March 23, 2023 (noting that “in recent years” the “legal finance market has witnessed “the growth of a new finance-adjacent product: litigation insurance policies on affirmative recoveries by companies and law firms.”);
[2] For a general explainer, see Certum Group, Judgment Preservation Insurance (video), available at https://www.youtube.com/watch?v=J3tF7d50_-E (last accessed Nov. 14, 2023).
[3] Morrison Forrester offers a rather useful instant tool that can show you the current pendency rates for Federal Circuit appeals. For patent cases originating from district court, it’s currently an average of 418 days from filing of the notice of appeal to decision. See Statistics, Federal Circuitry, Morrison Forrester (interactive tableau tool), available at https://federalcircuitry.mofo.com/statistics (accessed and tabulated Nov. 14, 2023).
[4] The comment to the 1970 FRCP amendment:
“Disclosure of insurance coverage will enable counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation. It will conduce to settlement and avoid protracted litigation in some cases, though in others it may have an opposite effect. The amendment is limited to insurance coverage, which should be distinguished from any other facts concerning defendant’s financial status (1) because insurance is an asset created specifically to satisfy the claim; (2) because the insurance company ordinarily controls the litigation; (3) because information about coverage is available only from defendant or his insurer; and (4) because disclosure does not involve a significant invasion of privacy.
Disclosure is required when the insurer “may be liable” on part or all the judgment. Thus, an insurance company must disclose even when it contests liability under the policy, and such disclosure does not constitute a waiver of its claim. It is immaterial whether the liability is to satisfy the judgment directly or merely to indemnify or reimburse another after he pays the judgment.”
