Legal Judgements

You know when you read in the paper how some company has to pay some claimant a large sum?  They don’t always get paid or at least they don’t get paid in the sum that you read about in the paper.

I am not a lawyer.  In the past few years, I discovered something I never knew existed.  A whole industry runs like a machine around legal cases against companies.  It’s more than just class action and patent trolls.  There are angels in the legal world that look for cases and fund them.  There are law firms that employ lawyers who do research and figure out which patents are vulnerable and which companies could be targets.  I am sure that they mock trial the entire case before they make a move so they have a pretty good idea of what’s going to happen before it happens.

I think that it’s been pretty well documented how the tech industry abhors patent trolls.  I agree with most of it because intensive legal action inhibits innovation.  Big corporates will use the court system to set up a thicket of legal hurdles to protect their turf.

On the other hand, having access to the courts keeps big companies honest. Big companies will assess whether a small company has the wherewithal to undertake a lawsuit and might just quash them.  Sort of like a big brother knowing he shouldn’t take the last biscuit when the parents aren’t home but he does anyway and the little brother can’t do anything about it.

I know as humans we like to presume the best about people and companies we meet but in practice there are bad guys out there.

I know of a few companies that continually trod over their industry like a bull in a china shop.  That’s not good for capitalism or competition either.  Courts can level playing fields when crony capitalism is rampant.  In the US we have a lot of government regulation which favors big huge corporates that can afford to handle the regulation over upstart competitors.  That’s why a company like Amazon welcomes charging sales tax in every venue.  They incorporate the cost easily across a lot of scale compared to a small merchant with a web presence. People forget that when they whine that they want more government intervention.

A few years ago I found out about a firm in Chicago that basically acts like a Venture Capital firm and funds lawsuits.  It also will contact parties that win a lawsuit and pay them a discounted settlement and take over the negotiation for the class.  The firm raises money just like a VC or PE firm would.

A lawyer friend of mine told me that winning a lawsuit is only half the battle.  It’s often hard to collect.  That, combined with the fact the losing firm needs to be able to stomach the award.  If their finances aren’t good enough, they will just go bankrupt.

Here is a deal I found that illustrates some of the things going on behind the scenes that we don’t often think about with companies.

Digital Ally Inc. has now received the maximum potential investment of $10 million from Brickell Key Investments LP (BKI), under an agreement that swaps a percentage of specific legal settlements or court awards for working capital.

The agreement, signed on July 31, gives BKI a set percentage of any settlements or judgements that Digital Ally (Nasdaq: DGLY) receives as a result of intellectual property lawsuits filed against its competitors. Initially, BKI invested $500,000 in the Lenexa-based developer of cameras for law enforcement.

For many software type startups, this isn’t a worry.  But for others engaged in science and hard tech the patent issue is a real issue. This happens a lot more than we think.