This op-ed was originally published at The Hill.
The U.S. Supreme Court famously has the words “equal justice under the law” emblazoned above its front door. While the application of this phrase is subject to debate in the courtrooms, committee rooms, and kitchen tables of America, one point of agreement is that the law is supposed to be about justice, not a financial instrument for investors to reap returns from. Unfortunately, a growing litigation finance industry twists our legal system, monetizing lawsuits into assets they can exploit for financial gain.
There are an expanding number of investors that use patents and patent law not as protections for inventors and to spur innovation, but as tools to extort profits from productive businesses. On one side of this patent litigation are the makers — businesses that develop new products, create jobs, and help drive our economy. On the other side are non-practicing entities, also commonly known as patent trolls. Patent trolls are takers. They are shell companies — often supported by litigation finance entities — that don’t innovate, don’t hire, don’t build, and don’t create anything other than lawsuits. And, more and more, they’re being funded by hedge funds and private equity companies, alongside foreign state-owned sovereign wealth funds.
The hedge funds, private equity funds, and sovereign wealth funds that account for many litigation financiers have not been wronged and aren’t representing clients seeking a remedy. Instead, funders are paying attorneys to develop lawsuits that wouldn’t otherwise be filed. They then receive a percentage of the winnings if the attorneys win the lawsuit. A doctrine called “champerty” used to ban this kind of litigation funding, but in many states it has been abandoned. And as a result, those private equity funds—including one that some credit with worsening the 2008 Global Financial Crisis—have started to pour their money into funding lawsuits that they see as likely to return profits. While many of these lawsuits will fail, they’re lottery tickets. You only need one lawsuit to hit the jackpot to more than pay for the rest. But that lottery ticket comes with collateral damage to ordinary entrepreneurs who are just trying to make a product for people to use.
The attorneys developing these patent troll lawsuits acquire unused or low-quality, broad patents with no intention of ever building anything with them. Instead, they target businesses ranging from neighborhood stores to major U.S. manufacturers and technology companies. Sometimes they send thousands of threatening letters demanding payment. And sometimes they file patent infringement lawsuits seeking a massive pay day. Many businesses don’t have the resources needed to fight these demands, and even the ones that do have to spend time and money that could be spent on new innovations and on hiring new workers.
Patent trolls often try to present themselves as small startups or the victim of large corporate greed, but in reality there is an entire industry designed to generate profit for investors at the expense of productive businesses that haven’t done anything wrong. As a whole, litigation finance has attracted more than $11 billion in capital in the U.S. and accounts for a $39 billion global industry as of 2019. While litigation funders fund cases in a number of areas of law, patent litigation is increasingly central to their business. We have seen more and more litigation financiers dedicating hundreds of millions of dollars to increased investment in patent trolls.
As litigation financing in the patent space has grown, so too have other practices that seek to further financialize patent litigation. There is a growing trend of verdict protection insurance policies. With this insurance, even if judgments won by patent trolls or others claiming infringement are overturned on appeal, they are guaranteed a significant portion of the funds awarded. This is all indicative of a sophisticated, interconnected series of industries that further incentivizes more aggressive behavior by trolls and their funders.
Fortunately, there are steps that Congress and the U.S. Patent and Trademark Office (USPTO) can take right now that would have a significant impact on leveling the playing field between innovators and professional patent litigators.
First, Sens. Patrick Leahy (D-Vt.) and Thom Tillis (R-N.C.) introduced the Pride in Patent Ownership Act, legislation that would allow the public — including those being targeted by patent litigators — to know who the real owners of a patent are by requiring patent owners to disclose their identity every time a patent issues or changes hands. This would go a long way in bringing greatly needed transparency to our patent system and taking many litigation funders out of the shadows and into the light.
Second, the USPTO can act now to reverse changes made unilaterally by its previous director that limits access to expert, fair patent infringement claim review by those targeted by patent trolls. At the USPTO, there is a Patent Trial and Appeal Board (PTAB) comprising subject matter and patent law experts who are able to review infringement claims through a process called inter partes review (IPR) and weed out the low-quality patents used by patent trolls.
However, the previous USPTO Director instituted the NHK-Fintiv rule, under which PTAB denies review, regardless of the merits of the claim, if there is litigation already in process. A review denied under NHK-Fintiv implicitly signals that the patent is of questionable validity—if the IPR lacked any merit, then the PTAB would have simply ruled on the merits. This is exactly the situation where IPR is most valuable for patent troll victims, meaning that the NHK-Fintiv rule gives patent trolls more leverage in an already unbalanced system and leaves invalid patents intact to be abused.
A balanced patent system rewards innovation. It shouldn’t punish innovators—but right now, that’s exactly what the U.S. patent system is doing. We cannot continue to allow litigation funders to twist patent law, generating a profit for takers at the expense of makers. The good news is that there is nothing stopping the USPTO from acting now to reverse the NHK-Fintiv rule and help to level the playing field between litigation funders and U.S. innovators. Action from Congress and the USPTO is desperately needed to rebalance our patent system and rein in the rapidly expanding litigation finance industry.