PublishedApril 13, 2023

ITC Reforms Deserve a Higher Priority

Global competition is a key political issue, particularly the rivalry between the United States and China. These superpowers are locked in a struggle for leadership of the global economy. Last year, the Congress passed the $280 billion CHIPS Act in an attempt to bolster economic growth in key industrial sectors. China also has made economic growth a top priority and recently revamped its Ministry of Science and Technology to strengthen its domestic tech sector, including a restructured patent office. Policymakers in the United States should take note. As China works to better align innovation and economic growth, the U.S. patent system is becoming more problematic for inventors and innovators. Patent reforms, including those at the International Trade Commission (ITC), deserve a higher priority if the United States is going to stay ahead of competitors.

More specifically, overly broad and poor-quality patents have led to increased litigation, particularly by non-practicing entities (NPEs). As I am sure many of you know, these groups acquire huge patent portfolios to assert infringement claims on others who are actually trying to innovate. They generate their profits through litigation, not innovation, earning them the popular moniker of “patent trolls.” In recent years, the problem has worsened with the rise of third-party litigation funders, who speculate on litigation outcomes.

Third-Party Litigation Funding On The Rise

NPEs have adopted third-party litigation funding (TPLF) to expand their reach. TPLF is a relatively new tool in American jurisprudence that allows outside parties to provide financial assistance to plaintiffs, typically in exchange for a share of the proceeds of the litigation. While the practice has been common in other countries such as the United Kingdom and Australia, concerns over frivolous and excessive litigation delayed the introduction of TPLF in the United States. However, over the last decade, the practice has become more established in this country, and now hedge funds, sovereign wealth funds and other financiers are investing in litigation for a cut of the profits.

The use of TPLF affects both consumer and commercial litigation, and patent litigation is particularly attractive to litigation funders. Both in the courts and alternative venues such as the ITC, litigation has increased considerably due to additional cases fueled by third-party funders working in concert with NPEs.

One conservative estimate suggests that third parties now fund almost a third of patent litigation. This has an adverse effect on innovation as potential legal threats hamper true innovators and divert resources from traditional research and development to litigation support. This can be especially challenging for smaller firms with limited resources. New products become costlier and riskier, making it more difficult to attract the funding that makes technological progress possible. Meanwhile, NPEs attract investors for the sole purpose of extracting resources from producers through lawsuits and licensing agreements.

Spreading beyond the courts, these practices are taking hold at the ITC, which was established to protect domestic industries from unfair competition by foreign firms. The ITC’s Section 337 investigations allow patent owners to request an exclusionary order to ban the importation of infringing products – providing powerful leverage for NPEs seeking to extract a licensing deal from a manufacturer at risk of losing its market.

NPE activity at the ITC is on the rise. As my colleague at the R Street Institute states, “[i]n 2022, non-practicing entities (NPEs) appeared in record numbers at the ITC. According to the ITC’s own data, NPEs were the complainant in 19 of the 59 investigations instituted at the ITC last year. The previous record for NPE investigations was 13 in 2012; last year, there were 10.” The piece notes that at least 32 percent of all ITC complainants did not practice the patents they asserted. It is likely that this growth will continue as more NPEs and third-party funders seek out the ITC and its exclusionary power as an alternative to the courts, which are more aptly suited to assess damages in cases of infringement. Indeed, one law firm tells potential clients, “the ITC may provide creative IP owners and litigation financers with lucrative opportunities.” While NPEs and their funders may enjoy the spoils, American companies bear the burden and become less competitive in the global marketplace. 

Solving the Problem

There are several ways to address the rising burden of litigation with respect to patents. One option is to reform the patent system so that it is more difficult for companies to obtain low quality patents. Improving the quality of patents can help reduce the uncertainty and litigation risks posed by infringement claims. At the same time, an efficient system for weeding out low quality patents that should never have been granted can strengthen the patent system and eliminate unnecessary litigation. The Patent Office’s Patent Trial and Appeal Board plays that role, and this process should be strengthened to provide an efficacious means for revisiting poor quality patents. 

Just as importantly, exclusion orders from the ITC are a poor substitute for adjudicating damages for patent infringement. Courts possess the ability to assess and apportion damages relative to the harm involved. But a blanket exclusionary order can, for example, halt the import of an entire automobile over a dispute concerning a chip in its entertainment system.

It would be useful for the ITC to consider whether the patent in question is actually being practiced, or merely asserted to sue potential infringers. This has significant implications for the economic impact of an exclusion order, demonstrating whether an innovative company is imposing unfair economic harms on a competitor or merely being forced into a licensing agreement for the benefit of an NPE. Likewise, the ITC should prioritize investigations involving domestic complainants and foreign respondents. Currently, ITC investigations often involve squabbles between competing domestic companies. An R Street study found that only 41 of 635 investigations involved solely domestic complainants and foreign respondents – just 6.5 percent. 

Finally, third-party funding plays a significant role in the rising burden of patent disputes, both in the courts and at the ITC. Yet, its influence is often unknown as third-party funders continue to fund NPEs at an increasing rate. In response, Chief Judge Colm Connolly of U.S. District Court for Delaware has called for greater transparency by requiring the disclosure of any non-party entity that provides litigation funding in return for “a financial interest that is contingent upon the results of the litigation.” The ITC should adopt a similar policy to provide a better understanding of what drives the increasing claims filed by NPEs. Indeed, as the agency is required to evaluate the public interest in such investigations, knowing whether hedge funds or sovereign wealth funds from abroad are the source of increased activity would be useful.

The uncertainty and risk created by excessive litigation brought by patent trolls discourages innovation and weakens American companies in the global marketplace. Patent reform at the ITC in particular, deserves a higher priority in both the administration and in Congress as they aim to expand economic growth and international competitiveness – especially as China focuses on revitalizing its tech sector.

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Wayne Brough

Policy Director, Technology and Innovation, R Street Institute

Wayne Brough is policy director for R Street’s Technology and Innovation team. He manages product flow on technology policy issues while also continuing his own research in competition policy and intellectual property.

Prior to R Street, Wayne was the president of the Innovation Defense Foundation, a free-market think tank focusing on technology policy that he co-founded. Additionally, Wayne was the chief economist and vice president for research for FreedomWorks, where he oversaw research on a broad portfolio of issues, promoting market-based solutions to public policy questions.

Wayne received his PhD in economics from George Mason University, with a focus in industrial organization and public choice.

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