Last week, I had the rare opportunity to speak at the UK’s Chartered Institute of Patent Attorneys Congress 2023 in Cambridge. I was there to discuss evolving business models of U.S. patent assertion and strategies related to litigation finance and investment. And business, at least as far as we know, is good.
The global and U.S. markets for litigation investment are, per their own reports, surging. In a forthcoming paper I’ve coauthored with Sean Keller, we examine some of the reasons why patent lawsuits now receive a disproportionate share of new litigation investment, and the impact that litigation funding transparency requirements – or really, the lack thereof – has on the industry, investors, and the courts.
Patent litigation funders, in particular, have little risk of losses beyond their investment capital compared to other types of commercial litigation investors, and the potential upside is seductive. Most patent litigation plaintiffs are non-practicing entities (NPEsNon-Practicing Entity. A broad term associated with trolls but now disfavored because it includes universities and legitimate technology developers that seek to license technology in advance rather than after a producing company has independently developed it. More) that pay fewer, if any, fees if they lose the lawsuit, have almost no assets, and can easily be wound up. This allows investors to minimize their own risk as they back patent claims. Cases also lack any intent requirement, and plaintiffs benefit from a presumption of patent validity. The practice of filing through holding companies adds another layer of anonymity to the process. What’s more, it is relatively easy for plaintiffs to establish standing in venues that many consider favorable to patent owners before particular judges – even if they are shell company LLCs – asserting infringement claims.
Meanwhile, plaintiffs and their investors see huge potential upside in patent infringement lawsuits with eye-popping damages judgments in the hundreds of millions, or even billions, of dollars. Mega judgments are often overturned on appeal, but the increasing prevalence of judgment insurance, insurance towers, and even more complex trading instruments further reduces the sense of investors’ immediate risk. The generally robust secondary market for patent assets also gives investors more vehicles from which to generate a return. And as the patent litigation market grows with outside funding, newer, oftentimes less sophisticated investors will chase the profits they see others promote by pursuing riskier, more questionable claims.
The mainstream consensus is that, done ethically, litigation financing will remain a piece of the modern litigation landscape. Put another way, there are many ways to structure private capital investments, some more straightforward than others, but most of which, when handled normally, raise few, if any, concerns. But how would we know?
Matters of justice for the court are matters of public concern. This is why lawmakers, the industry, and the public are debating uniform transparency requirements. Bringing the identity of funders and the contents of funding agreements to light would help courts identify conflicts of interest and ethical concerns, review terms, and ensure proper representation, all while removing information gaps between plaintiffs and defendants that often stand in the way of mutually-beneficial settlements. Uniform disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. would benefit all parties and the public alike and would enhance the judicial efficiency.
The discussion at the CIPA Congress 2023 came against the backdrop of a recent EU proposal for robust, consistent litigation finance transparency measures – ones frozen by special interests. A legislative report and recommendations authored by MEP Axel Voss, and adopted by the European Parliament, would require disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. to ensure that all participants in a lawsuit know if a funder is involved in litigation. The reasonable recommendation would prohibit investors from taking control of legal proceedings or charging excessive fees and would subject funders to the same type of oversight that is commonplace in other financial sectors, and is the first step in a long legislative process. Regrettably, the European Commission has since delayed progress, based on lobbying from the funding industry calling for further study. When someone opposes disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection., my first instinct is to wonder what they are afraid of.
Now that investors have established that backing patent lawsuits might be lucrative – and are selling that chance to investors – they will continue to develop increasingly sophisticated strategies for generating and protecting profits. As they hawk success, more participants will chase it and enter the market. Money chases money; funds motivated by their (very large) bottom lines will generally use every advantage available to make good on their multiple-ROI promises. But unless we can agree on bedrock transparency measures that serve everyone, it will remain a practice that is difficult to understand and harder to trust. Justice seen is justice done.
The ongoing education on and about litigation investment at events like the CIPA Congress is encouraging, as are transparency proposals, like the European Parliament recommendations and the Protecting Our Courts from Foreign Manipulation Act of 2023 that was recently introduced in the U.S. Senate. The Judicial Conference continues to consider sensible, limited changes to the Federal Rules of Civil Procedure Rules 7 and 26. And agencies like the SEC are moving to require more disclosureOne of the primary objectives of the patent system. In return for the government-granted right to exclude that is embodied in the patent, the inventor must disclose to the public through his patent the invention for which protection is sought. Inventors unwilling to disclose their invention to the public may instead opt for trade secret protection. in some circumstances. Nevertheless, litigation funders are smart, strategic, well-funded, and move fast. Further delay in turning transparency proposals into policy could exacerbate any existing bad behavior and harm investors and their confidence in the growing market.