PublishedJune 25, 2024

The U.S. Intellectual Property System and the Impact of Litigation Financed by Third-Party Investors and Foreign Entities

On Wednesday, June 12th, Paul Taylor, a Visiting Fellow at the National Security Institute at George Mason University – and previous Patent Progress contributor – testified in front of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, detailing the dangers associated with third-party litigation funding. Below is an abbreviated version of his written testimony. The full written testimony is available here:

When lawyers fund their own cases, they do so with an understanding that they owe their clients a duty of loyalty. That is, lawyers are supposed to respect the wishes of their clients as those wishes evolve throughout a lawsuit. But what happens when lawyers enter into agreements with third parties to fund their lawsuits with an exclusive economic incentive to maximize not justice, but their own profits, using contracts that condition funding on the lawyer and their client’s losing some degree of control over the case to their financial backers?

Unlike most lawyers, third party litigation financers only want to make a profit. That’s the sole reason they exist: to make money for themselves and their investors. Unlike law firms, funders also don’t have a privileged, fiduciary relationship with the plaintiff, even as they may be pulling the strings in a lawsuit. It is their duty to turn the justice system into a purely profit-making enterprise for themselves. 

Now, one might ask, aren’t third party litigation funders just private businesses that should be allowed to operate in a free market? No. Third party litigation funders are not purely private businesses in the sense that their entire business model is based on leveraging the power of the government through lawsuits. In America, I could pay a small filing fee, hand you a complaint making a ridiculous claim against you, and say, “This case would cost you $10,000 to defend yourself and win, but you’d be out that money. Why don’t you just pay me $7,000 now, I’ll give a cut to my funders, and then I’ll go away, and that way, you’ll save $3,000 out of the $10,000 it would have cost you to litigate this case to victory.”

Now, you might ask, allowing all these dysfunctions constitutes terrible public policy, but what does this have to do with patent law? It’s because third party litigation funders are particularly attracted to patent litigation in America. In patent litigation, funders work with so-called “patent trolls” – companies that often don’t make any products themselves, but instead seek out and buy up old, low-quality patents that likely shouldn’t have been granted in the first place. These trolls, and their funders, then use these patents to threaten companies that actually develop and sell products people want with infringement lawsuits, in the hopes of exploiting the dysfunctions in the American legal system described previously to extort money from productive American companies.

This extortionist effect is particularly strong in patent litigation because patents, once granted by the Patent and Trademark Office (including patents that were not properly granted under the relevant rules), are legally deemed to have a “presumption of validity.” That gives people who bring infringement claims an unfair advantage over people who claim the patent at issue was improperly granted in the first place. This is especially dangerous when patent trolls and their funders take the form of foreign enemies, like China, who can extort money through our legal system not for profits’ sake alone, but as a means of siphoning resources away from American industries, including defense industries. However, we don’t know the extent of this problem, because we don’t have a uniform rule requiring the disclosure of third-party litigation financing contracts when money damages are at issue. 

We can go a long way toward solving this problem with the simplest policy imaginable: transparency. And we know this works through the efforts of federal Chief Judge Connolly of the District of Delaware, who in 2022, mandated the disclosure of any third-party litigation financing contracts that applied to any party in his courtroom. As a result, third party litigation financing companies have already sought to dismiss their own funded cases in Judge Connolly’s court simply because they don’t want to reveal their financing arrangements. But Judge Connolly is just one judge, and his disclosure rule only applies in Delaware. Fortunately, Congress can help dispel this problem by following Judge Connolly’s example and exposing third party litigation funding agreements to the light of day.

Paul Taylor

Paul Taylor was counsel and chief counsel of the House Subcommittee on the Constitution, Civil Rights, and Civil Liberties, for over 20 years, where he shepherded dozens of bills through committee to be signed into law by presidents of both political parties. He was also counsel to the House Oversight Committee, where he handled constitutional and civil rights issues. He is the author of over a dozen law review articles on legal reform, continuity in government, religious liberty, congressional powers, and civil rights. He is an elected member of the American Law Institute (the first active congressional staff person elected to that body in its 98-year history), a 1991 graduate of Yale University (BA, summa cum laude), and a 1994 graduate of Harvard Law School (JD, cum laude).

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