The litigation finance industry’s growing investment in patent and IP cases is testing whether justice can be treated as a for-profit financial instrument in the United States. Without action from Congress or the judiciary, the answer may very well be yes.
Business is booming for patent litigation finance. Not even a multi-year global pandemic could slow down the private equity, hedge funds and foreign sovereign wealth funds that bankroll non-practicing entities — also known as patent trolls — and their abusive lawsuits against American businesses. Funders look for patent trolls whom they can weaponize for their own profit. The trolls then target everyone from major manufacturers to small businesses on Main Street, threaten them with a lawsuit, and then kick back the settlement money — or their litigation winnings — to their funders. It’s yet another tactic in a long line of high-risk investment schemes that leaves well-intentioned innovators and businesses as collateral damage.
Rather than using patents to promote and protect American innovation, these investors use them to extract profits from companies that actually make things — because to them, patents are just lottery tickets that can result in a massive settlement or jury verdict. For the litigation finance industry, it’s not about protecting a novel idea or a business, because patent trolls don’t actually make or produce anything. The goal is simply to game the system in the hopes of a big return for investors.
A report released in March showed that last year, out of the entire litigation finance industry, patent litigation accounted for about 30% of all capital commitments. That’s more than a 60% increase from the previous year. A separate analysis by Bloomberg shows that patent law became the second most active segment of litigation finance last year, largely due to increased investments and favorable settlements, often at large sums. For example, America’s largest semiconductor manufacturer Intel was ordered to pay $2 billion to patent troll VLSI Technology LLC over what the USPTO deemed a likely invalid patent. And Apple was recently ordered to pay more than $300 million to patent troll Personalized Media Communications LLC (PMC). That money doesn’t go to inventors — studies have shown that even if the original inventors are part of a litigation finance deal with a troll, the inventors get very little of the proceeds.
The current lack of transparency in our patent system advantages the bad actors that want to exploit it. Patent trolls often misleadingly present themselves as small businesses or scrappy startups, when in fact they are shells inhabited by the investors who are funding them. Right now, a defendant must engage in litigation that is both expensive and time-consuming just to find out who’s really behind the lawsuit against them. There shouldn’t be such a massive barrier to transparency.
But some judges believe that American courts should be open and transparent. And one judge is pulling back the curtain on this secretive industry.
In a critical move just last month, Delaware Chief District Judge Colm Connolly announced a standing order that requires plaintiffs to disclose when litigation is being funded by a third party as well as any conditions tied to the funding. Going further, Judge Connolly ordered that entities like LLCs must disclose the names of "every owner, member and partner of the party, proceeding up the chain of ownership until the name of every individual and corporation with a direct or indirect interest in the party has been identified." No more hiding behind shell companies if you want to benefit from patent litigation.
This is the type of transparency that is sorely lacking — but increasingly necessary. Federal courts in California, New Jersey, and Ohio have adopted similar disclosure requirements. But while these are welcome developments that should be replicated elsewhere, we can’t just rely on a patchwork of judicial standing orders to solve this problem. The federal Advisory Committee on Civil Rules should adopt a long-pending proposal to mandate disclosure of third-party litigation finance agreements in all civil cases.
In addition, Congress can and must act to bring transparency to our patent system. Luckily, this isn’t a partisan issue. Sens. Patrick Leahy, D-Vt., and Thom Tillis, R-N.C., introduced the Pride in Patent Ownership Act, which would allow the public to know the true owner of a patent, including those being targeted by litigators. Furthermore, Sens. Leahy and Tillis also correctly point to the national security implications of a more open patent system. More than half of all U.S. patents are issued to foreign inventors. This era of global competition demands additional transparency so that American businesses, innovators, and juries know exactly who is filing the infringement claims.
If left unchecked, the bustling litigation finance industry will continue to grow and do real harm to American innovators. It’s in the best interest of our economic and national security for judges across the nation to look to Delaware’s example, and for Congress to come together to bring more transparency and accountability to our patent system. The patent system is intended to promote invention — if we don’t fix it, it will just become one more investment for private equity, hedge funds and foreign sovereign wealth funds to profit from.
Joshua Landau is patent counsel at the Computer & Communications Industry Association.
This article originally appeared on Delaware News Journal: Delaware courts provide model for finance transparency