Litigation Funding and Its Impact on IP Litigation in Federal Courts

[1]

Corporate litigation is costly for U.S. companies as over a third of companies pay hundreds of thousands of dollars per case.[2]  The United States is one of the most expensive countries in the world in which to litigate.[3] Outside organizations are interested in the outcome of litigation and can impact litigation outcomes through direct funding.[4]

Litigation financing is a process where an outside investor agrees to pay a chunk of the price of litigation in exchange for a percentage of the potential payout.[5]  Litigation financiers can take anywhere between 20-40% of the potential award.[6]  Most litigation funding goes to complex commercial disputes but 19% of all new funding commitments in 2023 have gone into patent litigation.[7]  Patent litigation funding in recent years has become astronomical with patent litigation making up $672 million of the $3.2 billion in litigation financing in 2023.[8]

But why is there so much money specifically in patent litigation?  A whopping 97% of patent claims are for patent infringement in federal court.[9]  Patent infringement cases are extremely expensive for patentees to take on and over 95% of cases are settled before trial.[10]  Litigation financiers are aware of this and control for litigation risks while keeping in mind the potential monetary returns from investing in claims that will likely settle for millions of dollars.[11]

The phenomenon of litigation financing has clear benefits and drawbacks, especially within the context of patent litigation.[12]  On one hand, litigation financing provides legitimate patent owners to enforce their patents against infringers without having to pay some or all of the legal fees.[13]  On the other hand, critics of litigation funding argue that it encourages frivolous lawsuits, influences case strategy, creates a lack of transparency, and leads to potential conflicts of interest.[14]

In particular, litigation financing has amassed criticism in cases involving non-practicing entities (NPE)—also sometimes called “patent trolls”—that own and acquire broad patents and assert these patents against large and small corporations.[15]  These claims often settle because defendant corporations seek to avoid costly litigation which leads to profitable returns for  litigation financiers and NPEs.[16]  Companies that are sued by NPEs are often contacted by anonymous shell corporations demanding damages for alleged patent infringement.[17]  The NPEs often present themselves as patent owners but, in reality, are shell companies financed by large investors seeking to profit from settlement.[18]  The agreements between NPEs and litigation financiers are often private, making it hard for defendants to understand who has a financial interest in the lawsuit.  NPEs may be influenced by their financiers to pressure defendants into settling rather than pursuing trial.  Absent funding transparency, defendants in patent litigation claims are often forced into an irreconcilable position of either paying huge sums of money to NPEs or proceeding through an expensive trial in federal court because NPEs make it hard to distinguish between legitimate claims worth going to trial for and claims designed to simply to get a quick settlement.[19]

Most of this “patent troll” litigation occurs in the Eastern District of Texas, the Western District of Texas, and the District of Delaware which have been the top three venues for patent litigation in the last several years.[20]  The district courts in Texas and Delaware courts have taken very different approaches to handling transparency with litigation financing.[21]  The Texas courts have consistently allowed litigation financing and denied motions to compel by defendants that would disclose litigation funding.[22]

In addition, the Texas courts have held that litigation funding was not relevant to claims or defenses by defendants.[23]  Defendants in these cases tended to argue that litigation funding was relevant in expert testimony and in evidence of potential damages at trial.[24]  Texas has become a favored venue for litigation financiers because of their limited transparency requirements with respect to patent litigation.[25] 

The District of Delaware has taken a markedly different approach by introducing transparency requirements in all filings.[26]  In April 2022, Judge Connolly issued a standing order that all parties must disclose all partners and owners of a corporation filing suit pursuant to Rule 7.1 of the Federal Rules of Civil Procedure.[27]  This practice is aimed at litigation financiers who attempt to remain anonymous in court filings.[28]  Since the filing of this standing order, patent filings in Delaware have decreased, while Texas Courts have seen a  significant increase in patent filings.  The Eastern and Western districts of Texas have gone from a close first and third place to a runaway first and second place for patent filings, having overtaken the District of Delaware in patent filings in 2024.[29]

Despite federal courts being designed to be courts with unified procedures and requirements, disjointed rules on litigation funding transparency in patent litigation have created a problem of jurisdiction shopping as evidenced by the trends in patent litigation venues.[30]

Litigation financing has fundamentally changed the legal industry and has had major impacts on patent litigation.[31]  Policymakers are struggling with the activity of NPEs and have suggested legislation in Congress and in multiple states.[32]  Legislation on litigation financing such as the Protecting Our Courts from Foreign Manipulation Act, which was introduced in the US in 2023 but has not been reintroduced since, could help provide uniform rules for patent litigation and limit the impact that billions of dollars of outside funding have on the legal system. Specifically, the Act would require the disclosure of foreign entities funding litigation in the U.S. and having the DOJ submit a yearly report on foreign litigation financing.[33]

References

[1] Photo by Wesley Tingey on Unsplash, https://unsplash.com/photos/a-wooden-judges-hammer-sitting-on-top-of-a-table-TdNLjGXVH3s.

[2] See Big Discrepancy in Average Litigation Costs Between Large, Small Companies, Legal Dive (Oct. 24, 2022), https://www.legaldive.com/news/big-discrepancy-average-litigation-costs-between-large-small-companies-everlaw-acc-lawfirm-legalfees/634811/ (noting roughly a third of large companies spend approximately two hundred thousand dollars per litigation matter).

[3] See US Companies Vastly Outspend Rest of the World on Legal Services, Acritas Study Shows, Thomson Reuters (June 21, 2017), https://www.thomsonreuters.com/en-us/posts/legal/acritas-legal-services-spending-study/ (displaying U.S. companies’ high legal spending in relation to revenue).

[4] See How Litigation Finance Works, BL (Feb. 24, 2020), https://pro.bloomberglaw.com/insights/litigation/how-litigation-finance-works/ (defining litigation finance as third party “invest[ment] in a lawsuit in exchange for a share of the profit.”).

[5] See id. (comparing strong legal claim to return on investment).

[6] See What You Need to Know About Third Party Litigation Funding, U.S. Chamber Institute for Legal Reform (June 7, 2024), https://instituteforlegalreform.com/what-you-need-to-know-about-third-party-litigation-funding/#:~:text=Funders%20Are%20Often%20Paid%20Before,contingency%20or%20large%20winning%20fee. (explaining typical apportionment of award to third party financiers).

[7] See Justin Henry, The Am Law 200 Stepped Up Their Use of Litigation Funding Last Year, The American Lawyer (Mar. 27, 2024), https://www.law.com/americanlawyer/2024/03/27/the-am-law-200-stepped-up-their-use-of-litigation-funding-last-year/?slreturn=20241106173706. (explaining rise in capital commitments in patent litigation).

[8] See At Least 25% of the Last 3 years NPE litigation Caused by Litigation Investment Entities (LIEs), Unified Patents (Feb. 21, 2023), https://www.unifiedpatents.com/insights/2023/2/21/litigation-investment-entities-the-investors-behind-the-curtain#:~:text=Recent%20analysis%20shows%20that%20the,2021%20and%2021%25%20in%202022. (highlighting increase in litigation financing).

[9] See Robert Van Arnam & Rick Matthews, Patent Litigation Update 2024, Williams Mullen (Mar. 11, 2024), https://www.williamsmullen.com/insights/news/legal-news/patent-litigation-update-2024 (displaying trends in patent litigation filing and settling rates).

[10] See Elma Mrkonjić, 17 Incredible Patent Litigation Statistics [2024 Edition], The High Court (July 6, 2021), https://thehighcourt.co/patent-litigation-statistics/ (explaining patent litigation costs millions of dollars and over 95% settle before trial).

[11] See What You Need to Know About Third Party Litigation Funding, supra note 5 (describing portfolio funding style of management by litigation financiers to distribute risk).

[12] See Dennis Crouch, Third-Party Litigation Funding in Patent Cases: Transparency, Ethics, and Policy Concerns, Patently-O (Oct. 11, 2024), https://patentlyo.com/patent/2024/10/litigation-transparency-concerns.html (explaining the potential benefits and drawbacks of patent litigation).

[13]  See id. (noting ability to create “high-caliber legal teams” through litigation funding).

[14]  See What You Need to Know About Third Party Litigation Funding, supra note 5 (explaining legal and ethical issues which arise from litigation financing).

[15] See Eric Buresh, Three Considerations for Defendants in NPE Patent Litigation, Erise Intellectual Property Law (June 7, 2022), https://eriseip.com/insights/patents/three-considerations-for-defendants-in-npe-patent-litigation/#:~:text=The%20first%20group%20of%20NPEs,hold%20out%20for%20higher%20settlements. (explaining NPE patent litigation and considerations that come with it).

[16] See id.(describing class of “high-volume, quick-settlement” tactics by NPEs).

[17] See id. (explaining named plaintiffs are often shell companies to the NPE).

[18] See Joshua Landau, IP Litigation Financing Protects Investors, Not Inventors, BL (Oct. 31, 2022), https://news.bloomberglaw.com/us-law-week/ip-litigation-financing-protects-investors-not-inventors (describing process in which NPEs leverage low-quality patents in patent litigation).

[19] See Buresh, supra note 16 (describing NPE tactics in pursuing settlements and proceeding through trial).

[20] See Patent Dispute Report: 2024 Mid-Year Report, Unified Patents (July 22, 2024), https://www.unifiedpatents.com/insights/2024/7/22/patent-dispute-report-2024-mid-year-report (explaining trends in patent litigation filing in federal courts).

[21] See An Overview of How Third-Party Litigation Funders are Being Addressed by Courts and Policymakers, Baker Botts (June 3, 2024), https://www.bakerbotts.com/thought-leadership/publications/2024/june/an-overview-of-how-third-party-litigation-funders-are-being-addressed-by-courts-and-policymakers (describing Eastern District and Western District of Texas as “hotspots for NPE activity.”).

[22] See id. (explaining Texas courts’ approach to relaxing regulations on litigation financing).

[23] See An Overview of How Third-Party Litigation Funders Are Being Addressed by Courts and Policymakers, supra note 20 (explaining defendant’s request for litigation funding was fishing expedition).

[24] See id. (providing examples in which Texas courts have denied access to litigation funding information due to irrelevancy).

[25] See id.(noting Eastern District and Western District of Texas’s approach to relax regulations on transparency of litigation funding).

[26] See id. (explaining transparency-forward approach in District of Delaware).

[27] See U.S. District Court for the District of Delaware, Standing Order Regarding Disclosure Statements (Apr. 18, 2022), Standing Order Regarding Disclosure Statements.pdf (clarifying disclosure requirements); see also Fed. R. Civ. P. 7.1.

[28] See Judge Connolly’s Push for Funding Transparency is Working, PatentProgress (Dec. 21, 2023), https://patentprogress.org/2023/12/judge-connollys-push-for-funding-transparency-is-working/#:~:text=In%20April%202022%2C%20Delaware%20federal,in%20a%20November%202022%20memorandum. (describing the intentions behind Chief Judge Connolly’s push for funding transparency).

[29] See 2022 Patent Dispute Report, Unified Patents (Jan. 5, 2023), https://www.unifiedpatents.com/insights/2023/1/4/2022-patent-dispute-report (explaining trends in patent litigation filing in federal courts); Patent Dispute Report: 2023 in Review, Unified Patents (Jan. 8, 2024), https://www.unifiedpatents.com/insights/2024/1/8/patent-dispute-report-2023-in-review; Patent Dispute Report: 2024 Mid-Year Report, supra note 22.

[30] See Patent Dispute Report: 2024 Mid-Year Report, supra note 22 (describing revised case assignment order to address judge shopping in Texas court).

[31] See Crouch, supra note 11 (noting effects of litigation funding on the practice of patent litigation).

[32] See Emily R. Siegel, Litigation Finance Industry Faces Fresh Calls for Disclosure (2), BL (last updated Oct. 7, 2024, 6:00 A.M.), https://news.bloomberglaw.com/business-and-practice/litigation-finance-industry-faces-fresh-calls-for-disclosure (explaining developments at federal and state level to regulate litigation finance).

[33] See also Protecting Our Courts from Foreign Manipulation Act, S.2805, 118th Cong. (2023) (advocating increased transparency in litigation funding from foreign persons and states).