Litigation funding booms despite trolls’ shadow
Third-party litigation funding, a practice often mired in controversy in recent years, is now big business.
It’s an industry that boomed to the tune of $13 billion dollars in the US alone in 2021, according to a report published yesterday, February 21, by patent owner membership group, Unified Patents.
And the new investments are trickling fast and steadily into patent infringement litigations.
The report shows that funding increased by 61% in 2021 compared to the previous year, with patent litigation accounting for 29% of all commitments by third-party capital providers.
To put into context, third-party funding of patent litigation was virtually non-existent back in 2005.
Yet an air of murk prevails: after all litigation funding was once widely deemed a criminal activity under a French doctrine known as champerty.
Even in 2023, a handful of US states, including New York, still recognise this legal principle, but few, in reality, enforce it.
Under funding litigation arrangements, an investor or investment group pays for all legal expenses in exchange for a substantial portion of the potential award or settlement.
Often, this is done anonymously, which critics such Shawn Ambwani, chief executive of Unified Patents argue, creates a ‘curtain of secrecy’ that can be damaging to patent owners.
A viable option
For those who deem it is a pragmatic—and perfectly legitimate—route, these figures make perfect sense.
As Michelle Eber, director of patent investments at litigation funder Validity Finance, observes, the “word is getting out” about this increasingly attractive option for both companies and law firms.
And while patent litigation was once seen as a potentially dicey investment for funders, her company now sees around a quarter of its entire investments filter through to these types of cases.
“We're seeing more competition, and more funders, coming into the space. It’s a tool for when you have a really strong meritorious claim, but what you're missing is enough resources to be able to bring that claim. That’s where folks like us come in,” says Eber.
Richard Rochford, partner at Haynes Boone, chimes with this view. Chair of the firm’s IP litigation practice group, he is increasingly in regular contact with third-party funders when working on cases.
The popularity of patent funding litigation has been developing for a number of years, and may gain greater traction during tough times to come, he notes. This trend, in his view, is an overwhelmingly positive one.
“Having the opportunity to partner with a funder to pursue their rights is certainly a great alternative that we think will increase in use, perhaps even more because of current economic conditions,” he adds.
“It's a nice option for companies, particularly midsize companies, that see a competitor infringing their IP to get the resources needed to be able to protect their rights. So it's something that we as a firm actively pursue.”
The NPE conundrum
So why the persistent image problem? It could be primarily due to funding litigators’ association with non-practising entities (NPEs)— or to use their commonly-used, derogatory moniker—patent trolls.
Put simply, an NPE is a person or company that acquires a patent or patent rights but does not practise the patented invention. NPEs typically do not manufacture or sell any products or conduct any commercial processes.
There are certainly significant incentives for litigation funders to back NPEs, explains Nikolaos Papageorgiadis, professor at the University of Liverpool Management School, whose research focuses primarily on national patent and IP enforcement strategies.
“Funders take a portfolio approach to their investments and portfolios typically include higher risk investments that can result in very high returns,” he observes, adding that NPEs generally can achieve high returns from their litigation cases, explaining the continued interest of third-party funders.
The figures speak for themselves: when Fortress Investment Group backed NPE VLSI’s infringement suit against Intel, the end result was a blockbuster $2.18 billion verdict in its favour in 2021.
A wall of silence
For Unified Patents, which has a goal of “reducing the number of invalid NPE assertions in specific technology areas”, this is a big problem.
“While third-party litigation funding is often spun as a way to level the playing field between parties with disparate financial resources, it has become problematic in the NPE context, particularly when the funds remain entirely hidden behind a complex wall of corporate holdings and private agreements,” notes Ambwani.
This wall, he argues, makes it difficult for companies to defend themselves against a patent infringement claim since there is no readily available information on the entity that filed the complaint.
And according to a 2022 report by Korok Ray, associate professor at the Mays Business School of Texas A&M University, the secondary market that sees NPEs buying patents from innovators has many adverse consequences.
Ray’s study holds that the trend drains social welfare and creates a hidden tax on innovation, since operating companies spend costly resources to defend against so-called patent trolls “funded by Wall Street”.
This trend is doubly problematic, warns Unified Patents because the dearth of disclosure requirements throughout federal courts in the US, means that “it is hard to tell who is actually behind the curtain”.
Eber insists, however, that if a legitimate funder agrees to take on an NPE case, it usually means that there is a strong “meritorious claim” at the heart of the claim.
The majority of legitimate funders tend to avoid the patent trolls that pursue frivolous claims, she argues.
“What we're really looking for—whether or not the company is actively selling anything—is a strong invention story, and that means strong patents.”
Judge demands no more secrecy
Nonetheless, the culture of secrecy that surrounds third-party funders, especially when an NPE, is involved has antagonised some judges,
As Jeremy Bock, professor at Tulane University Law School, notes, some courts are opposed to parties preserving their anonymity because it is seen as interfering with the proper proceedings of the case.
“By knowing the identity of the ‘real party in interest’, the judge can assess whether they might have a conflict of interest or whether the named plaintiff has standing to bring the suit,” he explains.
Notably, in the US District of Delaware, Chief Judge Colm Connolly, issued two standing orders requiring litigants to disclose detailed ownership information and facts concerning any third-party financing of their cases (or defences). Unsurprisingly, the main targets of Judge Connolly’s ire have been focused on non-practising entities.
He went on to file a 78-page memorandum, noting that as of 2018, six federal courts of appeals and no fewer than 24 other federal district courts have third-party funding disclosure requirements of some kind. One week after filing the memorandum, the US Court of Appeals for the Federal Circuit permitted Judge Connolly to continue his pursuit of full disclosure.
According to Troy Brown, partner at Morgan Lewis, this means that patent lawyers will closely follow disclosure requirements for third-party funding of patent infringement litigation.
“It will be interesting to see whether other federal district court judges replicate Judge Connolly’s standing orders and, if so, whether they, and defendants in those courts pursue full disclosure with Judge Connolly’s doggedness,” says Brown.
“And it will be even more interesting to see whether that chills third-party funding of patent infringement cases in those courts or more broadly.”
Others, however, argue that concerns around disclosure have become overblown.
As Eber and Rochford note, in many scenarios, plaintiffs are more than happy for funding to be disclosed because it underscores that their case is strong enough to receive substantial backing.
“Sometimes helpful to disclose that there's a funder in the background, because that gives some added legitimacy to the case, and indicates that the plaintiff is serious about pursuing the claim and has the resources to do it,” adds Rochford.
“It shows that they're not going to be worn down by a deep-pocketed defendant, that they are determined to try and have their rights vindicated.”
A secret worth keeping?
Yet, for many, the incentive for secrecy remains. As Eber insists many plaintiffs have legitimate concerns over whether their funding arrangements will become “a sideshow or a distraction”.
The fact that some chose to get an outside funding source to help them have their day in court certainly (unless there is a potential conflict of interest) isn't usually relevant to the issues in the patent case, she contends.
“The court should address questions such as: is the patent valid? And what kind of damages should arise from the infringement? There is a risk that disclosure can be a distraction from all of that.”
Another strong incentive from the plaintiff’s point of view is that maintaining anonymity will limit the risks that sensitive documents exchanged as part of litigation funding arrangements might be considered as “discoverable” and not “privileged” in court.
Notes Papageorgiadis: “As part of the due diligence, funders may request access to sensitive information to decide if they will support a plaintiff. Plaintiffs will want to avoid having such information being accessed by the defendants as part of discovery.
“While there have been a number of court decisions in the US where such documents were treated as privileged, anonymity can further help in avoiding this risk.”
And according to Bock, NPEs and their third-party litigation funders have another— perhaps crucial incentive— to keep the details of their arrangement secret: to shield their assets and avoid blowback from a defendant.
“If the litigation funder were an entity, eg, a bank that, in some (in)direct way, had a business connection with the defendant, it would want to obscure its role in the suit, lest the defendant retaliates or countersues,” he adds.
Uncharted territory
Papageorgiadis agrees that third-party funders have especially strong incentives for keeping their arrangements under wraps.
For example, if the wider marketplace gains knowledge of cases funded by a third-party funder, he continues, this can potentially allow for an analysis of a funder’s past performance and the decisions that plaintiffs supported by a specific funder have taken.
“Such analysis could send signals about the preferred litigation strategy and tactics of a future litigation case.
“Additionally funders invest in a portfolio of cases and some of these cases may involve higher risks than others. Unsuccessful cases can result in negative publicity in the eyes of their investors and future plaintiffs,” he adds.
As Eber notes, many are still navigating uncharted territory when it comes to the litigation funding landscape.
“Nobody is sure how it's going to play out, and they are watching with bated breath to see how it all turns out.”
But she is adamant that despite its detractors and somewhat shadowy past, third-party funding litigation is now a firmly entrenched, and respectable, route for plaintiffs— and will evolve in response to any future stipulations.
“I don't see that third-party funding will ever go away. It will just maybe adapt, depending on what's required to be disclosed in the future. ”
Rochford agrees that a lot of the funders, particularly the biggest established ones, are getting more and more comfortable with funding patent cases.
He concludes: “They've created funding vehicles that are more customised for patent cases because they’ve ultimately figured out that patent cases can be lucrative and rewarding.”
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