In October, Bloomberg Law conducted a deep dive into the litigation financier Fortress Investment Group, amid growing calls to address undisclosed third-party litigation funding (TPLF). The reporting raises concerns around Fortress, which reflect broader issues with the litigation funding industry and reaffirm the need for reforms to increase transparency.
Let’s examine some of the key takeaways from Bloomberg Law’s reporting:
- Fortress’s stated business model involves turning a profit by backing abusive intellectual property lawsuits. Fortress has committed $2.9 billion and 19 full-time employees to intellectual property lawsuits. Fortress’s own head of Intellectual Property, Eran Zur, admitted in a 2015 article the perverse incentives within patent litigation, which this business model exploits: “These oversized [intellectual property damages] awards stem from the sheer complexity of interoperable components and systems sold as part of functional units, if not integrated devices…And because technology invention tends to be incremental, to the extent an individual patent owner can be awarded damages on the price of the entire end product as opposed to their specific patent claimThe section of a patent that describes the legal scope of the invention. Patent claims are supposed to establish the boundaries of the patentee’s entitlement to exclude. Under peripheral claiming as practiced in the U.S., claims establish the outer bounds of the patentee's privilege to exclude others. For further reading, see Burk and Lemley, Signposts or Fence Posts., a litigation incentive arises.” When goliaths like Fortress pour billions of dollars into lawsuits against American businesses—gaming our legal system for financial gain—our innovation economy lags behind as resources are diverted away from productive uses, and towards meritless litigation.
- Fortress’ funding approach exemplifies industry-wide concerns over undue investor control. One litigation funder who declined investment from Fortress described their approach as, “they choke you to death and then put you out of business.” This reflects a larger issue in the undisclosed litigation investment model, namely that it distorts incentives and creates conflicts, without key stakeholders like judges, defendants, and juries being any the wiser.
- Fortress is owned by an Emirati sovereign wealth fund, raising questions about undisclosed foreign involvement in American courtrooms. Fortress was itself owned by Softbank before being acquired by Mubadala Investment Co.––one of the United Arab Emirates’ state-owned sovereign wealth funds. While Fortress claims it conducts its business operations independently of Mubadala, the Emirati fund has a majority ownership stake. This is the type of arrangement that the Protecting Our Courts from Foreign Manipulation Act (introduced in the U.S. Senate and House last year) sought to rid our legal system of due to concerns that “leaving our courts unprotected from foreign influence—such as from China—poses a major risk to U.S. national security.”
- Fortress is unwilling to disclose its funding arrangements. With questions echoing everywhere about Fortress’s backing of litigious non-practicing entities, the company has refused to share details on its involvement in litigation, going so far as to withdraw a $4 billion infringement lawsuit when the District Court of Delaware mandated 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.. While Fortress claims that 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. of funding arrangements gives defendants undue legal leverage in cases, the reality is that these mechanisms exist for both plaintiff and defendant. The question stands – why are litigation funders running away from courts that ask them to disclose information about their backers and practices? What’s so important to keep secret that you’d walk away from a lawsuit potentially worth four billion dollars?
As I noted in Patent Progress recently, just this month, the U.S. Judicial Conference announced its plan to study rulemaking which 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. of funding arrangements in all federal civil courtrooms. As this process unfolds, Congress is making its own progress, as also in October, Rep. Darrell Issa introduced the Litigation Transparency Act of 2024, which would enforce transparency in all civil cases to this same end. The more we learn about the litigation investment industry through reporting like Bloomberg Law’s, the more clear it is that mandatory 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. is a necessity.
