On December 5th, the U.S. Government Accountability Office (GAO) released a report detailing its findings from an investigation into third-party funding of patent litigation. The report confirms what we have called out on Patent Progress for months – that third-party funding in patent cases is a rapidly-growing practice, which must be addressed through adequate 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. requirements.
The report, created at the request of Senate IP Subcommittee Chairman Thom Tillis (R-NC), “review[ed] recent developments in third-party funding of patent litigation,” engaging a range of stakeholders including judges, law firms and defendants involved in third-party funded lawsuits, and third-party funders themselves. While opinions varied on the risks posed by and benefits of TPLF in patent infringement cases––with some stakeholders having a clear financial interest in advocating for its advantages––there was broad consensus that there has been “a rise in third-party funded patent cases in recent years.” Indeed, some companies interviewed reported that “more than half of patent infringement lawsuits filed against them had confirmed or suspected third-party funding,” with dozens of lawsuits filed against them each year.
The report also shined light on the ethical concerns associated with TPLF, concerns we’ve discussed extensively on Patent Progress. Third-party funded infringement cases often appear more focused on extracting settlements than resolving legitimate IP disputes. In fact, the GAO found that “some funders require two to three times their investment before the patent owner begins receiving any proceeds from a successful lawsuit,” placing significant pressure on plaintiffs. As a result, several stakeholders confirmed that “third-party funders may complicate settlement negotiations, contributing to longer settlement times.”
While funders interviewed claimed they do not control litigation strategy, the investigation suggested otherwise. From the GAO’s own analysis of funding agreements, it found that “plaintiffs may be required to consult with their funder before accepting a settlement offer.” One judge interviewed went so far as to say that “this influence makes it difficult to conduct meaningful settlement negotiations.” When funders influence or control litigation strategy, it not only raises conflict of interest issues, but draws out cases to the tune of millions of dollars in litigation costs for all parties involved.
The undue influence of third-party funders becomes even more concerning when funders are based overseas. The report noted that “several countries,” including China and Saudi Arabia, have backed patent litigation in the U.S., though the exact extent of this funding is unknown “given the limited available data.” And if adversary nations involving themselves in our courtrooms wasn’t troubling enough, stakeholders spelled out the exact concerns this could mean for our national security. The GAO report notes that “litigation funding could be used by foreign entities to divert U.S. companies from their core mission by entangling them in costly and distracting legal battles.” Dissemination of sensitive information is also a concern. For example, one company noted that in the strategically-important semiconductor industry, a foreign competitor could access sensitive information about the manufacturing process during discovery and develop their own domestic semiconductor capacity “without the U.S. company’s knowledge.” While litigation funder stakeholders claimed that protective orders and similar court tools would prevent this, there is simply no reason to think that a country engaged in economic espionage would find a protective order a meaningful barrier.
The report references a case where one investment entity withdrew a $4 billion infringement lawsuit rather than disclose its foreign funders. Indeed, a University of Utah study released just this month found that patent lawsuit filings in the District Court of Delaware dropped 35% in the two years since 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. requirements were implemented compared to the national baseline. It should go without saying that if plaintiffs’ motives were all above board, they would have no reason to abandon their multi-billion claims just because their funders are required to step out of the shadows. Given this decline, it would seem that approximately one-third of recent patent filings in Delaware received litigation funding, a meaningful fraction and one that signals that the influence the litigation investment industry has on patent litigation is significant.
With legal and national security concerns abound, it is encouraging that the report found that “many stakeholders … including most patent litigation funders, were open to some additional 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. requirements.” Even more promising, the report also notes that Department of Justice officials “are examining whether foreign entities are investing in U.S. patent litigation to gain proprietary information that would help their own industries … but did not confirm the existence of or provide details of any ongoing investigations.”
As these inquiries continue and state-level pressure mounts to shine light on the litigation finance industry, Congress can do its part by passing the Litigation Transparency Act of 2024, legislation to 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 third-party funding arrangements in all federal civil lawsuits. While 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. alone is not a cure-all for the larger problem of patent trolls exploiting our legal system, it is a much-needed first step in getting purely profit-driven entities out of American courtrooms and off the backs of American companies.
What this month’s GAO report signals is that the days of undisclosed third-party funding manipulating our patent system may soon be numbered.
