Although some Congressmen are trying to resurrect bad ideas, other Congressional leaders are once again focused on taking action to address third-party litigation funding, a rapidly-growing industry with opaque business practices that have raised serious concerns on Capitol Hill and beyond.
On July 11th, House IP Subcommittee Chairman Darrell Issa introduced a discussion draft of legislation to mandate 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 litigation finance agreements in civil lawsuits. The same day, Senators John Cornyn and Thom Tillis wrote to the Administrative Office of the United States Courts, urging them to “promulgate a rule governing commercial third-party litigation funding.” And one day later, House Oversight Committee Chairman James Comer sent a letter to Chief Justice John Roberts calling for the U.S. Judicial Conference to examine the practice “and consider enacting rules requiring disclosures of third-party litigation funding.” These steps are a welcome sign that lawmakers are invested in addressing an issue that manipulates our judicial system and could even endanger our national security.
When most third-party funders – be they litigation finance firms, hedge funds or sovereign wealth funds – invest in lawsuits, they do so with their own financial gain in mind and hope to generate a return on their investment, whether a piece of a settlement or a jury award. Oftentimes, this puts them at odds even with the litigants they are funding, like in the case of Burford Capital, which was sued by its own client, Sysco, for preventing it from accepting a reasonable settlement in an antitrust case.
There are also national security risks at play. Without regulation or universal 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, foreign-based third-party funders have backed cases in order to weaken critical American industries, access intellectual property secrets, and undermine our nation’s strategic toolbox. For example, in March, a Bloomberg Law investigation found that a group of Russian oligarchs had invested millions in litigation in American courts, even after being sanctioned by the U.S. following the invasion of Ukraine.
Congress now seems poised to address these risks by mandating 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. Chairman Issa’s bill, the Litigation Transparency Act of 2024, would require litigants in any federal civil lawsuit to report and produce any arrangements between them and any commercial enterprise which supports them within ten days. Chairman Issa, who led an IP Subcommittee hearing on TPLF on June 12th, called the legislation “a breakthrough measure that will target serious abuses in our litigation system and achieve long-overdue transparency.”
Meanwhile, the joint letter by Senators Cornyn and Tillis renewed a multi-year effort to get the United States Courts Committee on Rules of Practice and Procedure to issue federal rulemaking to mandate 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. for all TPLF agreements, enable discovery into these agreements, and “allocate litigation fees and expenses to the financed party where appropriate.” Chairman Comer’s letter to Chief Justice Roberts likewise calls for “work towards enforcing transparency nationwide.” However, as I noted in a Patent Progress post in March, previous recommendations from the Judicial Conference haven’t carried the weight of binding rulemaking, leaving individual courtrooms with leniency to adopt changes as they see fit.
Wherever implemented, 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. of third-party funding agreements has been a surefire way to mitigate the most nefarious risks associated with the practice. For example, when Chief Judge for the District of Delaware Colm Connolly issued a standing order requiring 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 financing arrangements in 2022, we learned that the Chinese firm Purplevine IP was financing four patent trollAn entity in the business of being infringed — by analogy to the mythological troll that exacted payments from the unwary. Cf. NPE, PAE, PME. See Reitzig and Henkel, Patent Trolls, the Sustainability of ‘Locking-in-to-Extort’ Strategies, and Implications for Innovating Firms. lawsuits against leading tech companies, in what many saw as an attempt to weaken their competitors.
On their own, however, individual judges cannot achieve total transparency, as third-party funders can selectively “shop” for courtrooms where 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 not required. Recognizing this, this month’s congressional action seeks to standardize transparency measures, “to create consistency and clarity” for “the plaintiffs, the defense bar, and the court,” as the Senators’ letter put it.
Third-party litigation funding is a rapidly-growing industry, worth an estimated $15.2 billion in commercial litigation investments in the United States alone in 2023. While funders see litigation as an opportunity to earn a consistent return on investment, TPLF has left our courtrooms dealing with more lawsuits, longer lawsuits and more costly lawsuits. In the patent space, even conservative estimates have found that at least 30% of all patent litigation cases were backed by third-party funders, bogging down legitimate innovators with frivolous litigation.
Time will tell whether the actions taken by Congress this month will be implemented. Either way, these developments promise that federal lawmakers are finally honing in on the long-overdue problem of unchecked, unnamed third-party litigation funding.
