On October 10th, the U.S. Judicial Conference Advisory Committee on Civil Rules announced it would study the necessity of establishing a nationwide rule 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 litigation funding (TPLF) arrangements. After nearly a decade of deliberation, the Judicial Conference has finally heeded concerns about the detrimental impact of undisclosed lawsuit investments and taken the first step towards establishing much-needed transparency in our legal process.
The Judicial Conference’s decision to establish a subcommittee to examine the controversial practice comes a week after a letter penned by leaders in technology, healthcare, automotive manufacturing, and other industries called on the Conference to address “the continued uncertainty and court-endorsed secrecy of non-party funding in our cases [which threatens to] further unfairly skew federal civil litigation.”
Congress too has expressed concerns with TPLF in recent months. As I noted in Patent Progress in August, Senators John Cornyn and Thom Tillis, and House Oversight Committee Chairman James Comer called for the Judicial Conference to examine TPLF and consider 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.
Still, the creation of a subcommittee to study the issue is only the first step in what is expected to be a years-long process. In the meantime, our judicial system is relying on a sparse patchwork of state laws and individual district rules governing transparency requirements. Indeed, while some jurisdictions, like the District of Delaware, have been a model for transparency, others, like the Western District of Texas, which previously oversaw nearly one quarter of all patent cases nationwide, have become hotbeds for 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. plaintiffs and their undisclosed funders.
In 2022 alone, third-party funders invested at least $513 million in patent cases, with some estimates finding that, at minimum, 30% of all patent cases are backed by third-party financing.
Many of these litigation funders are powered by overseas hedge funds and sovereign wealth funds, raising national security and conflict of interest concerns, all while hampering American businesses with frivolous litigation. 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. rules have been enacted, as in the District Court of Delaware, foreign-backed third-party funders have gone as far as withdrawing their cases, illustrating the positive deterrent effects transparency requirements could have nationally.
As the Conference’s rulemaking process unfolds, it is crucial that Congress works concurrently to take initiative on the issue. Fortunately, in October, House IP Subcommittee Chairman Darrell Issa introduced the Litigation Transparency Act of 2024 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 TPLF agreements in civil lawsuits. In Representative Issa’s own words, “If a third-party investor is financing a lawsuit in federal court, it should be disclosed at the onset of the case. Awareness by all parties will help ensure fair and equal treatment by the justice system and deter bad actors from exploiting our courts.”
For too long, third-party financiers have gone unchecked and unnamed. Thankfully, it seems the days of tampering with our courts, threatening our innovation economy, and undermining our national security are winding down.
