Does litigation funding make justice the new financial asset?


The Supreme Court of the United States has the famous words “equal justice under the law” above its front door. Although the application of this phrase is debated in American courtrooms, committee rooms and kitchen tables, one point of agreement is that the law is meant to be about justice, not a financial instrument that investors can take advantage of. Unfortunately, a growing litigation funding industry is distorting our legal system, monetizing lawsuits into assets they can exploit for profit.

There are a growing number of investors who use patents and patent law not as protections for inventors and to stimulate innovation, but as tools to extract profits from productive companies. On one side of this patent litigation are the manufacturers – companies that develop new products, create jobs and help drive our economy. On the other side are non-practicing entities, also known as patent trolls. The patent trolls are takers. They are shell companies – often backed by litigation funding entities – that don’t innovate, hire, build or create anything but lawsuits. And, increasingly, they are funded by hedge funds and private equity firms, alongside foreign state-owned sovereign wealth funds.

The hedge funds, private equity funds and sovereign wealth funds that represent many of the lenders in litigation were not harmed and do not represent clients seeking relief. Instead, funders pay lawyers to develop lawsuits that would not otherwise be filed. They then receive a percentage of the winnings if the lawyers win the case. A doctrine called “champerty” once prohibited this type of litigation funding, but in many states it has been abandoned. And therefore, these private equity funds…including an this some credit with the worsening of the global financial crisis of 2008— have started pouring their money into funding lawsuits they see as likely to pay off. Although many of these lawsuits fail, they are lottery tickets. You only need one trial to hit the jackpot and pay out more than the rest. But that lottery ticket causes collateral damage for ordinary entrepreneurs who are just trying to make a product for people to use.

Lawyers who develop these lawsuits against patent trolls acquire vast unused or shoddy patents with no intention of building anything on them. Instead, they target businesses ranging from corner stores to major US manufacturers and tech companies. Sometimes they send thousands of threatening letters demanding payment. And sometimes they file patent infringement lawsuits to get a massive payday. Many companies lack the resources to combat these demands, and even those who have to spend time and money that could be spent on new innovations and hiring new workers.

Patent trolls often try to portray themselves as small startups or victims of big business greed, but in reality there is an entire industry designed to generate profits for investors at the expense of productive companies that have done nothing. of badness. Overall, litigation funding attracted over 11 billion dollars in capital in the United States and represents a global industry of 39 billion dollars in 2019. As funders fund cases in a number of areas of law, patent litigation is increasingly at the heart of their business. We have seen more and more litigation funders devote hundreds of millions of dollars to increased investment in patent trolls.

As patent litigation funding has grown, other practices that seek to financialize patent litigation. There is a growing trend verdict protection insurance policies. With this assurance, even if judgments won by patent trolls or others alleging infringement are overturned on appeal, they are assured of a significant portion of the awarded funds. All of this points to a series of sophisticated, interconnected industries that further incentivize more aggressive behavior from trolls and their backers.

Fortunately, there are steps Congress and the United States Patent and Trademark Office (USPTO) can take now that would have a significant impact on leveling the playing field between innovators and professional patent litigants.

First, Sense. Patrick LeahyPatrick Joseph LeahyIs litigation funding making justice the new financial asset? Former U.S. attorney launches Senate bid in Vermont (D-Vt.) and Thomas TillisThomas (Thom) Roland TillisCamp Lejeune Toxic Water Victims Eye Justice as Pivotal House Bill Passes Is Litigation Funding Making Justice the New Financial Asset? Big Tech allies point to threat from China and Russia to crush antitrust bill MORE (RN.C.) presented the Pride of Patent Ownership Act, legislation that would allow the public – including those targeted by patent litigants – to know who the true owners of a patent are by requiring patentees to disclose their identities each time a patent is issued or change hands. This would go a long way to bringing much-needed transparency to our patent system and bringing many litigation funders out of the shadows and into the spotlight.

Second, the USPTO can act now to reverse changes made unilaterally by its former director that limit access to expert and fair review of patent infringement claims by those targeted by patent trolls. At the USPTO, there is a Patent Trial and Appeal Board (PTAB) comprised of subject matter and patent law experts who are able to review claims of infringement through ‘a process called inter partes review (IPR) and eliminate low-quality patents used by patents. the trolls.

However, the previous director of the USPTO instituted the NHK-Fintiv rule, under which the PTAB denies review, regardless of the merits of the claim, if there is already an ongoing dispute. An examination refused under NHK-Fintiv implicitly signals that the patent is of questionable validity – if the IPR had no merit, then the PTAB would simply have ruled on the merits. This is exactly the situation where IPRs are most valuable to victims of patent trolls, which means that the NHK-Fintiv The rule gives patent trolls more leverage in an already unbalanced system and leaves invalid patents untouched to be abused.

A balanced patent system rewards innovation. It shouldn’t punish innovators, but right now that’s exactly what the US patent system does. We cannot continue to allow litigation funders to misrepresent patent law, profiting payees at the expense of manufacturers. The good news is that nothing prevents the USPTO from acting now to reverse the trend NHK-Fintiv rules and helps level the playing field between litigation funders and American innovators. Congressional and USPTO action is desperately needed to rebalance our patent system and rein in the growing litigation funding industry.

Joshua Landau is a patent attorney at the Computer & Communications Industry Association (CCIA).


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