Disclosure Order Targeting Funders Stunts Delaware Patent Suits

Patent lawsuits filed in Delaware’s federal court dropped precipitously after a judge started requiring litigants to reveal any outside funding for their cases.

Filings fell 41% in the two-year period after Delaware Chief Judge Colm F. Connolly issued his standing order in April 2022, compared with the same time span leading up to the decree, a University of Utah study found. Patent suits were down 15% nationwide during the same period, according to the study.

“From the evidence we’ve amassed, there’s a pretty good argument here that what’s going on is litigation funders don’t like disclosure,” said Jonas Anderson, a university law professor and the study’s author. The number of patent cases fell to 1,121 from 1,899 at the US District Court for the District of Delaware.

The findings raise the possibility that forcing disclosure and otherwise regulating litigation finance may lead practitioners to restrain their use of the tool—or at least be more selective about venues where they choose to employ it.

Litigation finance has grown into a $15.2 billion industry as third-party investors pay the cost of lawsuits in return for a piece of court awards or settlements. About 19% of outside funding goes to patent cases, the most popular investment for litigation financiers.

Proponents say the tool democratizes litigation by giving plaintiffs access to financing while critics complain of ethical questions and frivolous lawsuits. Connolly last year found that lawyers for patent monetization firm IP Edge violated professional conduct rules after using “shell” companies to obscure involvement in a string of patent lawsuits. He referred the lawyers to the Justice Department, US Patent & Trademark Office, and state lawyer ethics officials.

“I don’t believe our courts are casinos where people should just go to profit,” Connolly said at a conference in March.

His order requires litigants to identify third-party funders, describe the nature of the backing, and state whether their approval is needed for litigation or settlement decisions. At the March conference he estimated he’s seen a 20% drop in cases funded by outside entities since his order.

Anderson says funded patent cases have virtually disappeared from Connolly’s courtroom, with only one filed there this year. Connolly didn’t immediately respond to a request for comment.

It’s possible that a single large-scale filer putting activities on hold is responsible for the drop-off, said Aaric Eisenstein, founder of ASE Monetization LLC, which helps intellectual property owners access value for illiquid assets.

Fighting Disclosure

The US Chamber of Commerce, which blames litigation finance for frivolous lawsuits, has been leading the fight for disclosure. The group credits Connolly’s order for revealing that a Chinese firm may have used “privileged, confidential, and highly sensitive information” in pursuing a case.

In response to such lobbying efforts, states including Louisiana, Indiana, and West Virginia have enacted legislation that requires funders to operate more openly. Similar bills introduced in Congress in recent years have gone nowhere.

Proponents of outside investment in cases, including the trade group International Legal Finance Association, oppose disclosure requirements. They argue the practice can unfairly harm litigants by revealing strategies and other information.

Anderson said that to avoid disclosure in Delaware, the litigants might be filing cases in two other federal courts that often hear patent disputes: the US District Court for the Eastern District of Texas and the US District Court for the Western District of Texas. No disclosure of litigation finance is required at either venue.

“For Texas this is great,” he said. “For the judges in Delaware that want fewer patent cases, it’s great. For the patent system as a whole, and for society as a whole, it’s not great.”

Another factor that could account for the drop in cases in Delaware is that court’s backlog of cases, said Michael Gulliford, managing partner and co-founder at litigation funder Soryn IP Capital Management.

“One of our primary concerns is the ability to get to trial in a speedy period of time,” Gulliford said. “Because of the backlog of in certain jurisdictions including Delaware, that could be a hard thing to do.”

New Jersey

One of the few courts besides Connolly’s to require disclosure, the US District Court for the District of New Jersey, had only 88 cases with outside funding among 40,000 filed since the requirement took effect in June 2021, Anderson’s study found.

Most of the 88 cases were filed by one plaintiff with a single funder. Atlas Data Privacy Corp. brought lawsuits funded by Parabellum Capital that accuse data brokers of violating a state law that protects the privacy of judges and law enforcement officers.

New Jersey case funders might be restructuring their arrangements so they don’t fall under disclosure requirements, Anderson said. They also may have stopped financing cases in the state or didn’t have many cases there to begin with, he said.

Will Marra, director at litigation finance and insurance company Certum Group, said the study confirms his experience that “only a very small percentage of cases” gets outside funding. “Litigation finance remains a relatively small but mighty feature of our civil justice system,” he said.

Anderson said fears over disclosure resulting in discovery battles appear to be unfounded. He didn’t see requests for extensive discovery in any cases he analyzed, he said.

More disclosure would create a better understanding of the litigation finance industry, he said, but judges shouldn’t be able to influence how many such cases are filed in their courtrooms.

“Why should a judge be able to say, ‘I don’t want to hear these types of cases, I prefer these other types of cases?’” he said. “I just don’t think that’s the role of a judge to choose or shape his docket by discouraging or encouraging plaintiffs to file in his courtroom.”