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IP Litigation Financing Protects Investors, Not Inventors

Oct. 31, 2022, 8:00 AM

The US Constitution gives Congress the power to create a patent system to “promote the Progress of Science and useful Arts.” Sometimes the patent system achieves that goal. But far too often, third-party patent litigation financing funds patent lawsuits that exist to generate large returns for investors, not to reward inventors or promote progress.

Some argue that access to third-party litigation financing offers recourse for innovators whose patents are being infringed upon, but who may not have the resources to enforce them.

If we could be confident that nearly every patent granted by the Patent and Trademark Office were of high quality, then perhaps this positive narrative would hold weight, but that’s not the case. Maybe if the rewards actually flowed back to inventors, then this approach would work. But that’s not the case either.

Ideally, patents—and the protections that they offer inventors—are only granted when an idea is useful, novel, and non-obvious. These standards encourage true innovation and reward those who invest time and resources in developing innovative technologies that benefit us all.

But more than 600,000 patent applications are filed with the USPTO every year. Most applications are granted. As a result, there’s a wide range in the quality of patents awarded. The large number of low-quality patents awarded each year presents an opportunity for exploitation by non-practicing entities—NPEs, or patent trolls—that are funded by investors.

Market for Low-Quality Patents

Based on data from the National Bureau of Economic Research, USPTO examiners are given an average of just 19 hours to review and approve or reject a patent. This includes reading the application, understanding the technologies in question, researching relevant prior patents, conducting interviews, and writing a decision.

Given all this, it’s no surprise that many patents are granted on ideas any engineer could have produced—or already did. The issuance of so many low-quality patents is bad enough, but the real damage occurs when the bad patents are acquired by those who intend to exploit them.

There is a large secondary market for broad, low-quality patents. Hedge funds and other litigation funders stand up shell companies to own and assert patents. These companies are commonly referred to as non-practicing entities.

NPEs purchase overly broad patents and leverage them in patent infringement claims against everyone from small businesses to startups to large corporations. Their goal isn’t to protect the work of innovators—it is to create a return for their investors.

NPEs come in all shapes and sizes. Some sue school districts, municipal stadiums, public transit systems, and nonprofit hospitals for using video surveillance. Others have used generic data transmission patents to target ventilator manufacturers, and old Theranos patents to target diagnostic testing manufacturers during a global pandemic.

Still others go after tech companies, seeking judgments in the hundreds of millions or even billions of dollars. It’s predatory behavior, plain and simple. These lawsuits are a drain on our economy. They contribute nothing to the progress of the useful arts.

This problem impacts everyone from small businesses and startups to larger companies—they all receive threatening demands from anonymous shell companies just for operating their business. They then must choose between paying to make the threat go away, even when they know they aren’t in the wrong, or engage in risky and expensive litigation.

Funding Transparency Is Needed

Third-party financing can be difficult to track because many agreements are private and not even known to the court hearing the lawsuit.

But analysis conducted this year Texas A&M University shows that from 2015-2021, at minimum, almost 25% of patent lawsuits in the US were funded by third parties. The same data shows that from 2000-2021, NPEs were responsible for almost half of all patent cases. Both NPE litigation and third-party funding continue to rise.

This data is indicative of a deeply flawed patent system.

The first step in addressing the problems with patent litigation financing is to shine much-needed light on those who fund these lawsuits. NPEs often present themselves as startups or small inventors, and it can be difficult to determine where they receive their funding, even during active lawsuits.

In April, the chief judge of the District of Delaware issued a standing order that requires the disclosure of any third-party funding entities and the terms of any third-party funding agreements. Due to the prevalence of NPE litigation and third-party funding, this type of transparency is desperately needed across the board in patent infringement cases, not just in one court in Delaware.

We also need to restore protections for businesses and innovators who are targeted by well-financed NPEs. In 2011, Congress created a review process at the USPTO, inter partes review, where expert judges are able to call balls and strikes on patent disputes, and invalidate the overly broad patents that are all too often issued.

In recent years, however, rule changes at the USPTO have reduced the efficacy of IPR, making it easier for bad actors to exploit the patent system

USPTO Director Kathi Vidal recently released interim guidance that helped restore IPR as a protection for those who have low-quality patents used against them in infringement claims, but there’s a long way to go before that guidance becomes a rule.

We should not allow litigation financiers to impede progress in a patent system that is intended to promote it. Increased transparency and the restoration of key regulatory protections are a first step toward ensuring our patent system is rewarding innovators and promoting inventions, not being abused by litigation financiers to increase the size of their bank accounts.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Joshua Landau is the patent counsel at the Computer & Communications Industry Association. He joined CCIA from Wilmer Cutler Pickering Hale and Dorr in 2017, where he represented clients in patent litigation, counseling, and prosecution, including trials in both district courts and before the PTAB.