Bringing transparency to third-party litigation funding (TPLF) has been a key initiative for both the insurance industry and the business community. In the Feburary 2024 edition of the CCO Connect e-newsletter, CLM spoke with representatives from Triple-I and the U.S. Chamber of Commerce's Institute for Legal Reform about efforts spanning the past 10 years to raise awareness among legislators both at the federal level and around the states.
Those efforts have begun paying off, as several states have taken action and passed transparency and disclosure requirements, beginning with Wisconsin in 2018. Now, federal legislators are taking notice as, recently, the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a hearing to discuss the negative impacts of TPLF and the implications for the courts, national security, and theft of intellectual property. What comes from the hearing remains to be seen, and there were clear differences in opinions among both legislators and witnesses, but the subcommittee chairman did commit to leading an attempt to produce transparency legislation with bipartisan support.
Specifically, the June 12 hearing focused on “recent developments with respect to intellectual property (IP) litigation financed by third-party investors and foreign entities, including the impact of those developments on the U.S. IP system and our national security.” Foreign funding of lawsuits that is not disclosed, and the national security risks that poses, was a frequent topic of discussion among the legislators and witnesses.
Rep. Darrell Issa (R-California), chairman of the subcommittee, opened the discussion, stating that “there are newer forms of third-party litigation that present particular concerns. I say this because we are not here to eliminate third-party litigation. We are not here to eliminate people who need to have investors in order to protect their intellectual property rights or any other event that has happened to them. There are plenty of groups who, in fact, specialize in helping people assert their rights.
"However, with the growth of non-practicing entities, known as patent trolls, engaged in meritless litigation campaigns, we see vast settlements by asserting a wide swath of low-quality patents. More importantly, and most importantly for today, we see and have documented instances of foreign funding from China, Russia, and other sources who use shell companies to hide where they come from and what their meaning [may be].”
He added that "while some states and federal courts have considered and adopted measures to require at least a level of transparency, [TPLF] is not regulated by federal law. This committee looks to change that. Right now, insurance agreements and other financials of defendants are discoverable, and I want to emphasize that, if I am an insured and a plaintiff comes, one of the first pieces of discovery is they want to know how deep my pockets are and how deep my insurance coverage is, because that may very well dictate what they’re willing to settle for. They get transparency; however, the courts, with rare exceptions, have not asked for any discoverability as to the true plaintiffs, meaning the investors. And that’s why it’s time for Congress to take a look…at what disclosure and transparency is needed to stem the tide of [TPLF] abuse.”
Consensus on that issue may not be easy though, demonstrated by Ranking Member Rep. Hank Johnson's (D-Georgia) opening remarks. Johnson outlined why TPLF has become prevalent in patent cases, noting that it is difficult for inventors without massive resources to access the court system to enforce their patents when large corporations infringe on them. "After the America Invents Act was passed into law, even the worthiest of patent claims became procedurally difficult to pursue. As a result patent attorneys largely stopped taking cases on contingency basis because of the small likelihood of success," he said.
Inventors left without recourse began turning to outside investors to fund their cases, Johnson noted, so that they could access the justice system. "We're here today because big business does not want to be brought to court; not for the patents they infringe and not for any of the other harms against everyday Americans."
He criticized "the assault on [TPLF]," where business interests use what he called scare tactics to limit the ability of people to access the court system, and he cited the potential for foreign litigation investors in patent cases as an example. "One of those scare tactics has been raising the spectre of the threat of China to our intellectual and national security systems," said Johnson. "The only solution, they claim, is extensive transparency measures that would give defendants clear advantages over funded plaintiffs."
Debating the Impact of TPLF
Witnesses at the hearing outlined their concerns and defenses regarding TPLF's impact on the U.S. legal system. Former U.S. Rep. Bob Goodlatte, (VA-6), a previous chairman of the House Judiciary Committee, stated, “Third-party funders in cases both related to and outside of intellectual-property lawsuits have an incentive to maximize their returns. At times, this may come into conflict with the interests of plaintiffs and prevent plaintiffs and defendants from reaching fair settlements. Third-party funders often claim not to be involved in legal strategy, but we have seen reporting in publications like The Wall Street Journal investigating conflicts between funders and plaintiffs, and painting a picture of an industry where the investors influence case strategy to serve their own objectives, not the plaintiffs’.
“What’s worse, there is substantial reason to believe that the lack of disclosure requirements is now giving America’s adversaries a window to invest in litigation targeting critical industries and productive companies that are creating jobs, growing our economy, and keeping the United States on the cutting edge of innovation.”
Paul Taylor, visiting fellow, National Security Institute, George Mason University, spoke to deeper concerns with the U.S. legal system, and how TPLF, particularly from foreign-based sources, can exploit those issues for nefarious purposes. He stated, “The bad news is that, today, we face the perfect storm of legal and international dysfunctions. Our legal system that rewards meritless lawsuits meets third-party financers who see the justice system solely as a profit source.
"Those financers find maximum leverage of these dysfunctions in the American patent litigation system and use that leverage to extract profits through the legal extortion of productive American companies that have done nothing wrong, but instead have provided Americans with the products and national defenses that serve them best. And foreign enemies can now freely fund that extortion, and, in doing so, not only weaken American businesses and defenses, but also use those ill-gotten gains to fund other anti-American plans of their own. The good news is that Congress can help dispel this perfect storm by simply exposing [TPLF] agreements to the light of day.”
Donald Kochan, professor of law and executive director of the Law and Economics Center, Antonin Scalia Law School, George Mason University, spoke to potential damage to the legal system when court decisions are used as investment vehicles. “The courts are special," he said. "Stable courts help maintain stable markets and stable societies. When they are open for legal purposes and the resolution of legal disputes, they serve the market. Market participants know that the courts will be there if deals are broken, property rights need resolution, or traditional wrongs in tort need remedies. This confidence fuels and incentivizes private investments that lead to economic growth.
"The courts should be in the business of being courts. When litigants, or the investors propping them up, can start using the court decisions as investment vehicles rather than for their traditional role in investment preservation through the enforcement of rights, we convert courts into something they are not intended to be, necessarily diluting their ability to serve their traditional role. Courts should not become just a playground for investment and gambling. We need to maintain a civil justice system outside the market if we are to preserve the civil justice system as a predictable, neutral, and accessible system that serves the market. Put another way, in order to preserve the effectiveness of our nation’s courts to serve as necessary and neutral forums that facilitate the market, the court system must be insulated from market forces.”
Meanwhile, Professor Victoria Sahani, associate provost for community and inclusion and professor of law, Boston University, spoke to the benefits of TPLF and cautioned against an overly broad approach to regulate it. She said, “A litigant's inability to afford access to the federal courts, or access to experienced legal counsel, due to financial constraints represents a fundamental flaw in our justice system. [TPLF] provides funding for both consumer and commercial litigants to adjudicate their rights, and to law firms seeking working capital for their case portfolios. This is also true in patent litigation, where patent holders and their legal counsel can benefit from the third-party funder's resources to vindicate patent rights." She added, "Third-party funding can and should be on the menu of options available to legitimate parties while we work simultaneously to make justice more affordable and accessible to all."
She stated, "Regulation of [TPLF] in the national security context should be tailored to achieve clear goals and not be overly broad in ways that may inadvertently curtail the entire [TPLF] industry."
Potential Solutions
Taylor, speaking in favor of greater TPLF transparency, pointed to one prominent example as a potential guide. “We can go a long way toward solving the problem of known unknowns with the simplest policy imaginable: transparency. And we know this works through the efforts of federal Chief Judge [Colm F.] Connolly of the District of Delaware. A few years ago, Chief Judge Connolly, who handles a lot of patent cases, began to get the impression that the lawyers in cases before him often seemed unable to give him straight answers to questions, as though they needed to check with someone else first.
“Consequently, he issued standing orders in April 2022, mandating the disclosure of any [TPLF] contracts that applied to any party in his courtroom. As he explained in a November 2022 memorandum, this was an attempt to address potential 'abuse of our courts.' And his simple disclosure requirements have had dramatic results. [TPLF] companies have already sought to dismiss their own funded cases in Judge Connolly’s court simply because they don’t want to reveal their financing arrangements."
See Turning the Tide on Third-Party Litigation Funding for more on Judge Connolly's actions and the impact on patent suits in his district
Sahani, though, sought more nuance on the idea of disclosure. "I think that disclosure is a complicated topic," she said. Asked by Issa for minimum disclosure that she would support, she said, "I would support disclosure of the name, or identity, of the funder, and any relevant information regarding its business address or location."
She drew a distinction with Issa's earlier statements comparing disclosure of a funder's potential invesment return with the mandatory disclosure in many jurisdictions of a defendant's insurance limits, stating, "My understanding of the rule regarding the disclosure of the limits on liability insurance is with respect to the merits of the case and any potential damages award which may be paid by the insurance policy. Third-party funders do not pay the actual claim awarded amount. They only pay costs."
Goodlatte, though, who supports more comprehensive TPLF disclosures, contended that the insurance analogy "is actually a good one because the parties in most jurisdictions are able to not only get the information that Professor Sahani referred to, but can also get an actual copy of the insurance policy, and that contains a lot of useful information regarding how the strategy of a lawsuit will be pursued...."
He and Issa noted that insurance companies do not normally pay just for the damages, but also they pay for the defense, which Goodlatte said "is exactly what the third-party funders do" for plaintiffs, demonstrating the similarities.
Next Steps
Issa, in concluding statements, said that "it is fair to say, I believe, that we’ve agreed that, in fact, more transparency at a base level needs to be there. Now, the question is, can we get to a level low enough for [Sahani] and high enough for some of the other members of the panel?
"That is a challenge for members on both sides…and as you can see, we’re a ways off, but this is a bipartisan subcommittee, we have worked well so far…we will follow up with questions…."
He announced his intention to produce and circulate draft legislation on the topic. "It is a discussion draft, but I want to make sure that we begin to talk about the parameters of what can be done," Issa said. "My goal, obviously, in this Congress, is to get it done on a bipartisan basis.”
Commenting on the hearing, Nat Wienecke, APCIA’s senior vice president of federal government relations, states, “APCIA appreciates and supports the House Judiciary Subcommittee on Courts examining the negative impacts of litigation funded by third party investors, foreign governments and their agents and the implications for the courts, national security, and theft of intellectual property.
“[TPLF] has implications for consumers as well. It allows investors, even foreign entities and individuals, who have no relationship to the claimant or issue being litigated, to secretly invest in a lawsuit for their own profit. This abusive practice redirects judgments and settlements away from the claimant to unrelated investors while keeping our courts and judges in the dark about their involvement.
“By its very nature, [TPLF] contributes to the growth in lawsuits and increases litigation costs, both of which increase the cost of insurance over time for every American family, individual, and business who purchases it.
“It's time for sensible solutions in an area that costs all of us. We need transparency and mandatory disclosure of [TPLF].”