Source: Ray, Korok, Third-Party Funding of Patent Litigation: Problems and Solutions (June 1, 2022). Available at SSRN: https://ssrn.com/abstract=4125510 or http://dx.doi.org/10.2139/ssrn.4125510
The data showed a dramatic increase in both the number of cases and the percentage funded by third parties. While we cannot say with certainty that third-party funding has caused this growth in patent litigation, we can observe its high correlation to both the decline of enforcement of the law of champerty, and to the emergence of mega-judgments in U.S. patent courts on software patents, coinciding with the Uniloc v. Microsoft’s $388 million dollar verdict in 2007—then the fifth-largest patent verdict in history). Tracing the history of the doctrine of champerty in the United States reveals that, although the doctrine was originally decriminalized to allow under-resourced plaintiffs access to litigation, the use of litigation finance today by patent trolls leads to distortions in the marketplace and an excessive amount of frivolous litigation.
The secondary market for patents, in which non-practicing entities (NPEs) can buy patents from innovators and litigate against defendants, has created a robust market for litigation. Fueled by the capital markets seeking rapid turnaround and outsized returns, investment funds place bets on litigation in hopes of a financial return, with no interest in the underlying technology or innovation. This has contributed to a growth in litigation for litigation’s sake, turning our courts into another speculative money making vehicle. This growth in litigation drains resources better used for social welfare and criminal justice and creates a hidden tax on innovation, since operating companies and the Courts are then forced to spend costly resources to defend against patent trolls funded by Wall Street—and worse, foreign private sovereign nation funds and other shadowy investors who prefer to remain hidden.
Given there had been no study conducted to understand the impact of LIEs, in a NPE context, the data was collected in three phases. The first phase examined data from 2010 forward; specifically, within the Western and Eastern Districts of Texas. Litigation data from Unified Patents’ portal identify each plaintiff as an NPE (Patent Assertion Entity), NPE (Small Company), or NPE (Individual); see Appendix A for definitions.
Using these definitions, Unified first identified whether NPEs were aggregators, and then whether third-party financing was involved. NPE aggregators were defined as NPEs with more than one affiliated subsidiary that was also bringing, or had brought, patent litigation. An example of this would be IP Edge, Mavexar, and the various limited liability companies under its control that have filed hundreds of cases against operating companies. Third-party financing is defined as evidence of any third party with a financial interest other than the assertors; there is no formal registry for patent ownership or secured interests in patents, and recordation of assignments in the United States is neither required nor all that regular, so this data is by its very nature incomplete. But it is the best existing data set of entities connected with litigation financing collected to date.
This initial set was limited, as it focused on the Western and Eastern Districts of Texas. In the second phase, Unified used several public databases, such as Edgar, USPTO Assignment Records, the NPE Stanford Database, press releases, and its own database of NPEs to identify aggregators with any known third-party financial interest; we also used various secretary of state corporate filings or court-ordered disclosures. After those two districts were identified and fully cataloged, Unified then expanded the data to cover the top five most litigious venues for patents: the Western and Eastern Districts of Texas, Delaware, and the North and Central Districts of California. Over the past five years, on average, these districts have accounted for about 70% of all patent litigation. When this process was completed, the dataset was then expanded to include all U.S. district court jurisdictions from 2010 forward. It does not include U.S. International Trade Commission 337 trade investigations.
The third and final step was to expand the data set to include the period from 2000 to 2009. Using the NPE Stanford Database, and Unified’s Portal, the same process was followed. Unified identified all litigation that was known to be NPE-related. From there, using the top five jurisdictions’ aggregation and financing data, known aggregator entities—such as Intellectual Ventures—were identified using the same methodology. The original final dataset covers 2000-2021, and identifies (1) which plaintiffs are NPEs, (2) which NPEs are aggregators, and (3) which aggregators are known to have third-party financing.
The data set originally contained 79,541 observations, which include 73,989 unique patents filed over a time series of 2000–2021. The data captured the district court in which the patent lawsuit was filed, the case number and date, the year the summons and complaint were filed, the status of the case (open or closed), court in which the litigation occurred, the name of the plaintiff, the name of the defendant, and whether the lawsuit was funded by a third party. The data classified each lawsuit by entity type, such as non-practicing entity (NPE), operating company, other entity, patent assertion entity, small company, or individual, as well as the presiding judge on the case, the date the case was terminated, the date of the Markman hearing, and a description of the product. Some data are only available for the years 2015 to 2021, such as a description of the product, a flag that denotes whether the defendant is a small to medium enterprise (SME), and the industry classification.
Armed with this previous study, Unified decided to take the data and compare this to both Assignment and Secured Interest records from the USPTO to provide both transparency in terms of NPE ownership and any third party financing obligations. The premise being as more complex parties are coming to LIEs and in order to have perfection in collateral as a secured interest there needs to be a filing with the proper public office.The other factor is that since LIEs is being seen as an alternative investment vehicle, most funds want to advertise the success of a litigation campaign to win more business. It should be noted that different funds have different strategies when it comes to litigation.
For instance, R2 Solutions, the former Yahoo/Verizon portfolio that has low been divested to Acacia is being surgically asserted against defendants, with only 8 cases last year. IP Edge on the other hand had over 500 cases last year through its various entities. Bell Semiconductor, a Hilco entity, had been relatively dormant and in 2022 saw over 100 cases. Each of these entities employ a different strategy to monetize their portfolio.
