Third-Party Litigation Funding in Patent Cases: Transparency, Ethics, and Policy Concerns

by Dennis Crouch

The landscape of patent litigation has been dramatically reshaped by the rise of third-party litigation funding (TPLF) over the past decade. As someone who has been involved in patent law issues for 20+ years, I can confidently say that if I were asserting a patent today, I would actively seek litigation finance to mitigate risk, even if I had sufficient resources to self-fund (which I don’t). The availability of TPLF allows patent holders to create high-caliber legal teams and can also provide a strategic advantage by demonstrating to opponents that the case has been vetted by sophisticated investors willing to back it financially.

However, this trend toward litigation finance comes with complications and controversies. While TPLF has undoubtedly increased access for many patent holders, it has also given rise to significant ethical concerns and abuses. One of the most pressing issues is the potential for effectively sidelining the nominal plaintiff – the actual patent holder – in favor of the financial interests of funders and attorneys. In addition, there is some notion that TPLF is often channeled into the US via foreign sources — something that has raised concerns that this could somehow destabilize the rule of law.

At the same time, it’s important to acknowledge the positive impacts of TPLF. The availability of litigation finance has allowed larger, more established law firms to take on plaintiff-side patent cases that they might have previously declined due to risk or resource constraints. Anyone working in a law firm knows how difficult it is to convince partners to take on risk, and TPLF offers guaranteed partial payouts from funders even if the defendant wins.  That means that these firms can assemble formidable legal teams, potentially leveling the playing field against well-resourced defendants and improving the overall quality of patent litigation.

Given these benefits, it’s easy to understand why frequently-sued defendants have their own financial interest in limiting TPLF. And, short of limiting access, they would seek detailed disclosures of the particular finance arrangement so that they can either (1) argue that it is improper or (2) use that knowledge to obtain a better negotiation position.

Disclosure: One option that appears on the table is to require disclosure, perhaps via the Federal Rules of Civil Procedure (FRCP).  The FRCP already incorporate several automatic disclosure requirements designed to promote transparency and facilitate efficient litigation. One key example is Rule 26(a)(1)(A)(iv), which mandates that defendants disclose “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” This requirement, introduced in 1970, was justified by the Advisory Committee as enabling “counsel for both sides to make the same realistic appraisal of the case, so that settlement and litigation strategy are based on knowledge and not speculation.” The rationale behind this insurance disclosure rule closely parallels arguments in favor of mandatory TPLF disclosure. Just as knowledge of a defendant’s insurance coverage informs settlement discussions and case strategy, awareness of a plaintiff’s litigation funding arrangements could similarly impact case dynamics. Proponents of TPLF disclosure argue that extending the spirit of Rule 26(a)(1)(A)(iv) to encompass litigation funding agreements would level the informational playing field, allowing all parties to make more informed decisions throughout the litigation process. This parallel suggests that the FRCP could be a natural vehicle for implementing uniform TPLF disclosure requirements, potentially through an amendment that treats litigation funding arrangements as analogous to insurance agreements in terms of their relevance to case appraisal and strategy.

Two competing letters were recently sent to the Committee on Rules of Practice and Procedure of the Administrative Office of the United States Courts highlight the competing perspectives on this controversial practice.

  • Letter from 124 corporations to H. Thomas Byron III, Secretary, Committee on Rules of Practice and Procedure, Administrative Office of the United States Courts (Oct. 2, 2024). Companies-letter-transparency-litigation-funding.
  • Letter from Kristen Osenga, Chief Policy Counselor, Inventors Defense Alliance, to H. Thomas Byron III, Secretary, Committee on Rules of Practice and Procedure, Administrative Office of the United States Courts (Oct. 9, 2024). Inventors-Defense-Alliance-Letter-10.9.24

On October 2, 2024, a coalition of 124 major corporations submitted a letter to the Committee urging the adoption of uniform TPLF disclosure requirements in federal courts. The signatories, including industry leaders Amazon, Google, and Johnson & Johnson, argue that the current landscape of inconsistent and often inadequate disclosure practices creates an unfair litigation environment for these tech giants.

Key arguments from the corporate coalition include:

  1. Need for transparency: The letter contends that TPLF fundamentally alters case dynamics and impacts settlement possibilities. Without knowledge of who controls the litigation, defendants cannot make informed decisions.
  2. Procedural fairness: They argue that non-disclosure of TPLF agreements undermines key FRCP provisions such as proportionality in discovery and the requirement that actions be prosecuted by the real party in interest.
  3. Consistency across jurisdictions: The letter highlights the current patchwork of approaches to TPLF inquiry, ranging from ex parte discussions to written orders, and advocates for a uniform, straightforward procedure.
  4. Parity with insurance disclosure: As mentioned above, the letter also argues for parity with the mandatory disclosure of insurance agreements.

An Opposing View: In response, on October 9, 2024, the Inventors Defense Alliance, submitted a letter strongly opposing mandatory TPLF disclosure requirements. IDA is a new organization headed by Professor Kristin Osenga (Richmond Law).  The response argues that that TPLF provides (1) better access to justice and (2) levels the playing field — both in favor of the small businesses that drive the U.S. economy and help solidify the innovation incentive offered by patents. With regard to disclosure, the alliance letter expresses worry that mandatory disclosure could expose sensitive information regarding legal strategies and financial resources of smaller entities and that it is not truly parallel to mandatory insurance disclosure.  On this point, you might imagine a funding agreement that indicates the expected value of the case, the anticipated timeline for resolution, or specific milestones that trigger additional funding. This information could be exploited by larger, well-resourced defendants to tailor their litigation strategy, potentially overwhelming the smaller plaintiff with costly motions or prolonged discovery.

Legislative Response: The Litigation Transparency Act of 2024: Against this backdrop, Rep. Darrell Issa introduced the Litigation Transparency Act of 2024 on July 2, 2024. This proposed legislation aims to amend Title 28 of the United States Code to require disclosure of third-party beneficiaries in civil actions.  The bill would require mandatory disclosure of any commercial enterprise with a contingent right to receive payment based on the outcome of the civil action, including production of the agreement itself. TPLFDD.