At least 25% of the last 3 years NPE litigation caused by Litigation Investment Entities (LIEs)
Unified, as part of their ongoing deterrence activities, will be tracking and reporting on Litigation Investment Entities (LIEs) on at least a quarterly basis and attempting to shed light on this growing but nonetheless little-understood part of the patent litigation landscape.
INTRODUCTION
Recent analysis shows that the Litigation Investment Entities (“LIEs”) business is booming in the U.S., to the tune of $13 billion dollars in 2021, with new investments pouring fastest into patent infringement litigation. More specifically, new deal commitments for LIEs saw an increase of 61%. Patent litigation accounts for 29% of ALL commitments by third-party capital providers in 2021 and 21% in 2022.
Source: 2022 Westfleet Advisors Litigation Finance Market Report
LIEs is an investment strategy that has attracted billions of dollars worldwide and has, in the past twenty years, dramatically changed the U.S. legal system. Under LIEs arrangements, an investor or investment group pays for all legal expenses in exchange for a hefty, upfront portion of the potential award or settlement. Agreements are often written, in either letter or spirit, to allow the funders to control the litigation, the choice of counsel, settlement decisions, and more. The issue becomes the lack of transparency, with no required disclosure statements.
Many states have stringent disclosure requirements, as do many courts. See, e.g., Consumer Lawsuit Lending, Ark. Code Ann. § 4-57-109; Maine Consumer Credit Code Legal Funding Practices, Me. Rev. Stat. Ann. tit. 9-A, art. 12; Nonrecourse Civil Litigation Act, Neb. Rev. Stat. §§ 25-3301 -25-3309; Consumer Litigation Funding, Nev. Rev. Stat. ch. 604C (2021); Nonrecourse Civil Litigation Advance Contracts, Ohio Rev. Code § 1349.55; Consumer Litigation Funding Agreements, Okla. Stat. tit. 14A, art. 3, pt. 8; Tennessee Litigation Financing Consumer Protection Act, Tenn. Code. Ann. tit. 47, ch. 16; Consumer Litigation Funding Companies, Vt. Stat. Ann. tit. 8, ch. 74; Consumer Litigation Financing, W. Va. Code. ch. 46A, art. 6N; 2017 Wisconsin Act 235, § 12, Wis. Stat. § 804.01(2)(bg) (state disclosure laws); C.D. Cal. R. 7.1-1; N.D. Cal. Civil L.R. 3-15; N.D. Ga. Civ. R. 3.3; S.D. Ga. L.R. 7.1.1; N.D. & S.D. Iowa Civ. R. 7.1; D. Md. L.R. 103.3(b); E.D. Mich. L.R. 83.4; D. Nev. L.R. 7.1-1; E.D.N.C. Civ. R. 7.3; N.D. Ohio L.R. 3.13(b); S.D. Ohio Civ. R. 7.1.1; N.D. Tex. L.R. 3.l(c); W.D. Tex. Civ. R. 33 (Federal district court rules). But the broad patchwork of disclosure laws and rules have almost entirely evaded the few federal districts where patent litigation primarily resides.
This brings us back to Delaware. The Federal District Court of Delaware is, by default, a hub for patent infringement litigation, as Delaware is a popular location to incorporate large companies, and the judges are well-known for their expertise.
Recently, following suit from numerous federal judges and states before him, Chief Judge Connolly, the Chief Judge in the District of Delaware, issued two new standing orders requiring disclosure of third party litigation finance information—orders highly similar to ones put in place in the District of New Jersey and by other District Court judges.
Connolly’s orders require some basic disclosures, including the identity of any third-party funders in cases before the Court and whether their approval is necessary for legal strategy decisions and settlement conditions. This added transparency would allow everyone involved in the case — including the judge and jury — to know who the real party behind a lawsuit is, which is critical information for, among other things, ethical considerations like whether a judge should recuse themselves from a case. It also prevents David v. Goliath narratives from being used to sway juries, when in fact it’s more like private equity versus American manufacturers. The problem is, many are not complying with these orders.
METHODOLOGY
In 2022, Unified Patents worked with Associate Professor of Economics Korok Ray at the Mays Business School of Texas A&M University to provide the most comprehensive data set yet collected on third party funding of patent litigations, both to help increase transparency and to provide a floor for potential activity, given the lack of any comprehensive required disclosure. Professor Ray found that, in 2020, at least 30% of all patent litigation was financed, up from almost nothing fifteen years ago.
Percentage of 3rd Party Financed Cases
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.
Once a list of NPE Aggregators was generated, the assignment and secured interest data from the USPTO was mapped to the UCID and then combined with the litigation data. From here, flags were created to understand if the assignment or the secured interest occurred before the start of the litigation case. Since 2010, this has resulted in 10,269 unique cases. Of those cases, 10,231 (99.6%) the assignment occurred before the litigation and 1,750 (17%) cases had the secured interest filing before the litigation as well.
Again, as before, there are no requirements whereby the financing details of non-public entities must be publicly disclosed at the federal or state level or in the courts. Thus, any data analysis of which litigations are funded or financed is necessarily incomplete, since many of these arrangements are closely held, private, and unknown even to the courts and the parties to the actions. This data set endeavors to describe the minimum known amount of third-party funded patent litigation, and is necessarily underinclusive of all nonpublic deals, for which there is no available evidence or insight.
The assignment and secured interest flags served as confirmation to both the ownership of the patent and whether a secured interest was placed on the given patent, but as recordation is not mandatory in the United States, were likewise incomplete. Companies such as Acacia, for example, may only have a few secured interest records, but since the primary vehicle of the company is publicly traded for the sole purpose of patent monetization and has secured financing primarily from a major litigation financier, it was assumed that all litigation from Acacia was financed. For further generalized industry information on the size and scope of litigation funding for patent litigations, private sources often report on the size and scope of the burgeoning industry, at least in the aggregate, presumably based on private sources of data.
DATA
Since 2010 there has been a steady increase in the number of the cases where the assignment occurs to a NPE Aggregator and has a secured interest filing before the litigation commences. Without factoring in publicly traded companies and solely looking at if the assignment and secured interest occurred before the litigation date, LIEs for NPE Aggregators was at 23% for in 2022 and at 30% in 2020.
When looking at the top litigious NPE Aggregators in 2022, in only 23% of the cases does the assignment and secured interest filing happen before the case is actually filed. For instance, Acacia, a publicly traded company whose sole purpose is to monetize patents, only meets this criteria 23.73% of the time, when it is highly likely that all the patents in its portfolio are financed. For Fortress, the number was 22.22%, when it is known and widely self-reported by Fortress that its IP funds are designed to take failed startups, portfolios, and companies in bankruptcy and acquire and later monetize their intellectual assets. This highlights the need for increased transparency.
When accounting for entities such as Softbank, IP Edge, and Acacia and assuming they are funded, these numbers jump dramatically. For instance, in 2022 LIEs was over 30% among NPE Aggregators.
When looking at the top five jurisdictions that have the assignments and secured interests to a NPE aggregator before the litigation date, is the explosion of cases in the Western District of Texas. However, it seems that with the standing order of randoming assigning cases in the WDTX, NPE Aggregators and funders have decided to not take a chance, as noted by the sharp decrease in funded cases filed there. It would seem that as of 2022, NPE Aggregators with LIEs are starting to prefer the relative certainty of the Delaware and California Central District Courts, though the Eastern District of Texas has and maintains a high portion of all cases filed.
CONCLUSION
While LIEs is often spun as a way to level the playing field between parties with disparate financial resources, it has become problematic in the NPE context, particularly when the funds remain entirely hidden behind a complex wall of corporate holdings and private agreements. This wall makes it difficult for companies to defend themselves since there is no readily available information on the entity. This in conjunction with a pandemic fueled cash injection has led to a great challenge in deciding the merits of a case. Until further disclosure requirements are made, it will be hard to tell who is actually behind the curtain.
Appendix A: Definitions
Non Practicing Entity (NPE) = Company licensing activities. that derives the majority of its total revenue from patent
NPE (Patent Assertion Entities) = Entity whose primary activity is licensing patents and acquiring most of its patents from another entity.
NPE (Small Company) = Entity whose original activity was providing products and services, but now is primarily focused on monetizing its own patent portfolio.
NPE (Individual) = Entity owned or controlled by an individual inventor who is primarily focused on monetizing inventions patented by that individual inventor.
NPE aggregators = NPEs that have more than one affiliated subsidiary that is d also bringing patent litigation
Litigation Investment Entities = Evidence of any third party with a financial interest, other than the assertors.
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