Litigation Funding Disclosure and Patent Litigation

In an article slated for publication in the Federal Circuit Bar Journal, Sean Keller, J.D. Candidate at Texas A&M University School of Law, and Jonathan Stroud, GC at Unified Patents, have written about the growing policy debate surrounding litigation financing disclosures.

Litigation financing is one of the most significant developments in modern litigation. Since at least the 1990s, litigation financing steadily expanded in the United States and has grown into a multibillion-dollar industry. Litigation funding—providing third-party non-recourse funding contingent upon litigation recovery and outcomes—is a modern phenomenon of relatively recent vintage that nonetheless undergirds huge swaths of U.S. civil litigation today. And one of the biggest recent beneficiaries of litigation financing has been patent litigation.

Modern patent litigation, being high-stakes, arm’s-length, and Federal in nature, is both a high-risk, high-reward prospect for litigation funding. Studies show that up to a third of all modern patent litigation is now funded, making it the highest-growth area in litigation funding; the prevalence of litigation shell companies and other procedural quirks in patent litigation present potential advantages and challenges in employing funding. As it grows into a major feature of the U.S. litigation landscape, several academics, advocacy groups, policymakers, and practitioners have raised concerns about the lack of transparency in litigation financing, given there are comprehensive rules or practices surrounding disclosure of the existence and terms of such arrangements.

Historically, litigation funding regulation in the U.S. had been barred at common law and thereafter has been largely left to the states and their legislatures, resulting in a messy patchwork of disclosure requirements. State courts, legislatures, and judges have offered piecemeal approaches that often conflict. To remedy this in other contexts, the Judicial Conference Advisory Committee on Civil Rules has debated adding disclosure requirements to the Federal Rules of Civil Procedures, resulting years ago in Rule 7.1 and its minimal upfront corporate disclosures, as well as an insurance disclosure requirement into the FRCP. Both debates at the time were akin to the current debate about litigation financing disclosure requirements. Nevertheless, advocates have resisted comparisons between insurance and litigation financing disclosures. We tackle this comparison head-on by deconstructing some of the arguments disclosure opponents have cited to undermine the comparison. We conclude that arguments for enhanced disclosure are sensible, overdue, and inevitable; indeed, in many courts and some agencies, they are already here. Clear, focused Federal disclosure requirements would go a long way to preventing an unenforceable patchwork of state regulations, and would prevent enforcement that is under- or over-inclusive.

The article can be accessed on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4527378

Track LIEs (Litigation … ) in Unified’s Portal

As part of ongoing deterrence activities, Unified’s Portal is introducing the most comprehensive tracker of Litigation Investment Entities (LIEs). Tracking and reporting will be conducted on at least a quarterly basis and will attempt to shed light on this growing but nonetheless little-understood part of the patent litigation landscape. 

The LIEs tracker will consist of two components - a field for NPE Aggregator or NPE parent company of multiple NPEs, and the second is an option if a case is backed by a secured interest or by third-party financing. 

Users can use the plaintiff specific filters to search for entities such as IP Edge or Acacia. Using the Third Party Financing filter, a list of cases will be generated where a secured interest or known third party has an investment into a patent that has been litigated.

In addition to being able to search for NPE Aggregators and Third Party Financing Commitments, the case deal page will provide flags to understand if an entity is part of NPE Aggregator and Financed, such as Ridgeview IP LLC.

Also in the tracker, users can understand the true impact of LIEs and NPE Aggregators by using the Annual Report Tool for a graphical point of view. 

Click HERE for more information on the methodology and to read through Unified’s first LIEs Report. To view the LIEs Tracker in Portal, please click here.

The PTAB’s Misplaced Reliance on Litigation Trial Dates in the NHK Spring/Fintiv Framework

As discussed in prior blog posts (for example, here and here), the Patent Trial and Appeal Board (PTAB) has increasingly exercised its discretion under 35 U.S.C. § 314 (a) to deny institution of post-grant proceedings when the challenged patent is involved in related litigation, using the framework outlined in NHK Spring and Fintiv. See NHK Spring Co. Ltd. v. Intri-Plex Techs., Inc., IPR2018-00752, Paper 8 (Precedential); Apple Inc. v. Fintiv, Inc., IPR2020-00019, Paper 11 (Precedential). A major consideration in the NHK Spring/Fintiv framework is whether trial in related litigation will occur before the PTAB’s one-year statutory deadline for issuing a final written decision after institution; if trial will occur before, the PTAB will likely exercise discretion to deny institution. The rationale is simple and seemingly cogent: due to the advanced state of related litigation, institution would be an inefficient use of PTAB resources and inconsistent with the America Invents Act’s goal of providing an “effective and efficient alternative to district court litigation.” NHK Spring, Paper 8, pp. 19-20. But determining when trial in related litigation will occur is not straightforward because litigation schedules often change. Over the past year, such changes have become more prevalent due to the COVID-19 pandemic. Thus, the PTAB may deny institution based on a litigation trial date that ultimately falls after the statutory deadline. We discuss instances where this occurred below. 

• Next Caller, Inc. v. TRUSTID, Inc – Institution is denied but the trial date relied on is delayed by a year. 

TRUSTID asserted U.S. Patent 9,001,985 against Next Caller in January 2018 and amended its complaint to additionally assert U.S. Patents 8,238,532, and 9,871,913 in April 2018. See TRUSTID, Inc. v. Next Caller, Inc., 1:18-cv-00172-MN (D. Del. 2018). Next Caller filed an IPR petition challenging validity of the ’985 patent in October 2018; this proceeding was instituted and resulted in a final written decision finding some claims unpatentable and others not. IPR2019-00039, Paper 1; id., Paper 77, p. 90.

In April 2019, Next Caller filed IPR petitions challenging validity of the ’532 and ’913 patents. See IPR2019-00961; IPR2019-00962; IPR2019-00963. The PTAB exercised discretion to deny institution of each petition under § 314 (a), relying on the related litigation’s anticipated trial date in July 2020 versus the PTAB’s statutory deadline in October 2020. IPR2019-00961 and IPR2019-00962, Paper 10, pp. 14-16; IPR2019-00963, Paper 8, pp. 13-14. But the trial date was pushed back to July 2021 due to the COVID-19 pandemic.

•  Apple, Inc. v. Fintiv, Inc. – The trial date relied on in Fintiv itself is delayed and scheduled to occur months after the PTAB’s statutory deadline.

 Fintiv asserted U.S. Patent 8,843,125 against Apple in December 2018. See Fintiv, Inc. v. Apple, Inc., 1:19-cv-01238-ADA (W.D. Tex. 2018). In October 2019, Apple filed an IPR petition challenging validity of the patent. IPR2020-00019, Paper 1. The PTAB exercised discretion to deny institution of the petition under § 314 (a), relying on the related litigation’s anticipated trial date in March 2021 versus the PTAB’s statutory deadline in May 2021. Id., Paper 15, pp. 12-13. But again, due to COVID-19, the trial date was pushed back – this time to October 2021.

• Ethicon, Inc. v. Board of Regents, The University of Texas System – Institution is denied based on an “expectation” of trial within a year but knowledge of delay; the trial date relied on is delayed over a year.

The University of Texas (“UT”) asserted U.S. Patents 6,596,296 and 7,033,603 against Ethicon in November 2017 (serving the complaint in December 2017). See Board of Regents, The University of Texas System et al. v. Ethicon, Inc. et al., 1:17-cv-01084-LY (W.D. Tex. 2017). In December 2018, Ethicon filed IPR petitions challenging validity of the patents. See IPR2019-00406; IPR2019-00407. The IPRs were suspended for about a year pending the Federal Circuit’s decision in Regents of the University of Minnesota v. LSI Corp., Case No. 2018-1559, addressing the applicability of sovereign immunity to IPRs. IPR2019-00406 and IPR2019-00407, Paper 11. After the suspension was lifted, UT filed a preliminary response in the 00406 proceeding without addressing the merits, arguing only that the Board should exercise discretion to deny institution under § 314 (a). IPR2019-00406, Paper 26. And the Board did just that, even though it was aware the related litigation’s June 2020 trial date had already been continued due to COVID-19, relying on the litigation court’s “emphasis that the parallel litigation should proceed as if still set for June 22, 2020,” “expectation of holding a bench trial within a year,” and expected final written decision issuance date of June 2021. Id., Paper 27, pp. 9-10. But trial did not occur and instead, a bench trial is scheduled for September 2021.

Interestingly, the same Board panel instituted the 00407 proceeding on the same day the 00406 denial issued. IPR2019-00407, Paper 29. The 00407 decision did not address Fintiv, but UT did not file a preliminary response in that proceeding. Id. UT disclaimed all challenged claims of the patent at issue after institution and the Board entered adverse judgement in June 2021. Id., Paper 33.

• Cisco Systems, Inc. v. Ramot at Tel Aviv University Ltd. – Institution is denied based on trial date that is now uncertain, but litigation is stayed pending Ex Parte Reexaminations filed after the denial.

Ramot sued Cisco, asserting U.S. Patents 10,270,535 and 10,033,465 in June 2019, and adding U.S. Patent 10,461,866 in an amended complaint in December 2019. See Ramot at Tel Aviv University Ltd. v. Cisco Systems, Inc., 2:19-cv-00225-JRG (E.D. Tex. 2019). Cisco filed IPR petitions challenging the ’535 and ’465 patents in November 2019, and another petition challenging the ’866 patent in January 2020. IPR2020-00122; IPR2020-00123; IPR2020-00484. The PTAB exercised discretion to deny institution of each petition under § 314 (a), relying on the related litigation’s anticipated trial date in December 2020 versus the PTAB’s statutory deadlines in May 2021 and August 2021. IPR2020-00122, Paper 15, pp. 7-8; IPR2020-00123, Paper 14, pp. 7-8; IPR2020-00484, Paper 10, pp. 7-8. But after denial, Cisco filed Ex Parte Reexaminations at the U.S. Patent and Trademark Office (USPTO) challenging validity of the patents in suit, and after reexamination was ordered, office actions issued rejecting all asserted claims.  Ramot, Dkt. 235, pp. 1-3. Thus, the litigation court granted a stay pending resolution of the reexaminations in January 2021. Id. When the stay issued, trial had been delayed from December 2020 to March 2021. The case is currently still stayed, with the trial date uncertain.

According to the U.S. Patent and Trademark Office, the average reexamination pendency from filing to certificate is just under 26 months. See https://www.uspto.gov/sites/default/files/documents/ex_parte_historical_stats_roll_up_21Q1.pdf. Here, Cisco filed its reexaminations in June 2020 and November 2020 for each patent.  Ramot, Dkt. 235. Thus, the reexaminations are estimated to conclude in August 2022 and January 2023. These dates are over a year past what would have been the PTAB’s statutory deadlines in May 2021 and August 2021, had the IPRs been instituted. IPR2020-00122, Paper 15, pp. 7-8; IPR2020-00123, Paper 14, pp. 7-8; IPR2020-00484, Paper 10, pp. 7-8.

Conclusion

Due to the likelihood that litigation trial dates change, the PTAB’s reliance on such dates to deny institution of post-grant proceedings under the NHK Spring/Fintiv framework has had unintended consequences, denying petitions (and an examination of the merits) when trial ends up occurring months after when a final written decision would have issued. The PTAB’s analysis of litigation trial dates under the NHK Spring/Fintiv framework should therefore not take litigation schedules at face value; instead, a more nuanced approach is needed that considers circumstances such as the current stage of litigation, issues that remain in litigation, and whether (and to what extent) extensions to deadlines and/or changes to the trial date have been requested and granted.

Top-5 Patent Litigation Venues Seen Nearly Half of the Cases Related to a Super NPE

As the post-pandemic world begins to shape up, the patent litigation world has seen billion dollar verdicts to record-breaking amounts of litigation financing. The explosive growth in litigation financing has come from a backlog of capital during the covid pandemic and investors seeking non-cyclical returns. As highlighted from last year’s report on NPE patent financing in the Western District of Texas, this trend can be seen among the top-5 patent venues. From Waco to Silicon Valley to Delaware, the effect of aggregations and financing can be seen. 

These venues were chosen, since the Western District of Texas now accounts for 25% of all patent litigation, while the remaining four account for 43% in the first quarter of 2021. Collectively, these five venues have seen the most litigation over the last five years, with nearly 70%. 

As identified last year the rise, anecdotally, seemed tied to frequent filers, co-owned entities, and entities underwritten by private litigation financing. Unified examined public databases, such as Edgar, to determine if there was an aggregator and known financing. NPE aggregators were defined as NPEs that have more than one affiliated subsidiary also bringing patent litigation. Third-party financing was defined as any third party with a financial interest, other than the assertors. 

When looking at the new rocket docket, the Western District of Texas, the momentum has not stopped. Nearly 64% of all cases can be attributed to patent aggregators---i.e., entities like WSOU or Uniloc. 

The year-by-year data would suggest that this momentum is only growing. The Western District of Texas–-fueled almost entirely by the Waco division–-has already seen 172 of it's cases linked to an aggregator, of the 333 cases brought in 2021 to date.

In addition, nearly 50% of all of the cases brought in the Western District of Texas can be tied to litigation financing.

Judge Albright has made the Western District of Texas not only a safe haven for small-time NPEs, but also one for those investors who are looking to use US patent litigation to reap non-cyclical, non-correlated returns.

And although the Eastern District of Texas has seen a dramatic decrease in cases, 90% of cases it has seen can be attributed to aggregators.

This trend of decreasing caseload increasingly dominated by patent aggregators can be seen below.

And with the aggregation effect comes financing, with nearly 63% of all cases being financed.

The yearly trend can be seen below.

New to this year's report, but has a long tradition in litigation, is Delaware. Interestingly, between 2015 and 2021, over 62% of all patent cases can be attributed to an aggregator.

The yearly breakdown of this trend can be seen below.

The financing identified attributes to nearly 30% of all aggregators.

While litigation may also be declining in Delaware, litigation-financed suits over the last couple of years have picked up steam.

California Northern has also seen a rise in aggregation, with nearly 57% of filed cases associated with aggregators.

Looking at the year-by-year trends, aggregation in this district appears to remain steady.

Around 16% of all aggregation has some form of financing.

Last year, despite the pandemic, financing found its way into the most cases ever recorded.

California Central has seen nearly 50% of all cases can be attributed to an aggregator.

The year-by-year breakdown can be seen below.

While not as prominent, financing can be attributed to over 13% of all cases.

There has been some movement in recent years regarding financing in California Central.

Obviously, financing and third-party economic backing is shrouded in secrecy, so this data necessarily underestimates the total percentage of cases funded by third parties, whether through private capital groups like Magnetar, Starboard, Vector Capital, or Burford Capital, or via private sources unwilling or unable to acknowledge their stake.  But what is clear from an honest assessment of filed cases is that in all of these top venues, more than 50% of patent litigation is related to patent aggregators. 

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Copyright © 2021, Unified Patents, LLC. All rights reserved.

Webinar Materials - How Times Have Changed: Adaptations in NPE Litigations

Speakers:

Roshan Mansinghani — Legal Head-NPE, Unified Patents

Leslie Pearlson — Senior Litigation Counsel, LogMein

Jonathan Stroud — Chief IP Counsel, Unified Patents

Ilja Bedner — VP of Licensing, LOT Network

For over two decades, a substantial portion of US patent litigation involves non-practicing entities. Changes in the law and practice regarding NPE litigation during this time has led to developing strategies for litigants on both sides. This webinar explores those trends as well as how current practices should evolve in view of the shifts in the law and in the types of entities asserting patents today.

Thank you to our panelists for leading a great discussion!

To listen to the recorded webinar, click here: https://vimeo.com/555836559

Our next webinar, Reading the Tea Leaves: 5G Self-Declaration Trends, is scheduled for Tuesday, June 22nd. Visit our website for topic details and more information.