Opinions run hot and facts loose when it comes to describing providers of litigation capital, especially if the funds are used in support of plaintiffs in patent disputes.
It is widely known that third party litigation finance, or TPLF as is has come to be known, is necessary. It helps to level the playing field somewhat in protracted, high cost/ high risk patent litigation, where defendants can outspend anyone and keep cases alive for years. Some companies, mainly larger technology firms, say TPLF enables bad actors who rely on poor quality patents.
It is highly doubtful that litigation funders, who invest in fewer than 5% of the cases they see, seek to invest in questionable patents and owners, where the risk is higher.
Unfortunately, some businesses benefit from misinformation about the impact of non-bank capital sources, those who can help innovators to have their day in court. Until TPLF came along, small and medium entities, independent inventors – and even a many large, innovative companies lacking litigation resources or with access to a law firm wishing to take their case on contingency – were hard-pressed to face larger and better-financed defendants.
With TPLF, some businesses, especially those in technology and communications, are more likely to have to pay damages for patent infringement or to have to take licenses to inventions for which they would otherwise holdout. As to who benefits most – patent holders or funders – TPLF’s are businesses that must return a profit. They are not charities. But TPLF’s serve another purpose — to help level the playing field by providing capital in return for a piece of the upside on damages or a settlement. This enables legitimate inventions, inventors and investors to get a fairer hearing. For the right case it can be a win-win for all parties, except the infringing one.
Defendants in these matters are often public companies whose highest priority is to provide shareholder value, without regard for ethics or a suit’s impact on innovation. They will throw $10 million or even $50 million to defend themselves in a patent case because they know most plaintiffs can not afford to. To them, this is the cost of doing business, and, more importantly, keeps potentially irreparable threats at bay.
A recent opinion article that ran on Bloomberg Law by Computer and Communications Industry Association (CCIA) patent counsel Joshua Landau falsely argues that litigation finance protects the bad actors and costs consumers billions of dollars. Written for the lobbying group CCIA and citing the dubious Electronic Frontier Foundation, the article dwells on the few bad actors deliberately co-mingling them with legitimate licensors who seek fair and reasonable terms:
“NPEs come in all shapes and sizes. Some sue school districts, municipal stadiums, public transit systems, and nonprofit hospitals for using video surveillance. Others have used generic data transmission patents to target ventilator manufacturers, and old Theranos patents to target diagnostic testing manufacturers during a global pandemic.
“Still others go after tech companies, seeking judgments in the hundreds of millions or even billions of dollars. It’s predatory behavior, plain and simple. These lawsuits are a drain on our economy. They contribute nothing to the progress of the useful arts.”
The so-called predatory behavior are suits filed because many infringers refuse to take a license unless forced. Today, they have a larger and more expensive bag of tricks to employ.
Litigation funders are notoriously risk-averse. They are careful with their capital and conduct extensive due diligence to find the right few patents, disputes and inventors to fund. They conduct incredible amounts of due diligence and are not in the business of working with questionable patents or weak claims. They are a bad risk in an already risky business.
CCIA is a mixed bag of contradictions. Wikipedia’s take on CCIA:
According to their site, CCIA “promotes open markets, open systems, open networks, and full, fair, and open competition.” Established in 1972, CCIA was active in antitrust cases and against internet censorship and policies, mergers or other situations that would reduce competition. CCIA released a study it commissioned by an MIT professor, which analyzed the cost of patent trolls to the economy.
That “academic” study and others like it have been debunked as junk-science. The Wikipedia entry alludes to an article written in 2014 by avowed anti-IP rights writer Joe Mullin in Ars Technica. It states “A just-released study [PDF] by Catherine Tucker, a professor of marketing at MIT’s Sloan School of Business, finds that over the last five years, VC investment “would have likely been $21.772 billion higher… but for litigation brought by frequent litigators.”
This is utter nonsense.
Fear of the Future
What are tech companies afraid of? They are unprecedentedly cash rich can well afford to take licenses on fair and reasonable basis. Their tactics not only rob inventors, investors and the public, they short-change the quality of innovation, which they regard as potential threats to their continued success.
The fact is “13 non-financial companies in the S&P 500, including mainly tech giants like Apple (AAPL), Google-parent Alphabet (GOOGL) and Microsoft (MSFT), are sitting on cash and investments of more than $1 trillion, says an Investor’s Business Daily analysis of updated data from S&P Global Market Intelligence and MarketSmith.
Apple alone last week reported sitting on $202.5 billion in cash and investments. That’s 7.4% of all the S&P 500’s cash. Ten settlements totalling $1 billion or more would register barely a blip on their balance sheet.
The Bloomberg Law piece concludes:
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. – I should hope not
Insurance Journal recently ran a seemingly balanced article that leans heavily against the TPLF. It singles out their support of patent trolls. Again, false data was used to substantiate specious claims that support technology company defendants in patent cases.
“TPLF firms also fund some patent trolls,” writes Jerry Theodorou, a consultant and lobbyist. “Patent trolls are companies that do not produce any product or service. They are non-practicing entities and shell companies. Their business model is to acquire unused or low-quality broad patents, with no intention of ever building anything. They target businesses ranging from neighborhood stores to major U.S. manufacturers and technology companies.
“The Harvard Business Review has estimated that patent trolls annually cost U.S. businesses approximately $29 billion in direct, out-of-pocket costs [widely debunked Bessen/Meurer propaganda]. This does not include the opportunity cost of not innovating, not investing and not hiring. The activity of patent trolls has been characterized as shakedown and extortion. Trolls calling themselves Patent Enforcement Entities send thousands of threatening letters demanding payment. Several patent trolls are backed by TPLF firms.”
There is enough mis-information and (very) partial-truths in the above two paragraphs to fill a book. I will not burden you here with the details but remind you that when it comes to discussing intellectual property, agenda and shareholder value often outweigh both the fact and the law.
The excerpt above is from and article written by Theodorou for the ‘R Street Blog’, a part of Insurance Journal. Theodorou “presents the work and viewpoints of the free market think tank R Street Institute in Washington, D.C. where he develops and advances effective free market public policy solutions to complex issues where federal and state governments have intervened.”
Free-market – is that what this is about? I don’t think so. For a more balanced take on TPLFs read the perspective here and take a look at Litigation Finance Insider.
Bloomberg Law was smart enough to disavow any claims to the specious Landau piece, disguised at commentary. (That they never should have run the piece in the first place under the banner of commentary.) Unfortunately, Insurance Journal, is allowing its readers to be misinformed by a tech industry propagandist, without providing any context.
Disclosure: IP CloseUp and those responsible for producing it have no ties to any business or person in the litigation finance field.
Image source: wikipedia.com; ipwatchdog.com;