Federal court backlogs across the country can delay justice and hinder economic growth. Among other things, plaintiffs and defendants spend more money on litigation costs and attorney’s fees, delayed resolutions prevent business planning, and new initiatives are frequently placed on hold. Especially harmful are frivolous patent infringement lawsuits brought by non-practicing entities (NPEs), which both contribute to the backlog and burden innovative companies.
The federal judiciary and the executive branch should take action. Reining in NPEs through increased transparency measures in patent infringement cases and restoring review processes for low-quality patents will have the dual benefit of reducing waste and delays in our courts while also boosting the U.S. economy.
NPEs, sometimes called patent trolls, are in the lawsuit business. Their focus is making money through patent infringement litigation rather than providing goods and services. NPEs file thousands of lawsuits every year and issue even more threatening demand letters. They are now responsible for over half of all U.S. patent litigation. NPEs impose significant costs on the businesses they target. Their lawsuits result in $29 billion annually in direct costs to businesses and blunt growth by reducing investments in research and development by hundreds of millions of dollars for those they sue.
In recent years, NPE lawsuits are increasingly powered by third-party litigation funding (TPLF), where investors back lawsuits as a financial investment. Funders having a financial stake in case outcomes incentivizes lawsuits that otherwise would not have been initiated and prolongs cases as plaintiffs and investors seek to maximize profits. The potential for large payouts in patent infringement cases has attracted TPLF and now, TPLF supports a minimum of nearly 1 in 4 NPE lawsuits. The funders have not been wronged or had patents infringed on. Their interest in these cases is purely financial.
While outside investment has fueled the rise in frivolous patent lawsuits, businesses have faced increasing difficulty in accessing litigation alternatives. In 2011, Congress created a patent review process at the U.S. Patent and Trademark Office (USPTO), as a necessary alternative to costly NPE lawsuits. Through the agency’s process, called inter partes review (IPR), businesses sued by NPEs can ask experts at the USPTO to review the patents they are allegedly infringing and invalidate them if the patents shouldn’t have been issued initially. This process is faster and less expensive than lawsuits and creates a disincentive for NPEs to make meritless claims.
In 2020, however, the USPTO upended its own review process by implementing what is known as the NHK-Fintiv rule. Fintiv prevented the agency from reviewing a patent if it was already involved in district court litigation. This rule made it harder and more expensive for businesses to defend themselves from legal harassment and pushed more patent disputes into the court system instead of being resolved at the USPTO.
The system needs to be brought back into balance.
Courts have historically not required defendants and plaintiffs to disclose their third-party funders, making it easier for NPEs to game the legal system to their advantage. That, however, has started to change. Last year, Delaware Chief Judge Colm Connolly ordered that parties must disclose whether a litigation funder has an interest in their case. Delaware is a popular venue for NPEs, and after the ruling, NPEs funded by third parties started pulling back their cases. The result was fewer lawsuits brought in Delaware and fewer costly lawsuits against American businesses.
Requiring defendants and plaintiffs to disclose third-party funders has strong support from voters of both parties. A recent U.S. Chamber of Commerce Institute for Legal Reform poll shows 79% of likely voters believe third-party litigation funders should have to disclose their involvement in cases. Disclosure of third-party funding should have its limits, such as when nonprofits fund litigation and have no financial stake in the outcome, but implementing these transparency measures in situations where funders stand to profit would reduce wasteful lawsuits, boost our economy, and relieve our legal system. No wonder it’s politically popular.
TPLF transparency, paired with USPTO’s repeal of the Fintiv rule and restoration of its patent review processes would be an important two-pronged solution to reduce the burden on our courts and encourage economic growth. With greater transparency, fewer investors will put money into frivolous lawsuits, and with restored review at the USPTO, the agency can resolve more infringement lawsuits rather than the courts.
If these commonsense reforms are implemented, courts will have more resources to dedicate to resolving legitimate disputes. Innovative businesses will be able to invest more in growth, instead of funding long legal battles to defend against meritless claims. It’s the right thing to do – for the courts and the American economy.
Bob Goodlatte represented Virginia’s 6thDistrict in the U.S. House of Representatives from 1993 to 2019. He served as chair of the House Judiciary Committee from 2013 to 2019. Trey Gowdy represented South Carolina’s 4thDistrict in the U.S. House of Representatives from 2011 to 2019. Prior to serving in Congress, he was a federal prosecutor and solicitor (district attorney) in South Carolina.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.