Third-party litigation funding (TPLF) is big business. It claims to widen access to litigation to allow plaintiffs (who otherwise could not afford a lawsuit) to bring a claim against a defendant. 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, investment funds place bets on litigation in hopes of a financial return, with little interest in the underlying technology or innovation. Yet litigation growth drains social welfare and creates a hidden tax on innovation.
A new dataset from Unified Patents shows that there was a dramatic increase in both the number of cases and the percentage funded by third parties in the United States from 2002 to 2021. While we cannot say with certainty that third-party funding has caused this growth in patent litigation, we can observe its high correlation. Looking at the total number of patent cases and total number of third-party funded patent litigation cases in the United States from January 2000 to November 2021, both the number of cases and those funded by third parties increased, starting in 2010, and have remained statistically significant ever since.
The cases funded by third parties as a proportion of the total cases over the full sample from 2000 to 2021 averaged 11.25%. However, in the last 6 years (2015–2021), 358 lawsuits on average were filed per month, with 90 of those funded by third parties—an average slightly more than 24%. And from 2010 to 2021, for each additional year in that subsample, third-party funding of patent litigation increased by 1.56%.
Across the top 20 courts in the sample (from 2000–2021), the Eastern District of Texas account for 17.2%, while Delaware and the Central District of California for 13.23% and 8.25% of total cases. In the last 5 years (November 2016 to November 2021), the Western District of Texas now accounts for 11.13%, Delaware for 21.36%, and the Eastern District of Texas for 14.27% of total cases. For the full data analysis, see the paper here on SSRN.
Given their prominence in patent litigation, Texas courts merit a deeper dive. Since his appointment, Judge Albright of the Western District of Texas created the “rocket docket,” allowing for fast trials, quick settlements, and increases in the number of patent cases. The rocket docket has both partial and general equilibrium effects. The partial equilibrium effect is the reduced time for any case in the Albright courtroom; the general equilibrium effect is that plaintiffs over time will select his courtroom over others, which can increase the number of cases. Whereas the length of each case falls, the total number of cases rises, and the aggregate amount of litigation increases.
One solution is for courts to ask plaintiffs and defendants to disclose third-party funding arrangements as evidence in patent litigation. Courts can mandate such disclosure, but even allowing for voluntary disclosure could bring more transparency to the funding arrangements behind patent litigation. Juries could then factor these arrangements into their decisions to assess whether the lawsuits protect the rights of innovators, as originally intended. Disclosure has been effective in improving governance and reducing information asymmetries in the capital markets, and could have a similar positive effect in the market for litigation. Over time, unnecessary litigation could decrease, and third-party funding could achieve its goal of funding under resourced innovators.
Third-party litigation funding has allowed patent trolls to take advantage of loopholes in the patent litigation market. Greater disclosure of these funding arrangements can reduce distortions in this market and lead to greater innovation and economic prosperity for all.
Korok Ray is an Associate Professor at the Mays Business School Texas A&M University and Founder of the Mays Innovation Research Center. He can be reached at korok@tamu.edu or @korokray on Twitter.