A US Judge Is Enabling Tech's Campaign To Crush Startup Competitors

Startups across the nation are on edge -- and for good reason. 

A District Court judge in Delaware recently imposed rigid and burdensome disclosure requirements including on companies that sue their much larger rivals for patent infringement.

If the judge's Standing Orders survive, it will give Big Tech defendants in infringement cases a huge tactical advantage -- including improper insight into facts they are not ordinarily entitled to in discovery. Defendants can use fights over compliance with the disclosure requirements to slow cases down, delay judgments and increase plaintiffs' legal costs. 

In short, the new requirements will make it even easier for Big Tech firms to employ a strategy of "efficient infringement" -- willfully stealing smaller rivals' technology and then mustering armies of lawyers to drag out any lawsuits until the cash-strapped startups cry uncle and settle out-of-court for pennies on the dollar.

This typical disparity in resources is why startups and smaller innovators often seek third-party funding for infringement cases. Infringement lawsuits are expensive, and startups and small businesses often cannot afford to enforce their patent rights solely using their own modest cash reserves. 

But why would an investor help pay for someone else's patent-infringement lawsuit? 

Well, certain investment funds, having watched this growing trend in "efficient infringement," spotted an opportunity to help these startups -- and themselves. In effect, they agree to cover the costs of a lawsuit in return for a share of any damages. Big Tech and its shills like to say third-party funding promotes frivolous claims, but that is absurd. Investors review these cases carefully before agreeing to fund them, because they will not make money but will actually lose money backing meritless suits.

Unsurprisingly, Big Tech is unhappy about all this. So it has launched a campaign against third-party litigation funding, claiming that it is responsible for everything from rising health insurance rates to endangering national security. 

The right to sue for damages incurred is an essential feature of the American judicial system -- and third-party funding in various forms has long been a part of it. 

Lawyers take cases on contingency, effectively funding clients' cases with returns dependent on a win. Legal defense funds raise money to help vulnerable groups or individuals -- indeed, many of the most important civil rights courtroom victories were cases funded by third parties. Insurance companies routinely fund litigation. Parties in all kinds of cases -- from worker compensation to tenant-landlord disputes to civil rights -- rely on donations, loans, and pro-bono legal work. Third-party financing is not some unique feature of patent litigation; it is used in many areas of law.

Federal rules already require litigants to disclose major ownership stakes. 

But Judge Colm Connolly's added requirements go much further, demanding disclosure of all funders along with "every owner, member, and partner of the [litigating] party, proceeding up the chain of ownership until the name of every individual and corporation with a direct or indirect interest in the party has been identified." 

The judge departed from the prevailing view in most courts throughout the United States that the funders of a lawsuit are irrelevant to the merits of the lawsuit itself. 

Connolly's orders have sparked much controversy and two petitions before the U.S. Court of Appeals for the Federal Circuit seeking emergency relief from this judicial imposition (albeit denied as being premature). 

Lest there was any doubt about who benefits from the new disclosure rules, they attracted friend-of-the-court briefs from at least eight heavyweight tech companies, most of them worth billions, including Intel, Garmin, SAP, and Dish Network. Lobby groups that represent Big Tech also filed briefs. 

Big Tech companies say they just want "transparency" and "disclosure." Until now, however, courts had mostly recognized that the existence of third-party funding is irrelevant to the merits of a case and not a proper subject for discovery. The ongoing "disclosure" campaign could tie up small patent holders in expensive legal knots over issues irrelevant to the merits and only rarely relevant to case management.

If the Goliaths continue to get their way, it could curtail American innovation and the job creation it brings for decades to come because startups are unusually innovative.

Paul Michel served on the United States Court of Appeals for the Federal Circuit from 1988 to his retirement in 2010, and as its chief judge from 2004 to 2010.