An ongoing patent dispute has brought more attention to the practice of Third-Party Litigation Financing – outside parties funding lawsuits for a return on their investment if it wins – but without a widespread disclosure rule, it’s raising questions beyond potential conflict of interest.
There is no law requiring disclosure of litigation funding, and the Federal Rules of Civil Procedure do not specifically require it, said Dennis Abdelnour, IP partner with Honigman LLP, in an email responding to questions from the Northern California Record.
“Courts are largely taking up the issue on a case-by-case basis," Abdelnour said. “Some have no interest in mandating disclosure, while some, for example Chief Judge Connolly in the District of Delaware, have taken the opposite approach. Chief Judge Connolly issued a standing order mandating disclosure of the identity of third-party financiers at the outset of a case.”
Other courts have required some level of disclosure through local rules or standing orders, including the Northern District of California, but not in the Southern District, where Traction Technologies, backed by third party litigation funders, filed suit against Apple.
In that case, U.S. District Judge Jill Burkhardt on July 19 issued an order directing third-party litigation financiers Kenosha Investments LP and Gronostaj Investments LLC, who are affiliated with TPLF giant Burford Capital, to explain why they should not be sanctioned for potentially misleading the court about the level of their involvement in the litigation against Apple.
She said the funders may have violated their "duty of candor" to the court.
A hearing on that matter is scheduled for Aug. 15.
A coalition of 35 groups have sent a letter to the federal Committee on Rules of Practice and Procedure, asking for a mandatory disclosure. More than a dozen attorneys general have also called on the Department of Justice to investigate TPLF as a matter of economic and national security, but presently it remains unresolved, as does proposed federal legislation.
Whether litigation funding impacts the outcome of a case has emerged as a key question. As TPLF has become more prevalent, the ABA has published American Bar Association Best Practices for Third-Party Litigation Funding.
Patent litigation is highly expensive, so some parties turn to litigation funding arrangements, Jeremy W. Bock, Associate Professor of Law at Tulane University Law School, told the Record by email.
“But such arrangements can also be used to obscure the identity of the real party behind the lawsuit,” Bock said. “Patent trolls have been accused of using third-party litigation funding arrangements to avoid disclosure of who is really behind the suit to avoid scrutiny of their business models and shield their assets from the award of attorney fees and sanctions.
“For the court, such secrecy can be a problem because the judge needs to be able to figure out if there is a conflict of interest or whether the plaintiffs have standing to sue.”
Montana lawmakers in May unanimously backed new lawsuit funding transparency measures. Roughly a dozen other states also want to pass TPLF regulation or disclosure requirements.
Abdelnour said TPLF will rarely bear on the core issues in dispute in a patent case: Infringement and validity. It may, however, bear on damages.
“As the Court found in the Taction Technology case, a funder’s valuation of the patents at issue may bear directly on damages and the measure of a reasonable royalty,” Abdelnour said.
From a practical perspective, for a defendant, knowing how a case is funded may be critical to understanding whether there is a path to settlement, potential roadblocks, and who has final authority, Abdelnour said.
“Discovery relating to third-party litigation funding presents difficult privilege questions, which means that disputes will often end up in motion practice and before a Court for resolution,” Abdelnour said. “In the Taction Technology case, that is exactly what happened, with the litigation funder succeeding on quashing certain discovery requests, and then claiming that the defendant was acting in bad faith. The Court denied the request for sanctions, but this scenario could repeat itself.”
Abdelnour noted that funding may in some instances serve as a barrier to a reasonable settlement.
“That may otherwise benefit the named plaintiff and named defendant,” Abdelnour said. “Defendants may insist that a funder participates in court-ordered mediation.”
Beyond patent suits, outside litigation financing may have factored in the controversial Thomas Girardi case, which alleges the now disbarred attorney took money owed to families of plane crash victims but used it in part to pay off third- party litigation financiers.
A substantial proportion of the patent suits that tech giants face come from non-practicing entities, or NPEs, Bock said.
“Some of whom likely use third-party litigation funding,” Bock said.
While there are high-profile competitor cases between big tech companies, Abdelnour noted those are heavily outweighed by the large number of NPE suits.
“Litigation funding is impacting which suits get brought and when,” Abdelnour said. “In most cases, litigation funding may have little impact on the merits, and discovery into litigation funding may be difficult to secure. But in other funded cases, the litigation funding may impact central issues like damages and standing, and in those cases, you can invariably expect a heated discovery battle.”