#PatentLitigation

Litigation Funding in IP: Caveat Emptor

/ Washington Journal of Law, Technology & Arts / 1 Comment
Close up of poker chips by Markus Spiske is licensed under CC-CC0 1.0

By: Nicholas Lipperd

Gambling seems to be an American tradition, from prop bets on the Super Bowl to riding the stocks through bear and bull markets. The highest stake gambling is done by investment firms, some of whom are finding profitable bets to be had on civil court cases. The process of Third-Party Litigation Funding (“TPLF”) is simple enough on its face: a funder pays a non-recourse sum either to the client directly or to the law firm representing the client. In exchange, subject to the agreed upon terms, the funder receives a portion of any damages awarded. Thus, TPLF is no more than a third-party placing a bet on the client’s case, somewhat similar to the choice a law firm makes when taking a case on contingency. With $2.8 billion invested in the practice in 2021, TPLF seems to be a betting scheme that is paying off.

TPLF is expanding from business litigation into patent litigation. Since the creation of the Federal Circuit, damages in patent infringement cases have skyrocketed, increasing attention to patent cases. TPLF is no exception. The emergence of third-party funding in patent litigation could allow individuals to assert patent rights who previously could not have afforded it. Unlike agreements directly with law firms, third-party funding is not controlled by the American Bar Association’s (“ABA”) Rules of Professional Conduct for lawyers. While this creates some concern in any TPLF case, this lack of protection in patent cases is unique: the funder can obtain the rights of the patent(s) from their clients. 

As previously mentioned, a barrier many patent owners face when attempting to assert their rights is the cost of litigation. While patent litigation cases rarely proceed to a bench trial, these cases typically take three to five years to complete. Intrinsically linked to this timeline is the price tag. Infringement cases where over $25 million in damages is at risk may run a median of $4 million in litigation costs. For cases with less than $1 million at risk, the median litigation cost sits at just under $1 million. A simple look at the risk versus rewards tradeoffs in this case paints a discouraging picture for the plaintiff. Regardless of the expected damages, the cost of litigation is an undeniably large factor, and one that leads to many cases being settled within a year rather than being tried on their merits. 

When the client cannot afford to pay the price of litigation yet intends to assert the patent rights, TPLF creates an opportunity to pursue the case. Plaintiff-side litigation seems like a simple win-win for the client. Yet as with anything, the devil is in the details. A funder is naturally motivated to see a return on this investment, so a client looking at the deal must look past the surface. Not all funding is arranged on a non-recourse model, leaving clients no better off should cases become losers than if they had chosen a billable hour payment structure with the firm. TPLF often does not cover attorney’s fees awards, so clients may be on the hook for more than they realize. Litigation funding arrangements often come with “off-ramps” for the investor should the case take an unexpected turn or the funder stops believing in the merits of the case. This means the funder may be able stop funding the client at certain stages of litigation, leaving the client or the firm without funding for the remaining stages. 

TPLF has often been described as the “wild west” of funding cases. In part, this is due to the lack of regulations surrounding the practice. It is also due to the fact that third-party funders are not constrained by the ABA’s Rules of Professional Conduct like attorneys are. 

Attorneys may not abdicate their Rule 1.1 duty of competency, yet TPLF creates tension with this duty. A third-party funder has made an investment in a case. Like any diligent investor, the funder likely wants to track the case closely to ensure it continues to align with the funder’s financial interest. Should the funder attempt to exert control over the case to protect this interest, it is up to the lawyer to resist. This may leave the client in trouble; should the disagreement be large enough, the client could see their funding removed as the TPLF exercises a contractual “off ramp.”

Perhaps the most implicated ABA rule in TPLF structures is Rule 1.6, the Duty of Confidentiality. This rule, and the related Federal Rule of Evidence 502 regarding attorney-client privilege, create friction with TPLF arrangements. Funders want as much information as possible before and during the funding of a case, as they want to be able to gauge the strength of their future and current investments. While all disclosures must be clearly sanctioned by the client, when do these disclosures waive attorney-client privilege? The majority of lower courts hold that communications about the case with a TPLF fall under work-product privilege protection, a question the Supreme Court has not answered and one the Federal Circuit danced around. (See In re Nimitz Techs. LLC, (Fed. Cir. 2022) denying a writ of mandamus to protect the District Court from reviewing litigation funding materials in camera.)

While ABA Rule 1.5 prevents firms from charging unreasonable fees, including contingency rates, it does not prevent a TPLF from doing so. A funder can bargain with a client for whatever portion of the damages award they like, and they have much more bargaining power than the client does. This bargaining power may be used for more than simply leveraging a larger percentage contingency fee than a firm could charge.

While damages in patent cases are high enough to attract TPLF, it is more than money that may attract third-party funders to patent litigation. Often, the patent itself is just as valuable as the damages award. Rule 1.8(i) prevents attorneys from acquiring proprietary interest in the cause of action or subject matter of litigation. Again, this does not apply to third-party funders, who are free to include any and all patent rights in the contract to fund a client’s case. 

Patent owners may face a catch-22 style choice in this scenario. If they cannot afford to stake the cost of litigation and if a firm does not see value in taking it on contingency, owners may turn towards TPLF. Yet, if funders see more value in the patents than the potential litigation damages, patent owners must make a hard choice. Obtaining funding will give a patent owner a one-time shot at a large damages award. The owner, win or lose, will not be the owner of the patent any longer, and will lose any potential revenue stream it would produce. Yet if owners cannot assert their patent rights in court, what value do their patents hold? Patent owners have promoted the progress of science and useful arts in the United States, and in exchange they receive limited monopolies in the form of their patents. These monopolies are not so easily maintained and defended though. Patent owners must carefully consider their options when looking to assert their rights. Patent litigation is expensive and lengthy, and while having TPLF cover all litigation costs may seem like a sterling option, owners must dig deeper to fully understand the trade-offs. Could they lose funding support halfway through litigation? Would funding the case be worth giving up their patent rights? TPLF is still newly emerging in patent litigation cases, but for potential clients, the message is already clear: in deciding to take on a third-party funder, let the buyer beware.

Is Amazon’s APEX the Top Option for Patent Rights?

/ Washington Journal of Law, Technology & Arts / Leave a comment
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By: Nicholas Lipperd

Are more avenues to resolve patent disputes a good thing? Patent litigation is a process that can easily cost millions of dollars and which lasts years; it is not exactly an option available to every patent holder. Even with the availability of arbitration, options to protect patents remain limited. Amazon has determined that a private patent evaluation program is a good thing, at least for its Amazon Marketplace. After beta-testing for three years under the name “Utility Patent Neutral Evaluation (UPNE),” Amazon formally implemented its Amazon Patent Evaluation Express (“APEX”) system in 2022, which allows sellers to flag possibly infringing products for Amazon to analyze without the use of the judicial patent system. This system advertises cheap, fast, and fair outcomes to sellers on Amazon Marketplace asserting their utility patent rights, yet has drawn criticism for disproportionately one-sided outcomes leading to its use as a retaliatory tool. Does the fact that this cheap, quick process reduces barriers to litigation offset these shortcomings? Should Amazon make changes to its process to achieve more balanced results?

A case brought in Federal Court for patent infringement takes two to four years to adjudicate, not including an additional year if an appeal is sought. Intrinsically tied to this lengthy timeline is the hefty price tag. Though the median cost for patent infringement cases with $1 million-$10 million at risk fell 250% from 2015 -2019, a full patent trial will still average $1.5 million. How does a patent holder without such resources assert the patent’s rights? Arbitration or mediation are cheaper options, at $50,000 on average, but often requires the other side to agree to participate. When the patent owner wants the patent rights asserted within Amazon Marketplace, though, the owner generally has a cheaper and faster option.

Amazon’s APEX program allows patent holders to have their patents examined by a neutral third-party patent examiner, rather than the United States Patent and Trademark Office (“USPTO”). APEX begins with the patent holder submitting a complaint through Amazon’s Brand Registry, providing the Amazon Standard Identification Numbers (ASINs) of the allegedly infringing sellers and upon which claim in which patent the holder believes the ASINs infringe. For each alleged infringer, Amazon sends a notice and allows up to three weeks for a response. Should Amazon receive no response, such products will be automatically delisted, similar to a default judgment. Upon receipt of the response, an evaluator independent of Amazon and each party is assigned to the issue, and each side is required to pay a $4000 fee, refundable to the winner. The patent holder gets three weeks to submit arguments. The sellers then have two weeks to respond, with the patent holder given one week to submit an optional reply. The evaluator then decides within two weeks, making only the determination if the sellers’ products likely infringe on the patent holder’s claim. It is noteworthy that the APEX evaluator does not make any determination on the validity of the claims in the patent at issue. If the evaluator decides in favor of the seller, the product stays on the platform; if not, the products are removed. There is no appeal process from the evaluator’s decision. The entire process takes fewer than three months, and at a price tag of $4000 per party, creates a fiscal barrier of a fraction of the cost of formal patent litigation.

This process is not, though, without its drawbacks. The patent holder wins a disproportionate amount in APEX proceedings, creating incentives to initiate the process without valid claims. Because the evaluator does not look at the validity of the asserted patent, the accused sellers can do nothing but play defense. In legal terms, they are without the affirmative defense of invalidity. They can’t win, they can only hope to survive. Further, the evaluation is not subject to formal rules like the Federal Rules of Civil Procedure or the Federal Rules of Evidence. The evaluators are hired for their expertise in the patent field, not for their investigative skills in the information provided. With no process of verification from Amazon, patent holders are submitting fraudulent information to obtain favorable judgments. With loose evidentiary rules, a low fiscal barrier, and no chance for the patent to be ruled invalid, the incentives all line up for patent holders to abuse this process, especially considering there is no chance for appeal. Should a competitor be cutting significantly into profits, $4000 is a very low risk for a possibly high reward of ejecting your competition from the market. Tortious interference claims stemming from the APEX process are already coming to light. 

Perhaps the most well-known legal spat involving Amazon’s patent evaluation process is the case of Tineco Intelligence Tech. Co. v. Bissell Inc. (W.D. Wash, 2022). Bissell is a US company that sells vacuums, and Tineco is a Chinese company that does the same. When Bissell initiated a UPNE proceeding, Tineco ignored it, leading to the automatic removal of its products. Tineco moved for a ruling in district court that Bissell’s patent claims were invalid and that their products did not infringe. Luckily, perhaps in part because of the sheer volume of business both entities do, Amazon deviated from its set UPNE/APEX process and reinstated Tineco’s listings before the District Court case finished, though U.S. International Trade Commission (“ITC”) proceedings continued. This case and Amazon’s deviation are seen by some as the exception to the rule. Many entities are still using APEX as a hammer to bludgeon competition into settlements and licensing agreements, despite the tortious interference claims that sometimes follow.

Amazon’s APEX has the potential to be the first of many commercial patent dispute programs due to its budget-friendly, expedited decisions. Yet before it can be considered a system after which other businesses should model their systems, it must rebalance and overcome the issues outlined above. Although a large burden is placed on “neutral evaluators” hired by Amazon, these evaluators currently do not review the patent at issue for invalidity. To establish a more balanced approach and to disincentivize misuse of APEX by predatory sellers, invalidity must be considered. Even if such consideration drives up the required fee slightly, the trade-off would be worthwhile to promote fairness in the process. Amazon has three years of beta-testing under its belt with this system and thus has the data available to see where fraud and misuse are most prevalent. A thorough review of this data should lead to the tightening of its evidentiary standards throughout the process. Despite the name inviting such a pun, APEX must not be allowed to thrive as a predatory tool.

While barriers to justice should not be so high that patent holders may not assert their rights, the process should not be so favorable and easy that it inadvertently incentivizes abuse of the process. Through small tweaks, APEX can continue to serve patent holders’ rights without demanding the time and money that large-scale patent litigation requires.