GAO report reflects positively on patent litigation finance

On December 5, in response to a Congressional request, the United States Government Accountability Office (GAO)^[1] published a report on “third-party funding” of patent litigation.

Like a previous report issued by this independent, non-partisan agency in 2023, the recent GAO report reflects positively on the commercial legal finance industry and emphasizes several of the advantages it offers to US businesses engaged in litigation relating to the enforcement of patents.

The following are particularly noteworthy takeaways from the GAO’s report:

• As the report asserts, “Third-party funding provides the financial resources necessary for patent owners to pursue litigation against efficient infringers and protect their research investments, according to several stakeholders,” acknowledging the important role that legal finance plays for US businesses, inventors, entrepreneurs and universities. “The length and complexity of patent litigation cases…makes them expensive to pursue,” and patent litigation presents unique risks (such as invalidation of a patent at the Patent Trial and Appeal Board (PTAB). Businesses with strong claims may be unable to bear the associated cost and risk, making legal finance exceedingly important to their ability to access justice.

• The GAO emphasizes the significant rigor with which funders diligence potential patent claims for investment, definitively refuting any assertion that the availability of legal finance contributes to an increase in claims lacking merit. “Almost all funders we interviewed said they typically fund 5 percent or fewer of the patent litigation cases that they consider. Funders told us they thoroughly vet potential patent cases to help ensure the case will be successful given the unique risks and costs of patent litigation.”

• The report emphasized that the presence of legal finance can promote efficiency alongside justice. As the report notes, funders craft terms to “incentivize early settlements.” Because legal finance providers do not control litigation or settlement, they work to ensure that their clients have realistic expectations for settlement; “if the patent owner has unrealistic expectations about how much their case will ultimately settle for, it could prolong litigation by causing the patent owner to reject settlement offers the funder would consider otherwise reasonable.” Conversely, the presence of legal finance could discourage a far more negative scenario in which “a large company willingly chooses to use a patent owner’s technology without licensing or paying for it” because it makes a bet that the patent owner won’t have the resources to enforce its rights through litigation.

• The GAO made no recommendation for additional federal regulation or disclosure. As the report observes, “[A] district court judge said that the court system is not intended to investigate third-party funders unless there is a direct allegation of a conflict of interest or the funding is otherwise relevant to the litigation.”

• Finally, the GAO finds no evidence of the funding of patent litigation by foreign interests for the purposes of harming US business or interests. The report notes that serial defendants have made this assertion without evidence as the basis for blanket disclosure of all funding. However, as the GAO notes, “funders, law firms, and judges we interviewed stated that there are courtroom protections, such as protective orders, to prevent disclosure of unauthorized information to anyone not directly involved in the case, such as a foreign entity or other third party. Funders, including some that are partially foreign owned, said their business structures prevent foreign investors from gaining access to sensitive information through discovery.”

Once again, the GAO’s findings are positive and reflect the value of the commercial legal finance sector.