House IP Subcommittee Concerns of Foreign Interference in Patent Litigation are Sensationalized
“Our policymakers for decades have failed to understand the fundamental problem with our innovation economy and with patent litigation. But if we allow ourselves to blame others, e.g., ‘foreigners’ for our problems, we forego the empowerment that comes from introspection and taking responsibility.”
In June 2024, the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet held a hearing titled the “The U.S. Intellectual Property System and the Impact of Litigation Financed by Third-Party Investors and Foreign Entities.”
In it, Hon. Bob Goodlatte, former U.S. Representative and former Chairman of the House Judiciary Subcommittee, raised seemingly serious concerns of an “urgent and growing threat to our intellectual property system.” (29:20).
He and other witness testified that due to lack of disclosure requirements for third-party litigation funding, we do not know whether foreign adversaries are behind such financing, with a potentially nefarious motive to disrupt vital U.S. industries. And we do not know if foreign adversaries are financing patent lawsuits in the United States, to illegitimately procure confidential information.
Threats of foreign interference must be taken seriously. But a closer examination reveals that policymakers misdirected their concerns, at the cost of overlooking a more fundamental problem with U.S. innovation.
No Unauthorized Access to Confidential Information
Foreign interference regarding trade secrets and confidential information is a legitimate concern. As an example, with a plethora of international graduate students at top universities with access to proprietary research, there is a valid concern that such research would be leaked to foreign adversaries.
But does this concern exist with respect to confidential business information disclosed during patent litigation?
The witnesses claimed that to be the case but, when questioned, failed to articulate how unauthorized disclosure of confidential information could occur.
To illustrate, below is an exchange between Congressman Glenn Ivey (D-MD) and witness Donald Kochan, Professor of Law and Executive Director of the Law and Economics Center, Antonin Scalia Law School, George Mason University. Ivey asked the witnesses to articulate how protective orders, during the ordinary course of litigation, would fail to protect against the unauthorized disclosure of confidential information to foreign litigation funders:
Ivey [1:27:35]: If a protective order is put in place by the lawyers on both sides, wouldn’t it normally restrict the distribution of the information to a very tight circle on the plaintiff side like counsel, maybe some of the experts, but certainly not arms-length investors, right?
Kochan: I assume that was to me?
Ivey: Yeah. Well, to whoever.
. . .
Kochan: . . . So, if the opponent asks the plaintiff’s counsel, the plaintiff’s counsel is not required to disclose to the defense counsel the existence of the third party financing. So, you don’t know how to protect yourself if you don’t know the environment in which you are . . .
Ivey: . . . I mean, you could draft an agreement that excluded third parties, who are not party to the litigation, and even within the entity that is on the plaintiff’s team, you could restrict who gets access to the information, right? That happens all the time, doesn’t it?
Kochan: I don’t think you can tailor that without knowing enough what the agreement is and what the contract is with the other side.
Ivey: I got to cut you off, because I think that is routine, actually, in litigation to limit those sorts of disclosures using protective orders.
In patent litigation, protective orders protect defendants from disclosing their confidential information to competitors, in the event their competitors sue them for patent infringement. As Ivey pointed out, protective orders limit the disclosure of confidential information to a tight circle, typically attorneys and experts, and specifically exclude the plaintiff from being able to access such information.
So, the question becomes, in what scenario does the existence of a foreign litigation funder introduce risk of unauthorized disclosure of materials protected under a protective order?
Kochan’s response was that a defendant cannot protect against that which it does not know. In other words, a defendant cannot protect itself if it does not know of the existence of a foreign litigation funder or an agreement between a funder and patent holder.
But this is not a cogent response and fails to answer the question.
If a protective order limits disclosure of confidential information to a specified group, e.g., plaintiff’s counsel and its expert, and no one other than those in the specified group would have access to such information, then how would the existence of a litigation funder or an agreement with a patent holder enable unauthorized disclosure of material protected under the protective order?
It does not.
The protective order operates independently of the patent holder and of the existence of a funder. Regardless of whether or not a litigation funder exists, and regardless of what agreement may exist between the patent holder and funder, they are each barred from accessing information protected under a protective order.
While the witnesses raised seemingly serious concerns of foreign interference with respect to confidential business information, their inability to articulate how protective orders during the ordinary course of litigation fail to protect against the unauthorized disclosure to foreign litigation funders, demonstrate their concerns to be hollow.
Misdiagnosis of Disruptor to Vital U.S. Industries
What about the concern that foreign adversaries may fund patent litigation to disrupt vital U.S. industries?
According to the witness testimony of Goodlatte (31:32):
Goodlatte: “What’s worse, there is evidence is that the lack of disclosure is giving American adversaries a window to target critical industries and productive companies. In December 2022, 14 State Attorneys Generals sent a letter to Attorney General Merrick Garland requesting information about what the Justice Department has done or is currently doing to ensure our courts are protected from TPLF (third party litigation funder) driven foreign interference. Their letter raised a number of valid concerns including that foreign countries like China and Russia could use TPLF to fuel targeted lawsuits designed to weaken U.S. national defense companies in the business of protecting our national security interests.”
To unpack this, let’s say that a Russian oligarch is strategically funding patent litigation against U.S. defense companies. The argument is that these patent lawsuits are disruptive to the U.S. defense companies, and therefore threaten national security interests.
Now, instead of a Russian oligarch, let’s say a U.S. hedge fund is strategically funding those patent litigations. Are the patent litigations funded by the U.S. hedge fund any less disruptive or less threatening to national security interests than those funded by the Russian oligarch?
More directly, does the U.S. or Russian status of the litigation funder change the legal issues that comprise the merits of the case? Would it change the scheduling order? Would it change the issues or burdens of proof relating to infringement, validity, or damages?
It does not.
So, if the national status of the litigation funder does not change the underlying nature of the case, what makes the patent infringement lawsuits disruptive and threatening to national security?
Is it the existence of a litigation funder? Is it the financial capability of a patent holder to bring a patent lawsuit and take it to trial?
Goodlatte, Kochan, and each of the 14 State Attorneys Generals pointed the blame towards “foreign interference,” and perhaps more generally at third-party litigation funding, without asking themselves this foundational question.
According to the economic teachings of Nobel Laureate Douglass C. North, there is only one cause that can be cited as being disruptive with respect to patent litigation. The alleged disruptiveness is caused by the court system itself: the exorbitant transactional costs imposed by courts to measure and enforce patent rights.
As it stands today, courts require litigants to expend millions of dollars and years in litigation to determine the most basic informational attributes of a patent: its scope, validity, and value.
Framing it from the opposite perspective, if courts provided a low-cost means to measure and enforce patent rights, and thus defend them, would patent infringement lawsuits against U.S defense companies be disruptive? Would they threaten national security?
Of course not. They would be efficiently adjudicated, irrespective of the existence of a litigation funder and its national origin.
But Goodlatte, Kochan, and the 14 State Attorneys Generals all overlook this foundational economic principle and its impact, and thereby fail to recognize that the court’s inability to affordably measure and enforce patents is the cause of the alleged disruption to the U.S. economy and threat to national security.
More importantly, they fail to understand how this failure creates a crippling “incentives problem” with U.S. innovation. The high costs imposed by courts to measure and enforce patent rights limits patent holders’ access to the courts, which limits their access to justice in the case of IP theft. Without protection from theft, this creates either a disincentive for inventors to disclose their innovations to the market, or an incentive by others to engage in theft when they do (i.e., the efficient infringer).
All of these problems flow directly from the court’s inability to affordably measure and enforce patent rights.
Pointing Fingers is Not a Solution
While the witnesses and even the 14 State Attorneys Generals raised concerns of foreign interference regarding patent litigation funding, their concern demonstrates a lack of understanding regarding litigation-disclosure processes, and a misunderstanding of more foundational economic principles.
Perhaps more saliently, this lack of understanding causes them to point the finger at “foreign interference.”
Our policymakers for decades have failed to understand the fundamental problem with our innovation economy and with patent litigation. But if we allow ourselves to blame others, e.g., “foreigners” for our problems, we forego the empowerment that comes from introspection and taking responsibility. Without taking responsibility and directing our attention to the root cause of the problem, a problem caused by the U.S. court system itself, we will continue down a path of ignorance, to the detriment of our innovation economy.
