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. 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.
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.
Unsurprisingly, Big Tech is unhappy about all this. So it has launched a campaign against third-party litigation funding.
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. 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.
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).
Big Tech companies say they just want “transparency” and “disclosure.” 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. This piece originally ran in RealClearPolicy.