Third-Party Funding in Patent Litigation: An Analysis

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Patent litigation has become a central aspect of intellectual property law, serving as a critical mechanism for inventors to protect and monetize their innovations. However, the high costs associated with such lawsuits—often reaching millions of dollars—have led to the increasing reliance on third-party litigation funding (TPLF). The report titled INTELLECTUAL PROPERTY: Information on Third-Party Funding of Patent Litigation, published by the U.S. Government Accountability Office (GAO), provides an in-depth examination of this phenomenon, exploring its implications, benefits, and challenges. This article builds upon the findings of the GAO report to provide a detailed overview of TPLF in patent litigation.

Patents are a cornerstone of the innovation ecosystem, granting inventors exclusive rights to their creations for a specified period. These rights incentivize innovation by providing a legal framework for inventors to profit from their efforts. However, when these rights are violated, patent owners must navigate the complex and costly process of litigation to seek remedies such as monetary damages or injunctions. Patent litigation is uniquely expensive, with median costs exceeding $3 million depending on the damages pursued. This financial barrier is compounded by the risk of patent invalidation during the litigation process, which can result in significant losses for patent owners. The GAO report highlights how these challenges have made patent litigation an attractive domain for third-party funders, who see it as a high-risk, high-reward investment opportunity.

TPLF provides financial backing to patent owners or their legal representatives in exchange for a share of the lawsuit’s proceeds if the case is successful. Unlike traditional loans, TPLF is typically nonrecourse, meaning funders bear the financial risk if the lawsuit fails. This arrangement has gained prominence in the U.S. over the past decade, mirroring trends in other countries such as Australia and Canada.

Funders exercise rigorous criteria when evaluating potential cases for investment. The GAO report identifies several key factors that influence funding decisions. High-quality patents, particularly those covering foundational or breakthrough technologies, are preferred. Such patents are less likely to be invalidated and have higher settlement potential. Clear and compelling evidence of unauthorized use strengthens the case for funding. Funders favor cases where the infringement involves a core feature of a product rather than a peripheral aspect. Realistic expectations regarding settlement outcomes are crucial. Funders are wary of cases where plaintiffs have inflated expectations, as this can prolong litigation and reduce returns. Patent litigation funders must navigate unique risks, including the potential for patent invalidation by the Patent Trial and Appeal Board (PTAB). Approximately half of the patent claims reviewed by PTAB are deemed unpatentable, underscoring the high stakes of these investments.

The GAO report notes a significant rise in TPLF-funded patent litigation since 2019. Industry estimates suggest that TPLF now accounts for a substantial proportion of all patent infringement lawsuits, driven by the growing complexity and financial stakes of these cases. Large technology firms, which are frequent targets of patent litigation, report that a majority of the lawsuits filed against them involve third-party funding. These companies often face dozens of such lawsuits annually, with some estimating that TPLF is involved in over half of their cases. The COVID-19 pandemic accelerated the growth of TPLF in patent litigation, as returns from these investments were uncorrelated with traditional financial markets. This period also saw an influx of foreign-sourced funding, raising concerns about national security and the potential for foreign entities to exploit the U.S. patent system.

TPLF democratizes access to the judicial system, enabling small companies, universities, and individual inventors to assert their patent rights. Without this financial support, many of these entities would be unable to afford the high costs of litigation. Efficient infringement occurs when large companies knowingly use patented technologies without licensing, betting on the patent owner’s inability to finance litigation. TPLF empowers smaller entities to challenge such practices, preserving the integrity of their intellectual property. Universities and research institutions benefit significantly from TPLF. By providing the resources to enforce patents, TPLF helps these organizations protect innovations derived from publicly funded research. This, in turn, ensures continued investment in groundbreaking technologies.

Defending against TPLF-funded lawsuits imposes substantial financial and operational burdens on defendants. With the backing of third-party funders, plaintiffs can afford top-tier legal representation, making it more challenging for defendants to prevail. Critics argue that TPLF may incentivize the litigation of low-quality patents. While funders generally prioritize high-quality cases, the rise of TPLF has sparked debates about its impact on the overall quality of patents being litigated. The lack of mandatory disclosure requirements for TPLF arrangements hampers efforts to understand its prevalence and implications. The GAO report highlights the need for greater transparency to address concerns about conflicts of interest and foreign involvement.

Proponents of mandatory disclosure argue that it promotes transparency, aids in identifying conflicts of interest, and provides valuable data for legal research. Disclosures could also help assess the extent of foreign involvement in TPLF. Opponents caution that disclosure requirements could unfairly advantage defendants by revealing the plaintiff’s financial capabilities. They also warn that such mandates could increase litigation costs and burden the court system. The involvement of third-party funders can complicate settlement discussions. Plaintiffs may prioritize meeting their financial obligations to funders over reaching a timely resolution, prolonging litigation and increasing court resource demands. TPLF introduces risks such as the potential for foreign entities to gain access to sensitive information through litigation. Protective measures, such as court-ordered confidentiality agreements, are designed to mitigate these risks, but concerns persist.

For universities, TPLF provides a vital mechanism for enforcing patent rights and protecting research investments. Without this support, the commercial value of their patent portfolios could diminish, undermining their ability to attract funding and license technologies. Technology companies face significant challenges in defending against TPLF-funded lawsuits. Beyond the financial costs, these cases divert personnel and resources from core operations, potentially delaying product development and innovation. TPLF has proven to be a lucrative investment strategy, offering high returns despite the associated risks. Funders continue to refine their evaluation criteria and funding models to maximize profitability while addressing stakeholder concerns.

Third-party litigation funding has reshaped the landscape of patent litigation, offering both opportunities and challenges. While it provides critical support to resource-constrained patent owners, it also raises important questions about transparency, fairness, and the broader implications for the intellectual property ecosystem. As TPLF continues to evolve, stakeholders must balance its benefits against its potential risks to ensure that it serves as a force for innovation and justice.

Last update on 2025-12-19 / Affiliate links / Images from Amazon Product Advertising API