[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
THE U.S. INTELLECTUAL PROPERTY SYSTEM AND
THE IMPACT OF LITIGATION FINANCED BY THIRD-
PARTY INVESTORS AND FOREIGN ENTITIES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, INTELLECTUAL
PROPERTY, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
WEDNESDAY, JUNE 12, 2024
__________
Serial No. 118-85
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Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via: http://judiciary.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
56-096 WASHINGTON : 2024
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COMMITTEE ON THE JUDICIARY
JIM JORDAN, Ohio, Chair
DARRELL ISSA, California JERROLD NADLER, New York, Ranking
MATT GAETZ, Florida Member
ANDY BIGGS, Arizona ZOE LOFGREN, California
TOM McCLINTOCK, California SHEILA JACKSON LEE, Texas
TOM TIFFANY, Wisconsin STEVE COHEN, Tennessee
THOMAS MASSIE, Kentucky HENRY C. ``HANK'' JOHNSON, Jr.,
CHIP ROY, Texas Georgia
DAN BISHOP, North Carolina ADAM SCHIFF, California
VICTORIA SPARTZ, Indiana J. LUIS CORREA, California
SCOTT FITZGERALD, Wisconsin ERIC SWALWELL, California
CLIFF BENTZ, Oregon TED LIEU, California
BEN CLINE, Virginia PRAMILA JAYAPAL, Washington
KELLY ARMSTRONG, North Dakota MARY GAY SCANLON, Pennsylvania
LANCE GOODEN, Texas JOE NEGUSE, Colorado
JEFF VAN DREW, New Jersey LUCY McBATH, Georgia
TROY NEHLS, Texas MADELEINE DEAN, Pennsylvania
BARRY MOORE, Alabama VERONICA ESCOBAR, Texas
KEVIN KILEY, California DEBORAH ROSS, North Carolina
HARRIET HAGEMAN, Wyoming CORI BUSH, Missouri
NATHANIEL MORAN, Texas GLENN IVEY, Maryland
LAUREL LEE, Florida BECCA BALINT, Vermont
WESLEY HUNT, Texas
RUSSELL FRY, South Carolina
Vacancy
------
SUBCOMMITTEE ON COURTS, INTELLECTUAL PROPERTY, AND
THE INTERNET
DARRELL ISSA, California, Chair
THOMAS MASSIE, Kentucky HENRY C. ``HANK'' JOHNSON, Jr.,
SCOTT FITZGERALD, Wisconsin Georgia, Ranking Member
CLIFF BENTZ, Oregon TED LIEU, California
BEN CLINE, Virginia JOE NEGUSE, Colorado
LANCE GOODEN, Texas DEBORAH ROSS, North Carolina
KEVIN KILEY, California ADAM SCHIFF, California
NATHANIEL MORAN, Texas ZOE LOFGREN, California
LAUREL LEE, Florida MADELEINE DEAN, Pennsylvania
RUSSELL FRY, South Carolina GLENN IVEY, Maryland
CHRISTOPHER HIXON, Majority Staff Director
AARON HILLER, Minority Staff Director & Chief of Staff
C O N T E N T S
----------
Wednesday, June 12, 2024
OPENING STATEMENTS
Page
The Honorable Darrell Issa, Chair of the Subcommittee on Courts,
Intellectual Property, and the Internet from the State of
California..................................................... 1
The Honorable Henry C. ``Hank'' Johnson, Ranking Member of the
Subcommittee on Courts, Intellectual Property, and the Internet
from the State of Georgia...................................... 2
The Honorable Jerrold Nadler, Ranking Member of the Committee on
the Judiciary from the State of New York....................... 4
WITNESSES
The Hon. Bob Goodlatte, former U.S. Representative (VA-6); Chair
of the House Judiciary Committee; Chair of the Subcommittee on
Intellectual Property, Competition, and the Internet
Oral Testimony................................................. 6
Prepared Testimony............................................. 9
Paul Taylor, Visiting Fellow, National Security Institute, George
Mason University
Oral Testimony................................................. 15
Prepared Testimony............................................. 18
Donald Kochan, Professor of Law, Executive Director of the Law
and Economics Center, Antonin Scalia Law School, George Mason
University
Oral Testimony................................................. 30
Prepared Testimony............................................. 32
Victoria Sahani, Associate Provost for Community and Inclusion,
Professor of Law, Boston University
Oral Testimony................................................. 43
Prepared Testimony............................................. 45
LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE HEARING
All materials submitted by the Subcommittee on Courts,
Intellectual Property, and the Internet, for the record........ 80
Materials submitted by the Honorable Glenn Ivey, a Member of the
Subcommittee on Courts, Intellectual Property, and the Internet
from the State of Maryland, for the record
An article entitled, ``Breaching a Litigation Funding
Agreement--the Sysco/Burford Story,'' Mar. 29, 2023,
Bloomberg
A letter to the Honorable Jim Jordan, of the Committee on the
Judiciary from the State of Ohio; the Honorable Jerrold
Nadler, Ranking Member of the Committee on the Judiciary
from the State of New York; the Honorable Darrell Issa,
Chair of the Subcommittee on Courts, Intellectual
Property, and the Internet from the State of California;
and the Honorable Henry C. ``Hank'' Johnson, Ranking
Member of the Subcommittee on Courts, Intellectual
Property, and the Internet from the State of Georgia,
from the Council for Innovation Promotion (C4IP), Jun.
12, 2024
A statement from the International Legal Finance Association
(ILFA), Jun. 12, 2024, submitted by the Honorable Henry C.
``Hank'' Johnson, Ranking Member of the Subcommittee on Courts,
Intellectual Property, and the Internet from the State of
Georgia, for the record
Materials submitted by the Honorable Darrell Issa, Chair of the
Subcommittee on Courts, Intellectual Property, and the Internet
from the State of California, for the record
A statement from the American Property Casualty Insurance
Association (APCIA), Jun. 12, 2024
A letter to Honorable Jim Jordan, of the Committee on the
Judiciary from the State of Ohio; the Honorable Jerrold
Nadler, Ranking Member of the Committee on the Judiciary
from the State of New York; the Honorable Darrell Issa,
Chair of the Subcommittee on Courts, Intellectual
Property, and the Internet from the State of California;
and the Honorable Henry C. ``Hank'' Johnson, Ranking
Member of the Subcommittee on Courts, Intellectual
Property, and the Internet from the State of Georgia,
from Jonathan Stroud at Unified Patents, from Jonathan
Stroud General Counsel, Unified Patents, Jun. 10, 2024
An article entitled, ``Some Third-Party Litigation Funders
Pose a Threat to US Security,'' Apr. 7, 2023, Howard
McKeon, former Chair of the House Armed Services
Committee, Bloomberg
A letter to the Honorable Darrell Issa, Chair of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of California, and the Honorable
Henry C. ``Hank'' Johnson, Ranking Member of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of Georgia, from Cisco Systems,
Inc., Jun. 11, 2024
A report entitled, ``Foreign Funded NGO at Center of Anti-
Fossil Fuel Activism,'' Center for Climate Integrity
(CCI)
A statement from The National Association of Mutual Insurance
Companies (NAMIC), Jun. 12, 2024
A statement from the U.S. Chamber of Commerce Institute for
Legal Reform (ILR), Jun. 12, 2024
A letter to the Honorable Darrell E. Issa, Chair of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of California, and the Honorable
Henry C. ``Hank'' Johnson, Jr., Ranking Member of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of Georgia, from The U.S.
Manufacturers Association for Development and Enterprise
(USMADE), Jun. 12, 2024
An article entitled, ``Intel is being targeted by patent
trolls. We need to know who holds the purse strings,''
Jun. 12, 2024, Patrick Tiberi, former Member of Congress,
President and CEO of the Ohio Business Roundtable, The
Columbus Dispatch
A letter to the Hon. Merrick B. Garland, Attorney General,
U.S. Department of Justice, the Hon. Lisa O. Monaco,
Deputy Attorney General, U.S. Department of Justice, and
Mathew G. Olsen Assistant Attorney General, National
Security Division, U.S. Department of Justice, from 14
State Attorneys, Dec. 22, 2022
A letter to the Honorable Darrell E. Issa, Chair of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of California, and the Honorable
Henry C. ``Hank'' Johnson, Jr., Ranking Member of the
Subcommittee on Courts, Intellectual Property, and the
Internet from the State of Georgia, from the National
Association of Manufacturers (NAM), Jun. 12, 2024
APPENDIX
A statement for the record from the High Tech Inventors Alliance
(HTIA), Jun. 14, 2024, submitted by the Honorable Darrell E.
Issa, Chair of the Subcommittee on Courts, Intellectual
Property, and the Internet from the State of California
QUESTIONS AND RESPONSES FOR THE RECORD
Questions submitted by the Honorable Darrell E. Issa, Chair of
the Subcommittee on Courts, Intellectual Property, and the
Internet from the State of California, the Honorable Scott
Fitzgerald, a Member of the Subcommittee on Courts,
Intellectual Property, and the Internet from the State of
Wisconsin, and the Honorable Laurel Lee, a Member of the
Subcommittee on Courts, Intellectual Property, and the Internet
from the State of Florida, for the record
Response to questions from Paul Taylor, Visiting Fellow,
National Security Institute, George Mason University;
Donald Kochan, Professor of Law, Executive Director of the
Law and Economics Center, Antonin Scalia Law School, George
Mason University
Response to questions from the Hon. Bob Goodlatte, former U.S.
Representative (VA-6); Chair of the House Judiciary
Committee; Chair of the Subcommittee on Intellectual
Property, Competition, and the Internet
Response to questions from Donald Kochan, Professor of Law,
Executive Director of the Law and Economics Center, Antonin
Scalia Law School, George Mason University
Response to questions from Victoria Sahani, Associate Provost
for Community and Inclusion, Professor of Law, Boston
University
THE U.S. INTELLECTUAL PROPERTY SYSTEM
AND THE IMPACT OF LITIGATION FINANCED
BY THIRD-PARTY INVESTORS AND
FOREIGN ENTITIES
----------
Wednesday, June 12, 2024
House of Representatives
Subcommittee on Courts, Intellectual Property, and
the Internet
Committee on the Judiciary
Washington, DC
The Subcommittee met, pursuant to notice, at 2:30 p.m., in
Room 2141, Rayburn House Office Building, the Hon. Darrell Issa
[Chair of the Subcommittee] presiding.
Present: Representatives Issa, Massie, Fitzgerald, Cline,
Lee, Fry, Johnson, Nadler, Ross, Lofgren, and Ivey.
Mr. Issa. The Subcommittee will come to order.
Without objection, the Chair is authorized to declare a
recess at any time.
We welcome everyone here today to a hearing on third-party
litigation funding and intellectual property.
I now recognize myself for an opening statement.
It's an odd combination of third-party litigation and
intellectual property, and to say the least, third-party
litigation, or investing in litigation, is, in fact, not
limited to intellectual property. However, because of the large
awards that are possible and the proliferation of troll
activity, it is, in fact, one of the most lucrative and growing
areas.
These groups often do so for good and legitimate reasons.
It pays well. The law firms do it because it limits their risk.
There's only an upside, no downside. Whether they win or lose,
they know that their fees will be paid. When they win a portion
of the profits will be split. Everyone wins, except, of course,
the defendants who often find themselves with a settle-rather-
than-go-to-court situation even when innocent.
However, there are newer forms of third-party litigation
that present particular concerns, and I say this because we are
not here to eliminate third-party litigation. We are not here
to eliminate people who need to have investors to protect their
intellectual property rights or any other event that has
happened to them. There are plenty of groups who, in fact,
specialize in helping people assert their rights.
However, with the growth of nonpracticing entities known as
patent trolls engaged in meritless litigation campaigns, we see
vast settlements by asserting a wide swath of low-quality
patents.
More importantly, and most importantly for today, we see
and have documented instances of foreign funding from China,
Russia, and other sources who use shell companies to hide where
they come from and what their meaning may need to be. For
example, Huawei, a company that cannot sell in the United
States, in fact, can both invest in the United States and
assert their patents. That means that they can, in fact, stifle
the growth of fifth generation, or 5G, advancement in the
United States, while freely doing whatever they want in their
home country and around the world.
We've also seen that foreign control patent trolls like
VLSI win billions of dollars in damages from American companies
on weak patent infringement claims. While some States in
Federal Courts have considered and adopted measures to require
at least a level of transparency, third party, or TPLF, is not
regulated by Federal law. This Committee looks to change that.
Right now, insurance agreements and other financials of
defendants are discoverable. I want to reemphasize that. If I
am insured, and a plaintiff comes, one of the first pieces of
discovery is they want to know how deep my pockets are and how
deep my insurance coverage is, because that may very well
dictate what they're willing to settle for. They get
transparency. However, the courts, with rare exceptions, have
not asked for any discoverability as to the true plaintiffs,
meaning the investors.
That's why it is time for Congress to take a look and, in
fact, look at what disclosure and transparency is needed to
stem the tide of TPLF abuse. I hope to gain constructive
feedback on this topic today, but let there be no doubt, we
know already there is a growing problem. We know that we have
to find a reasonable and balanced solution.
Last, as we will hear from our witnesses, it is extremely
important that we not stifle the ability of small inventors to
find partners to help fund the defense of their intellectual
property. If you're willing to fund a small inventor, why are
you not willing to be stated as a supporter and funder of that
small inventor?
With that, it's my pleasure to recognize the Ranking
Member, Mr. Johnson, for his opening statement.
Mr. Johnson. Thank you, Mr. Chair.
We've all heard this story again and again. A little guy,
patent owner, small business guy, begins talks with a large
corporation, a big business, a national corporation, maybe even
a multinational corporation. They engage in negotiations about
the little guy's invention. The little guy inventor shares
documents and all kinds of secret information about the
product.
Then, when it seemed like everything was looking so
positive for the little guy, radio silence from the
corporation, don't hear anything from them, can't get your
calls returned, just radio silence. Months later, small
inventor wakes up, sees an advertisement for product just like
the one that he showed to that big corporation, and guess what?
It's that same big corporation that he talked to and shared his
secrets. Come to find out that this corporation is using
technology that clearly infringes on the little guy's patent.
The patent owner, being a little guy, can't do anything to stop
it because it is far too expensive for that little guy to
afford a multi-year patent litigation against a large
corporation.
In the United States, the only way to enforce your rights
as a patent owner, in most cases, is to sue in civil court.
Inventors themselves must monitor the market for violations of
their property rights, and they must hire lawyers to go after
infringers. An American patent is only as good as the owner's
ability to police it, and in the United States today that means
stealing a patent is easier than ever. After the America
Invents Act was passed into law, even the worthiest of patent
claims became procedurally difficult to pursue.
As a result, patent attorneys largely stopped taking cases
on contingency basis because of the small likelihood of
success. Corporations, confident that they could rarely be
sued, began risking efficient infringement, as it's called,
where a business infringes on a patent because of the reduced
likelihood of ever being held accountable for doing so.
Inventors left without recourse began turning to outside
investors to fund their cases, so that they could access the
justice system.
Third-party litigation funding is increasingly being used
to manage risks and absorb the astronomical cost of patent
cases. In these situations, investors uninvolved in the
litigation provide financing in exchange for a percentage of
the final award. If the inventor does not win, they have no
obligation to pay the investor back, because it is difficult
for infringed parties to overcome the financial hurdles just to
get to the courtroom. Outside nonrecourse funding has become a
tool to allow some of these cases to move forward.
In 2022, for example, inventor Michael Coffman won a
judgment for Microsoft's infringement on his patent. For five
years, he knew the infringement was occurring, but he was
unable to cover the significant cost of pursuing the company in
court until he received funding from Woodsford, which is an
Australian litigation funding firm.
Tort reform advocates often speak as though patent
litigation is like two giants fighting, but in reality, these
cases are more like David and Goliath, and many large
corporations would like to keep it that way. We're here today
because big business does not want to be brought to court, not
for the patents they infringe and not for any of the other
harms against everyday Americans.
The assault on third-party litigation funding, the tort
reform movement, is against the practice, third-party
litigation funding. The scare tactics and fear-mongering
rhetoric we hear in this debate are designed to compel changes
to our third-party litigation funding system that would prevent
individuals from accessing the justice system when they need it
most.
One of those scare tactics has been raising the specter of
the threat of China to our intellectual and national security
systems. The only solution, they claim, is extensive
transparency measures that would give defendants clear
advantages over funded plaintiffs. We've had multiple hearings
about the threat to our intellectual property from China, and
we know how the Chinese Government is conducting economic
espionage. Patent experts agree that funding long term--excuse
me, the funding long-shot patent litigation cases is not one of
them.
I'm committed to protecting our intellectual property from
foreign governments seeking to steal it, which is why I am an
advocate for a strong U.S. patent system where Americans can
pursue their claims. It is also why I supported President
Biden's CHIPS Act, and his Administration's work to raise
tariffs on Chinese technological products and prevent China
from accessing advanced AI chips made from U.S. intellectual
property.
With the deck stacked against inventors in the U.S. patent
system today, nearly every claim has become a long shot, a
series of Davids going up against Goliaths. While third-party
funding has become essential to leveling the playing field by
allowing just a few of the meritorious infringement claims to
go forward, we should not think of it as a panacea. The only
way to fix systemic problems in this system is through reforms
that make the justice system more accessible and ensure that
meritorious claims have a chance.
I thank the witnesses for being here today, and I yield
back the balance of my time.
Mr. Issa. I thank the gentleman.
We now recognize the Ranking Member of the Full Committee,
Mr. Nadler, for five minutes.
Mr. Nadler. Thank you, Mr. Chair.
Mr. Chair, access to justice takes many forms.
Unfortunately, so do efforts by large corporate interests to
create barriers to justice for individuals in small businesses
who seek to hold them accountable. Today, we are examining
proposals to restrict third-party funding of litigation, the
latest attempt to slam the courthouse doors shut to all but the
most wealthy and powerful.
Third-party litigation funding is an arrangement in which
an entity unrelated to a case agrees to pay some or all the
litigation fees for a plaintiff or a defendant in exchange for
a share of the potential award. Unlike a bank loan, in
nonrecourse litigation funding, the recipient only owes money
in return if they win their case or otherwise collect an award.
These third parties can be individual investors, but more
often, they are larger litigation funders, venture capital
firms, or hedge funds, to name a few.
There are also many ways to finance litigation. Investors
can put their money into a single case, or even invest in a
firm's portfolio of litigation. Funding from third parties has
been used increasingly over the last 10 years to pay for the
astronomical amount of money needed to enforce a patent against
an infringing corporation. Even then, only a select few
potential cases are backed by third parties.
Litigation funders are selective about the lawsuits they
take because they seek to pursue claims that have the best
chance of winning, and ultimately, they take only a small
percentage of those cases presented to them. Concurrent with
the increase in third-party funding, litigation in the patent
arena has steadily declined. Studies of all court filings have
seen a trend of fewer cases each year since 2013 when 6,497
claims were filed. In 2023, for example, only 3,111 patent
pleadings were filed, less than half the number from 10 years
earlier.
It is harder than it has ever been to take a corporation to
court. The third-party funding has helped to ensure that some
of these claims are heard, which is exactly why these corporate
interests now seek to limit this practice. Today's hearing is
simply tort reform by another name, and we have all seen the
show before. Over the years, my colleagues across the aisle
have repeatedly brought Chamber of Commerce-backed legislation
for consideration before this Committee, from the so-called
Lawsuit Abuse Reduction Act to the fairness in class-action
lawsuits legislation and everything in between.
Each time we are told the businesses are suffering from the
scourge of pesky plaintiff litigation; whereas, in reality,
corporations simply do not want to be held accountable when
they produce products that make people sick, violate employees'
Constitutional rights, or steal patents from investors.
The Chamber's attacks on third-party litigation funding are
more of the same. Third-party litigation funding levels the
playing field by helping individuals who cannot afford to bring
their case when they are injured by a wealthy corporation. The
odds are stacked against individual plaintiffs when they go up
against businesses with seemingly endless resources, who can
litigate until claimants run out of money or are forced to
settle for pennies of what their claim is worth.
While this hearing may be specific to patent cases,
Republicans have introduced legislation that would affect all
third-party funding arrangements for plaintiffs. Investors--I'm
sorry, inventors and businesses that own an infringed patent
should be able to reach the courthouse doors, as should every
other injured plaintiff. The solutions in search of a problem
offered by my Republican colleagues today would make it harder
for them to do. Forcing only victims to comply with overly
burdensome disclosure requirements, for example, would make it
harder for prospective plaintiffs to fund and litigate their
cases.
In addition to acting as a deterrent for large investment
firms with many investors, the proposed transparency measures
would provide a strategic advantage to the defendant. A
corporate defendant with insight into a victim's financing can
strategically delay a case, bury the victim in paperwork, or
pressure settlement of a case for far less than a victim or
their family is owed.
Finally, over the last year, I have heard my Republican
colleagues repeatedly and baselessly allege that we have a two-
tiered system of justice in this country. It is incredibly
ironic that a two-tiered system of justice is exactly what
advocates for so-called tort reform are seeking. A two-tiered
system of justice exists when inventors and businesses cannot
afford to enforce their property rights, but beamers (ph) can
still sue one another for infringement.
It exists when citizens poisoned by their drinking water
cannot hold companies polluting our waterways accountable, but
those companies can go to court to challenge our environmental
regulation. A two-tiered system of justice exists when everyday
Americans are cheated out of their savings with no affordable
recourse, but big banks can pay billions to settle with
regulators. The harder it is for Americans to reach the
courthouse doors, the closer we are to this reality.
I appreciate our witnesses for appearing today.
I particularly want to welcome our former colleague, Chair
Goodlatte, back to the Judiciary Committee. During his time as
Chair of this Committee, we did not agree on everything, and I
am sure we won't today, but we were able to get important work
done together, including the U.S.A. FREEDOM Act in 2015 and the
Music Modernization Act in 2018. These landmark pieces of
legislation were so impactful because they were the product of
bipartisan cooperation. I hope we can return to doing work like
that on this Committee going forward, and I yield back the
balance of my time.
Mr. Issa. I thank the gentleman. Without objection, all
opening statements will be included in the record, and I'd like
to now introduce our distinguished panel of witnesses,
beginning with the Chair, whose picture is on the wall, Chair
Bob Goodlatte. Mr. Goodlatte is the former Chair of the
Judiciary Committee, former Chair of the Ag Committee, and a
distinguished former Member from Virginia's 6th Congressional
District, who served for many years, and as the Ranking Member
said, developed a body of expertise on issues including the
ones before us today.
Mr. Paul Taylor, a visiting fellow at the National Security
Institute at George Mason University, previously served for
some long 20 years at the side of many of us here on the
Ccommittee and is, in fact, an expert on the subject. Mr.
Taylor has published widely on several issues, including on
third-party litigation.
Mr. Donald Kochan. Mr. Kochan is a Professor of Law and
Executive Director of Law and Economic Center at the George
Mason University Antonin Scalia School of Law. Professor
Kochan's scholarship focuses on property law, constitutional
law, administrative law, and law and economics.
Ms. Victoria Sahani--I knew I'd miss it--I would go
slowly--Sahani is an Associate Provost of Community and
Inclusion and a Professor of Law at the Boston University
School of Law. The Professor's scholarship focuses on
attribution law and third-party litigation and funding law.
I want to welcome our witnesses here today. As Chair
Goodlatte did many times, I would ask that all of you rise to
take the oath for your statements here today.
Do you solemnly swear under penalty of perjury that the
testimony you're about to give is true and correct to the best
of your knowledge, information, and belief so help you God.
Please be seated.
Let the record reflect that all witnesses answered in the
affirmative.
Please, all of you note that your testimony in its entirety
will be included in the record, and so that gives you the
opportunity perhaps to stay at or below five minutes,
recognizing that every word that you have in your written
statement, plus additional material, whether extraneous or not,
will be included in the record.
With that, I recognize Chair Goodlatte.
STATEMENT OF THE HON. BOB GOODLATTE
Mr. Goodlatte. Chair Issa, Ranking Member Johnson, Ranking
Member Nadler, and the Members of the Subcommittee, thank you
for the opportunity to testify today about an urgent and
growing threat to our intellectual property system. My
testimony today represents my personal opinions and not those
of any other organization with which I am affiliated.
The rise of third-party litigation financing, or TPLF, has
turned American jurisprudence on its head. Right now, very few
Federal Courts require plaintiffs to disclose third parties
that are funding their litigation or ownership interests that
may have a stake in the outcome of their case. Like all
investors, these entities are hoping to generate a return,
specifically a portion of a settlement or verdict award.
TPLF is now a $15.2 billion industry in the United States.
Each day, hedge funds, big banks, and foreign sovereign wealth
funds invest in lawsuits against productive American companies.
The intricacies of IP litigation present these financiers with
a ripe opportunity. By operating through shell companies called
patent trolls, investors face little risk. Inflated patent
infringement damages verdicts for hundreds of millions or even
billions of dollars give them a high upside. As much as 30
percent of all patent lawsuits are now funded by third-party
entities.
Twenty percent of all new litigation funding capital is
directed toward patent cases. In most lawsuits, these entities
operate in the shadows, ensuring they can engage in abusive
litigation free from the light of public scrutiny. The entire
TPLF business model is anticompetitive by nature. The investors
are not creating jobs, growing our economy, or doing anything
to further American innovation. Their abusive tactics, however,
slow down companies that are generating economic growth.
At times, the interests of investors may also come into
conflict with the interests of the plaintiffs and prevent
plaintiffs and defendants from settling. Third-party funders
claim to not be involved in legal strategy. We have seen
reporting in publications like The Wall Street Journal
investigating conflicts between funders and plaintiffs, and
capturing an industry where investors influence case strategy
to serve their own objectives.
What's worse, there is evidence that the lack of disclosure
is giving America's adversaries a window to target critical
industries and productive companies. In December 2022, 14 State
Attorneys General 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-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.
Because of the third-party funding disclosure requirements
in the District Court of Delaware, one of the few venues that
does require disclosure, we learned that a Chinese firm,
Purplevine IP, is bankrolling patent infringement lawsuits
targeting technology companies in the U.S. Courts.
In March of this year, another report uncovered that
sanctioned Russian oligarchs are investigating millions of
dollars in lawsuits in our courts even though they are supposed
to be prohibited from doing business in the United States.
This is what we know. At the core of our predicament,
however, is that without the disclosure requirements we cannot
know the full picture, who is funding these efforts, and which
industries or companies are at risk of finding themselves on
the receiving end of an abusive lawsuit.
This must end. The American justice system is the model the
rest of the world follows. At their very best, courts work to
resolve disputes with cases decided on the merits of the
opposing arguments. TPLF undermines that model, treating our
courts as another investment vehicle.
Good news is that there are steps we can take to fix the
problem, such as requiring disclosure of third-party litigation
funding in civil cases, including Federal class actions in
multidistrict litigation proceedings where the third-party
funder has a right to receive any payment that is contingent in
any respect on the outcome of the civil action by settlement,
judgment, or otherwise, requiring funders to disclose
litigation funding from foreign entities and a foreign
government and that government's role in the litigation to
other parties, the court, and the U.S. Government.
Of course, Speaker Johnson and Senators Kennedy and Manchin
have introduced the Protecting Our Courts from Foreign
Manipulation Act to end overseas meddling in American
litigation.
These steps should all be on the table. Thank you again for
your invitation to testify today, and I look forward to your
questions.
[The prepared statement of the Hon. Goodlatte follows:]
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Mr. Issa. Thank you, Mr. Chair.
Mr. Taylor.
STATEMENT OF PAUL TAYLOR
Mr. Taylor. Thanks to the Committee for inviting me here
today.
When lawyers fund their own cases, they do so with an
understanding that they owe their clients a duty of loyalty;
that is, lawyers are supposed to respect the wishes of their
clients, including how their client views justice playing out
in the case. Often, lawyers get paid a percentage of the money
awarded, but importantly, when lawyers fund their own cases,
they do so with one eye on their ability to recover their costs
and make a profit and the other eye on achieving what their
clients see as a just result.
Today, lawyers are increasingly entering into agreements
with third parties who will fund their lawsuits under a duty to
maximize not justice, but their own in their investors' profits
from settlements or awards, using contracts that have terms
that, to some degree, take control away from lawyers and their
clients and give it to their financial backers.
Now, some might say that third-party litigation funders are
just private businesses that should be allowed to operate in a
free market, but they'd be wrong because third-party litigation
funders are not private businesses, in the sense that their
entire business model is based on leveraging the power of
government through lawsuits.
Here's how: If a litigation funder wanted to pay me to sue
any of the Members here for some bogus reason, all I'd have to
do is pay a small filing fee to a court, so I could hand you a
piece of paper with a complaint.
You might read it and think it's absurd, but you couldn't
toss it away and ignore it, because if you ignored it, I'd win
my lawsuit by a default judgment that is enforced by the
government. You don't want that to happen, so you'd have to
hire a lawyer and spend a lot of time and money to finally win
your case. At some point, I could say to you, hey, maybe my
case is bogus, but let's get real. This case would cost you
$10,000 or whatever to defend yourself and win, but you'd be
out that money because we don't have a ``loser pays'' rule in
America. Why don't you just pay me $7,000 now, I'll pay my
funders their cut, and then I'll go away, and that way you'll
save $3,000 out of the $10,000, it would've cost you to defeat
my claim in court.
It's legal extortion, sure, but it's the way the system
works. Rule XI of the Federal rules of civil procedure is no
help because it requires victims of frivolous lawsuits to spend
even more money to get their case declared frivolous, and even
then, judges aren't required to make the victims whole.
No truly private business relying solely on voluntary
agreements in a free market could rely on government power to
its advantage in that way, but third-party litigation funders
can and do in fulfilling a duty that breaches the attorney's
duty of loyalty and puts profit in the eyes of the funding
investors in place of justice in the eyes of the client, which
leads to absurd results.
A lawsuit brought by food distribution company Sysco
against food suppliers was funded by third parties. At a
certain point in the litigation, Sysco wanted to settle, but it
had signed a litigation financing agreement that stipulated
Sysco, quote, ``shall not accept a settlement offer without the
funder's prior written consent,'' and the funder said, ``Sysco
was settling for too little,'' with the funder's chief
investment officer even writing an email staying, quote, ``We
are going to have to sue Sysco, it seems. They are about to
breach our contract.''
OK, so that's bad, but why are we talking about this in the
patent Subcommittee? Well, the American patent litigation
system includes additional dysfunctions that third-party
financiers can leverage to maximize their profits at the
expense of innocent parties, and here's how that works: In
patent litigation funders work with so-called patent trolls,
companies that don't make any products themselves but instead
buy from others' old, low-quality patents that likely shouldn't
have been granted in the first place, and they use them to
threaten productive companies with infringement suits.
Patent trolls have an unfair advantage. Once granted, even
patents that were not properly granted by the Patent and
Trademark Office are legally deemed to have a presumption of
validity. That means that a party defending against an
infringement claim has to show the patent at issue is invalid
by clear and convincing evidence, which is a much higher
standard than the usual preponderance of the evidence, which is
all the patent troll needs to meet and win the infringement
claim.
Think about what that means in a real-world jury room in a
case involving some very complex technology. If any one of us
were on that jury, we would likely be very confused. If jurors
are confused about a technical issue, they'll find it difficult
to reach any decision. Since they would've to reach much
further to get to clear and convincing evidence and invalidate
an improperly granted patent, they'll have the incentive to tap
out at the much lower standard of preponderance of the evidence
and decide in favor of the patent troll in their funder's
infringement claims. So, even innocent innovators knowing this
are incentivized to settle lawsuits involving complex
technologies. The third-party funders turn patent courts into
casinos where the rules are rigged in their favor.
Now, as former Secretary of Defense Donald Rumsfeld said,
There are known/unknowns; that is to say, we know there are
some things that we do not know. And the issue of third-party
litigation financing by foreign enemies is a known/unknown of a
dangerous kind.
Before the terrorist attacks of 9/11, Federal agencies knew
of al-Qaeda's existence and its intent to harm America, but not
the specifics of its operation and capabilities. Today, patent
trolls and their funders can be foreign enemies who extort
money through our legal system as a means of syphoning
resources away from American industries, including defense
industries.
We know foreign enemies like China have the will and the
way to use third-party litigation financing to hurt America; we
just don't know the extent of it.
To conclude, a couple years ago, Chief Judge Connolly of
the district of Delaware issued standing orders mandating the
disclosure of third-party litigation financing in his
courtroom. That simple disclosure requirement had dramatic
results. Third-party litigation financing companies dismissed
their own funded patent cases in the court simply because they
didn't want to reveal their financing arrangements. Let that
sink in for a moment.
Judge Connolly simply cast a light in the direction of the
litigation funders, and the litigation vanished just like that.
Congress, too, could dramatically improve the justice system by
simply exposing third-party litigation agreements.
[The prepared statement of Mr. Taylor follows:]
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Mr. Issa. Thank you.
Mr. Kochan.
STATEMENT OF DONALD KOCHAN
Mr. Kochan. Chair Issa, the Ranking Member Johnson, the
Ranking Member Nadler, and distinguished Members of the
Subcommittee, thank you for this opportunity to provide
testimony today on the U.S. intellectual property system and
the impact of litigation financed by third-party investors and
foreign entities, and the chance to submit my written
testimony, which I incorporate here by reference.
My name is Donald Kochan. I am a Professor of Law and
Executive Director of the Law & Economics Center at George
Mason University's Antonin Scalia Law School. Across my now 22
years in academia, I have extensively researched, studied, and
written scholarly analysis of our civil justice system. I've
also taught courses on Federal civil procedure, Federal Courts,
and State Constitutional law, among others.
My research in law and economics also contributes to my
understanding of the incentive's problems involved in third-
party litigation financing, TPLF for short, ongoing. My
testimony today represents my personal expert opinions and not
those of the George Mason University, the Law & Economics
Center, the Antonin Scalia Law School, or any other
organization with which I am affiliated.
Our Founders designed the finest court system in the world.
Individuals can invest and innovate because they know and trust
that the court system will be there as a forum for the neutral,
predictable resolution of true cases and controversies between
actual litigants. Only individuals who need the courts are
supposed to be involved in cases. Courts should not be the--or
should be the guarantors of the rule of law and accessed only
by those seeking justice for personal wrongs or to clarify
personal rights.
The courts are successful at fulfilling their purpose when
they can promise to be uncorrupted by private incentives in
their management and uncorrupted functionally by nonlitigant
speculators wishing to exploit the courts for private gain.
Court systems do not work well if we create incentives to flood
the courts, draining resources available for traditional
consumers of courts.
Yet, the new TPLF infects the court system with precisely
those kinds of features, threatening to convert the civil
justice system into a speculative market, flooding the courts
with cases gambling on potential payouts. Courts should be
insulated from normal market forces such that courts will be
available to the traditional market to use in a reliable way.
This is why traditional defenses of markets, from free market-
oriented individuals who favor innovations in finance, and
discourage limitations on vehicles for investment, do not hold
true in the ``courts as a market'' narrative that TPLF
encourages.
Facing this, legislation should be guided by a principle
that preserves the integrity of courts. We need to maintain the
civil justice system outside the market if we are to preserve
the civil justice system as a predictable, neutral, reliable,
and accessible system that serves the market. Putting this
another way, to preserve the effectiveness of our Nation's
courts to serve as the necessary and neutral forums that
facilitate the market, the court system must be insulated from
market forces.
The third-party litigation funding is used as a vehicle for
investment, or as a means of achieving other strategic goals of
the funder, including harming strategic or geopolitical
competitors or using the courts and the litigation discovery
process as a conduit to gain access to sensitive trade secrets
and confidential intellectual property that otherwise would be
shielded from view.
When the courts are open to TPLF, funders logically include
foreign influencers who will use the opening to weaken the
strength of our civil justice system for their own geostrategic
gain, or see it as a way to cut America's innovative spirit by
investing in litigation that destabilizes our protections for
intellectual property or litigation that simply imposes costs
on innovators in a manner that gives a competitive advantage to
the investors behind the funders.
Despite these clearly distinct incentives, TPLF funders
regularly propagandize TPLF as an access to justice issue to
try to gain supporters, obfuscating TPLF's true contemporary
features by attempting to place a public interest mask on a
massive private profit activity, a type of phenomenon regularly
analyzed in law and economics. It's important not to be
deceived by that mask.
The investment mark of a TPLF is still a pretty dark black
box. The default rule operating in our system is that
disclosure is not required. There are only a handful of judges
and a few States that now require it. Mostly parties and judges
themselves have no idea whether or who is bankrolling the
litigation.
Consequently, there are many known/unknowns, as my
colleague mentioned, things we know or do not know about the
market, like the location, scope, frequency, purposes, and
backer identity of such funding. Because of the lack of
transparency, there are also, many unknown/unknowns, things
that we do not know, and that should scare us given the
potential influence these external forces can have on the
courts.
On one last note, lessons from the study of law and
economics predict that funders will not just have an interest
in increasingly funding specific cases for immediate return.
They also have an independent incentive to fund cases solely to
transform precedent to their advantage or to impose costs
through the change in law. This can include weakening
intellectual property rights that favor their competitors or
that are important to the United States economic advantages of
a foreign nation.
Similarly, those TPLF long-view holders will understand
that it is beneficial to expand the size, scope, and frequency
of tort liability because they can increase their payouts if
there are more payors, i.e., more legally liable parties. They
will invest in loosening constraints on the supply of favorable
judgments, irrespective of the legal or policy merits of such
an expansion.
Thank you for examining this issue. Thank you for the time
to speak. Thank you again for the opportunity to provide this
testimony. I look forward to your questions.
[The prepared statement of Mr. Kochan follows:]
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Mr. Issa. Thank you.
Ms. Sahani.
STATEMENT OF VICTORIA SAHANI
Ms. Sahani. Good afternoon, Chair Issa, the Ranking Member
Johnson, the Ranking Member Nadler, and the Members of the
Subcommittee. Thank you for this opportunity to testify today.
My name is Victoria Shannon Sahani. I serve as Associate
Provost for Community and Inclusion at Boston University, and
as Professor of Law at Boston University School of Law. I am
honored to have the opportunity to share more than 12 years of
expertise in third-party funding, and more than 15 years of
experience in international arbitration involving global
entities and cross-border disputes.
In addition to publishing numerous law review articles,
book chapters, and essays on third-party funding, I coauthored
the first book in the world on third-party funding, titled,
``Third-Party Funding in International Arbitration.'' I also
served on the global Third-Party Funding Task Force from 2013-
2018, and contributed to drafting the task force's 2018 final
report.
I am honored to be invited to contribute my expertise to
this critically important dialog. My testimony reflects my
personal research and views, not the views of Boston University
or any other organization.
I will assert three main points: First, the third-party
litigation funding industry serves three separate populations:
Consumer third-party funding primarily for individual parties;
commercial third-party funding primarily for business parties;
and law firm financing. There is some overlap between these
three populations, and all three populations can benefit from
third-party funding.
A litigant's inability to afford access to the Federal
Courts, or access to experienced legal counsel due to financial
constraints represents a fundamental flaw in our justice
system. Third-party funding provides funding for both consumer
and commercial litigants to adjudicate their rights and to law
firms, seeking working capital for their case portfolios. This
is also true in patent litigation where patent holders and
their legal counsel can benefit from the third-party funders'
resources to vindicate patent rights.
Second, third-party funding is one tool that can assist
with expanding access to justice, but it is not a panacea.
Third-party funding illuminates but does not fix the cracks in
our justice system that we as a society must repair.
Nevertheless, the potential for third-party funding to deliver
access to justice more broadly is even greater than we
currently realize.
As I have described in my research, the next frontier for
increasing access to civil justice involves a multifaceted
approach, including encouraging pro bono or lower cost funding
as a subset of each for-profit funder's portfolio, providing
access to justice for plaintiffs with nondamages claims or
defenses, including patent holders seeking nonmonetary
declaratory determinations of patent validity or infringement,
and providing access to justice for parties with legitimate
claims that are exceedingly expensive or might be difficult to
prove.
Third-party funding can and should be on the menu of
options available to legitimate parties while we work
simultaneously to make justice more affordable and accessible
to all.
Finally, although national security is outside my area of
expertise, I understand that concerns about national security
primarily stem from the fear that adversaries may use third-
party litigation funding for nefarious purposes, rather than
fear about the existence of third-party litigation funding
itself. We should be cautious not to shut down this new
industry or reduce opportunities for this industry to improve
the administration from justice out of fear.
Third-party litigation funding is a global industry with
legitimate, ordinary business relationships between third-party
funders, funded clients, investors, patent holders, law firms,
and case filings that routinely cross multiple national
boundaries without cause for concern.
Regulation of third-party funding in the national security
context should be tailored to achieve clear goals and not be
overly broad in ways that may inadvertently curtail the entire
third-party litigation funding industry.
Thank you again, and I welcome your questions.
[The prepared statement of Ms. Sahani follows:]
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Mr. Issa. I thank you.
We now recognize the gentlelady from Florida, Ms. Lee, for
five minutes.
Ms. Lee. Thank you, Mr. Chair.
I yield my time to the gentleman from California, Mr. Issa.
Mr. Issa. I thank the gentlelady.
I'm going to go last witness first, if you will. Ms.
Sahani, you perhaps share with the Ranking Member some concerns
about anything that would cause further disclosure of third-
party investors. Is that correct?
Ms. Sahani. Thank you for the question, Mr. Chair. I think
that disclosure is a complicated topic. There are different
types of disclosure, different amounts of disclosure, different
types of information--
Mr. Issa. Would--
Ms. Sahani. Yes.
Mr. Issa. Would you give us the minimum disclosure you
would support?
Ms. Sahani. Sure. Thank you. I would support disclosure of
the name or identity of the funder, and any relevant
information regarding its business address or location. I think
that is reasonable, and given my research globally, that seems
to be the trend.
Mr. Issa. If I could ask, if the plaintiff is allowed to
ask for and receive, in all jurisdictions around--or all venues
around the United States, able to receive information as to
whether the defendant is insured, and how much that insurance
is for. Would a similar reciprocal as to the funder's
investment and/or return, or something along that line be
equally the other side of the same coin?
Ms. Sahani. Thank you for the question, Mr. Chair. My
understanding of the rule regarding the disclosure of the
limits on liability insurance is with respect to the merits of
the case, and any potential damages award, which may be paid by
the insurance policy. Third-party funders do not pay the actual
claim awarded amount. They only pay costs. So, the disclosure
for the purpose of insurance is for a different purpose than
the disclosure for third-party funding agreements.
Mr. Issa. Mr. Goodlatte, how would you feel about this
balancing question? Because we know that there will be people
who perhaps disagree with any transparency, and there will be
those looking for common ground, and I'd like to seek as much
understanding of that today as we could.
Mr. Goodlatte. Well, I think the insurance analogy is
actually a good one, because the parties in most jurisdictions
are able to not only get the information that Professor Sahani
referred to, but can also get an actual copy of the insurance
policy. That contains a lot of useful information regarding how
the strategy of a lawsuit will be pursued, whether you're going
to settle the case and whether the insurance company is going
to deduct the amount of the cost of the litigation from the
overall coverage limit in the case.
Mr. Issa. This is an important question. Would you repeat
that for everyone to understand that they normally do not pay
just for the damages, and in some cases don't pay for the
damages at all, but they actually are paying for the defense?
Mr. Goodlatte. Definitely. That is a very, very common
standard for the insurance company to pay for the cost of the
litigation, which is exactly what the third-party funder is
doing.
Mr. Issa. So, we are dealing with the equivalent, in your
opinion, of the third-party litigant investor who's paying for
the legal fees, and the insurance company who's paying for the
legal fees, at least those two are identical?
Mr. Goodlatte. That's right. I think for a judge, whose
duty is to make sure there's fair and impartial administration
of justice, and given the volume, the efficient need for that
justice to be administered, the judge needs to know what the
terms of that are to be able to facilitate a discussion process
to settle the cases.
If you don't have that information, you wind up with a
situation like the one Mr. Taylor referred to in which the
plaintiff in the Sysco case had a very different objective than
the third-party funder had, and not only did that not result in
settlement of the case, when Sysco attempted to settle the
case, Burford stepped in and said you're violating the terms of
our agreement.
I think the judge and all the parties of the case, not the
jury, not the general public, but the parties of the case need
to know that information for the efficient and fair
administration of justice.
Mr. Issa. Mr. Taylor, the Chair brought up a very
interesting point. Would you agree that even if the jury never
hears or sees any of this, that, in fact, at a minimum the
judge needs to know or has a right to know, and a magistrate
who is doing the early neutral attempt at settlement would
certainly have a right to know this or should?
Mr. Taylor. Absolutely. In fact, the judge that's the
leading reformer on this, Judge Connolly in the District of
Delaware, originally decided he had to come up with a standing
rule to disclose this sort of thing because he was having
lawyers come up to him during cases. He was trying to discuss
in a sidebar some potential resolution and some of the lawyers
were not able to give him a definitive answer there, indicating
to him that there was someone else not in the courtroom who was
directing what was decisions that were going to be made. Now,
that is not a good system. We need to know who is making the
calls to negotiate fair settlements with the interests of all
concerns represented.
Mr. Issa. Thank you. My time is expired.
The Ranking Member is recognized.
Mr. Johnson. Thank you.
I want to recognize the appearance of our good friend Bob
Goodlatte. Always good to see you, sir.
I want to address a question to Ms. Sahani. You stated that
there are some disclosure requirements that you would be
comfortable with. Those seem to be insufficient to suit the
other witnesses. What other disclosures would they be asking
for, and what would be your opinion of going further than just
simply name, address, and the identifying information?
Ms. Sahani. Thank you for the question, Ranking Member
Johnson. This is a debate that has been going on worldwide for
many years, actually. So, disclosure is one of the key features
of the third-party litigation funding regulation movement
around the world, and there's a wide variety of different types
of disclosure that have been requested and different rules that
exist in the international arbitration as well as the
litigation space.
The reasons why further information beyond the identity or
name of the funder and, say, the address or location of the
funder, the reasons why that other information would be
requested would have more to do with whether or not the funder
is, say, for instance, engaged in controlling the litigation,
or whether the funder is trying to participate in the
proceedings in some way, which is unusual. Most funders don't
do this.
In those circumstances, the judge or arbitrator in
international arbitration that has observed such behavior
already has power inherent in their role as judge, or inherent
in their role as arbitrator to request further disclosure of
the funding arrangement, and that has occurred.
So, under the existing rules, judges or arbitrators can ask
for more if they feel more is warranted based on the facts and
circumstances of the case.
Mr. Johnson. So, how would a requirement that more
information than just simply identifying information be
produced? Why is that harmful?
Ms. Sahani. Thank you, Ranking Member Johnson. One of the
reasons why it's harmful is much of the information in a
funding agreement relates to the relationship between the
funded party and the funder, or if it's a law firm, the law
firm and the funder, and that can often involve limitations on
the amount of money that the funder might invest.
So, for example, if the opposing party were to know that
the funder has capped the cost or expenses that they're willing
to pay at a certain amount, then as Mr. Goodlatte, Chair
Goodlatte mentioned earlier, that is litigation strategy to say
they can only spend this much money of the funder's money. So,
to know that in advance gives the opposing side a huge
advantage, a tactical advantage that they wouldn't ordinarily
have if the funded party just had a bank loan or was self-
funding. They wouldn't have that information. So, to require
full disclosure of the funding agreement basically is like
pulling back the curtain on the litigation strategy of the
funded party.
Mr. Johnson. The funded party is typically the smaller guy
in the equation. Is that correct?
Ms. Sahani. Yes. It can be--not always, but often it's the
smaller party, the party that is viewed as either a small
business or individual owner of a patent.
Mr. Johnson. Now, in terms of disclosing the amount of
insurance coverage versus the details of the funding agreement
that the funder has with the little guy, can you talk about the
differences between those two disclosure requirements?
Ms. Sahani. Yes. So, the funding agreement, the disclosure
of the funding agreement to the court is one measure of
disclosure. There's also disclosure to the opposing side, and
both of those disclosure provisions are common. You can see
disclosures to the court on camera, or disclosure to the court
and the opposing side of either, of course, the identity and
the location of the funder. Certain jurisdictions require
disclosure of a few provisions within the funding arrangement
if the funding arrangement is at issue in the case, but
otherwise, that's not requested, and that's different from the
disclosure in the rule that Chair Issa raised with respect to
insurance.
Mr. Johnson. OK. Thank you.
Unlike the Chair of the Committee, I'm going to resist the
urge to move further than my five minutes, so I'll yield back
the balance of my time, and I hope that I will set the example
for the--
Mr. Issa. Mr. Chair--or Mr. Ranking Member, you always set
a fine example.
With that, we go to the gentleman from Kentucky, Mr.
Massie.
Mr. Massie. Thank you, Chair Issa.
Professor Sahani, so we've discussed insurance arrangements
and bank loans, but what about venture capital? Like not
specifically for the purposes of the lawsuit, but let's say
they're investors, angel investors, and they're venture capital
investors in a small company that brings a lawsuit. Is what
we're talking about, would it encompass disclosing all those
investments if somebody gets into a lawsuit, or is it just the
specific financing of lawsuits?
Ms. Sahani. Thank you so much for the question, Mr. Massie.
I presume you mean investors in the fund as opposed to
investors in the party, but please clarify.
Mr. Massie. Investors--let's say a company, just a small
startup brings a lawsuit, and they've got some investors in
their company. I think what we're discussing today is this--I
don't know if it's novel, but it's certainly not what a lot of
people think of when they think of lawsuits, but what we're
discussing today is when you have somebody who finances a
specific lawsuit, right, and putting transparency on that. My
question is, those transparency requirements, would they peel
back the curtain on just investors who hold stock in the
company, for instance?
Ms. Sahani. Thank you for clarifying, Mr. Massie. No, the
current disclosure rules and provisions that we've been
discussing would not necessarily reveal investors in the
company unless one of those investors was a third-party funder
meeting the definition in the disclosure rule. Standard
investors and shareholders that would not be third-party
funders would not be covered by the disclosure rule we have
discussed.
Mr. Massie. Thank you very much. I'm going to yield the
balance of my time to Chair Issa.
Mr. Issa. I thank the gentleman.
Mr. Kochan, you've certainly looked at the agreements we're
alluding to in many cases. Is that correct?
Mr. Kochan. The few that are available, yes. I would--it's
very--
Mr. Issa. What you're saying is, they're not often gotten
even when they're sought?
Mr. Kochan. Correct, because there is no requirement to
turn them over to the court or to--unless the court decides to
create a rule.
Mr. Issa. So, on those that were available to you, similar
to what the gentlelady said, were they--did they have
limitations in what you looked at and how much they were
willing to invest?
Mr. Kochan. I've not seen the limitations of the
willingness to invest. The things that have been exposed are
the control provisions, for example, in the Sysco litigation
that was alluded to earlier, and that is despite the fact that
the funders regularly claim that they do not exercise control.
As we stated, because we don't have access to the contracts,
because there's been high resistance to providing access to
those contracts, there cannot be any generalization as the
funders do not exercise control, and, in fact, the few times
we've seen them they are taking control of the litigation.
Mr. Issa. So, let me give you a hypothetical but I think a
fairly narrow one. If you have a contract between a law firm,
let's say the patent holder, and the investment company, even
if it limits the amount of money it has in it, isn't that
simply a deal that could be renegotiated if more money was
needed?
Mr. Kochan. Absolutely.
Mr. Issa. So, the fact that it might have a limitation
doesn't mean that there is a limitation particularly if the
investor is a Sovereign Wealth Fund, BlackRock, or some other
large--CalPERS, some other large entity?
Mr. Kochan. Correct. As litigation is ongoing, the calculus
may change as to the level of expected costs or other changes
that would lead to renegotiating of that--
Mr. Issa. I've never had negotiation I've been in as a
plaintiff or defendant end up with what we originally estimated
or less. It is only the other way.
Well, isn't it also a question of, if they put a limitation
on it, isn't that, in fact, by definition, a form of control,
because when that money is used up the plaintiff's investor, in
fact, is in a position to then renegotiate the deal, or in some
other way, control whether you settle or not?
Mr. Kochan. Certainly. Anytime you have an opportunity to
renegotiate or any time that the person relying on that
contract has a need to come and ask for permission to do
something more, that you're going to have leverage.
Mr. Issa. Now, for both of you, sort of put your
professor's hats on for a moment, isn't one of the basic
principles of American law, mostly taken from the British, that
you have a right to face your accuser? Is that pretty much what
we all think is normal?
Mr. Kochan. Correct.
Ms. Sahani. Yes.
Mr. Issa. So, if an investor, in fact, is the actual
accuser, in other words, if it's a competitor of yours seeking
to get information through discovery, if, in fact, it's an
entity that you may have disagreements with, or be in direct
competition with, and you don't know who they are, then, in
fact, you're not being faced by your true adversary in this
case, whether they have overt or implied control? Would that be
fair?
Ms. Sahani. Thank you. I think that the question is whether
or not the entity or person financing the case is a real-party
interest. There is arm's-length financing, there is bank
financing through loans, there are parent corporations that
finance the litigation of their subsidiaries all the time.
So, the question of whether or not there is an interested
entity that's funding versus just a financier of some sort
would need to be answered for me to answer your question.
Mr. Issa. Thank you. To be continued.
We'll go to the gentlelady from North Carolina.
Ms. Ross. Thank you, Mr. Chair.
Thank you so much to our panel. This is a really
fascinating subject and I think a very important one.
We've heard quite a bit today about issues patent holders
face in disputes over their intellectual property, on both
sides.
However, third-party litigation funding is not the root of
these problems. These problems have come just from how patents
are enforced.
This Subcommittee, I believe, should be instead focusing on
ways to make the PTAB a fairer venue for patent holders, and
doing so would mean that patent holders with solid claims may
not have to rely on third-party litigation funding.
I introduced a bipartisan, bicameral bill with former
Representative Buck called the PREVAIL Act. That bill would
reform PTAB to address the high rate of patent invalidation.
The bill would require standing for PTAB challengers and limit
repeat petition. It would harmonize burdens of proof at PTAB
and the Federal District Court. It would also end duplicative
patent challenges by requiring a party to choose to sue either
in PTAB or the District Court, because some people do both
venues at the same time and roll the dice.
These measures would be more narrowly tailored to address
the high invalidation rates at PTAB, and these are the first
measures we should take to make our patent system fairer,
rather than measures that might overhaul our entire tort
system.
A broad overhaul would impact not only patent disputes, but
a wide swath of civil claims, which often rely on third-party
litigation funding to move forward at all.
We've heard from our professor that third-party litigation
funding is used in a variety of different ways and sometimes to
give litigants their only method of bringing their claims
forward.
So, pursuing justice in court or at the PTAB is
staggeringly expensive, and that's been established. Without a
policy of reforms to address the root causes of the disparate
access to justice, broadly limiting third-party litigation
funding could threaten our already uneven justice system.
Now, my first question I'll pose to the professors first
and then to the practitioners.
A GAO report found that third-party litigation funders only
accepted about five percent of cases brought to them.
Does this mean that there are some good cases that are
still left on the table even with third-party litigation
funding available?
Ms. Sahani?
Ms. Sahani. Thank you so much, Ms. Ross, for the question.
Yes, absolutely. Third-party litigation funders, in my
understanding from talking with many of them, are very
selective in terms of which cases they choose to fund.
There are a variety of factors that are financial and
nonfinancial that go into that decision, and many cases end up
on the cutting room floor, so to speak, meaning that they don't
receive funding.
This is one of the challenges of the access to justice
piece that I write about in my research, where I say that
funders should fund more cases than the ones that they already
do.
Ms. Ross. Mr. Kochan?
Mr. Kochan. So, the GAO Report is, I believe, a few years
old, correct? So, I'm not sure what that number would be today.
I also think there's a presumption in there that the five
percent that is claimed there are actually meritorious cases.
As mentioned, the funders consider a variety of factors
which may not, in fact, be about merit. Many of them are about
the ease of settlements, the ease of leverage that can be
gained in these cases. So, they're being assessed for their
financial return, rather than necessarily for their legal
claims.
Ms. Ross. Just as they would be with the private bar.
I'm going to move on to my next question.
Does third-party litigation funding replace the need for
equal access to justice reform that gets to the heart of the
issue in our justice system, Ms. Sahani?
Ms. Sahani. Thank you so much, Ms. Ross.
No, it does not replace. Third-party funding is a bit of a
Band-Aid. Again, as I just mentioned, since they don't fund
very many cases, it's not a big enough Band-Aid to help stop
the issue that we have in our legal system with many, many
litigants that don't have access to sophisticated counsel to be
able to pursue their claim or defend against their claim.
Ms. Ross. Thank you.
Mr. Chair, I yield back.
Mr. Issa. I thank the gentlelady.
We now go to the gentleman from South Carolina, Mr. Fry.
Mr. Fry. Thank you, Mr. Chair.
Former Mr. Chair, good to see. It's always a pleasure to
have you in front of this Committee.
Mr. Chair, what do you think, what would you say, for an
average law firm, your run-of-the-mill country lawyer, what
does a contingency percentage usually look like?
Mr. Goodlatte. That's a great question, Congressman.
Generally, I think you're talking about between 25-40
percent.
Mr. Fry. That's usually the standard. That's pretty
standard across, in your experience, across the profession. Is
that correct?
Mr. Goodlatte. Well, in my rural part of the world, maybe
the same as yours.
Mr. Fry. Yes, sir.
Mr. Goodlatte. Of course, so the third-party funder is
going to take something on top of that.
Mr. Fry. Well, and who usually sets that, right? Who
usually sets that percentage? I know it's a contract issue.
Aren't there usually rules in Federal Court or in State Courts
that kind of cap the percentage that a plaintiff's lawyer could
get?
Mr. Goodlatte. There are in some jurisdictions, yes.
Mr. Fry. What do you see the difference in something like
that from a plaintiff's side and something in what the industry
is having with third-party litigation funding?
Mr. Goodlatte. Well, I think the biggest difference is that
that lawyer has a fiduciary responsibility to the court. They
have all kinds of obligations in terms of disclosure, in terms
of how they treat their client, in terms of making sure there
are no conflicts of interest, and so on.
When that attorney or the client decides to bring in a
third-party funder--and these are generally in larger cases--
you develop another potential major conflict that is not
disclosed to the court.
Mr. Fry. Right.
Mr. Goodlatte. Which you have two bosses. You have two
bosses. As we've talked about with this Sysco case, which is
sort of an open look into something that we usually don't get
an open look into because there's no transparency, in those
circumstances, that third-party funder--I saw the one that was
involved in the Sysco case on ``60 Minutes'' last year say,
``We don't have any control over the course of the
litigation.'' Then, we found out that in that case they had a
very nice clause that said, ``You can't settle this case
without our approval.''
Mr. Fry. So, they need the bar license to file the
pleadings with the court, right? They need that. They need the
straw man in the chair to ask the questions. The lawyer is not
actually advising the client. They're just kind of propped up
by the third-party litigation funding component. Is that fair
to say?
Mr. Goodlatte. That's fair to say. There's another danger,
and that is, the lawyer may find themselves with their own
conflict of interest, as they found in the Sysco case, because
Sysco eventually fired their attorneys because they felt they
were representing the third-party funder more than they were
representing their interests when they wanted to settle the
case and the third-party funder--
Mr. Fry. Chair, I looked at the Delaware court. So,
Professor Sahani talked about the disclosure. Her threshold was
disclosure of the name or the entity and the address, right?
That's what she would be comfortable with.
Delaware says that you need to give the identity of the
funders. You also need to describe the financial benefit the
funder stands to gain, so the contingency fee in that
particular case maybe, and then whether or not the funder's
approval is required before settlement.
In addition--is that a good model, would you say, that
Congress should look at or policymakers should look at?
Mr. Goodlatte. I think it's a very good model. That's why I
say, and as the Chair has indicated as well, actually getting a
look at the agreement, which is very similar to getting a look
at the agreement that an insurance company has with a
defendant, would reveal some of these facts as well. You could
avoid that by asking enough of the kind of questions you just
described.
Mr. Fry. Last question, and I'm going to yield the
remaining portion of my time to the Chair. What would you do in
the case of an identity where you have a corporate entity that
has multiple people that are funding the lawsuits? Would that
also be disclosed, or would there just be the corporate entity?
Mr. Goodlatte. Well, I think that it would depend on,
obviously, what the Congress decided to do. I would recommend
that you go deeper than that, particularly when it relates to,
for example, third-party litigation funders who are major
investors in the vehicle that's being used. For example--
Mr. Fry. So, you couldn't hide behind a corporate shell, is
what I'm getting at.
Mr. Goodlatte. Right. What if you had in your hedge fund a
sovereign wealth fund investor, a foreign government-owned
entity?
Mr. Fry. That's what I'm getting at.
Mr. Goodlatte. I think that should be disclosed.
Mr. Fry. Thank you for that.
With the remainder of my time, I yield to you, Mr. Chair.
Mr. Issa. Ms. Sahani, I'll followup on just exactly that.
Do you believe that implied or possible conflicts of
interest as to, quite frankly, the settlement of the case, the
process, anything of that sort, should, in fact, have some
level of transparency that currently it could have under the
orders of a judge, but doesn't have uniformly?
Ms. Sahani. Thank you so much for the question, Chair Issa.
I do believe that if a judge finds in a case that they
think there is behavior taking place--
Mr. Issa. No. I asked about should there be discovery based
on whether those conflicts exist, separate from the judge
having an inkling and doing it. Because, obviously, the judges
can do it now, but normally do not and don't feel obligated to
know whether that happens or not.
Ms. Sahani. Thank you so much, Mr. Chair.
As a matter of course, I think that if the funding
arrangement states that the funder has control of the
litigation or if the funder is a part owner, say an equity
stake in the funded party, then the funder is part of the party
and, therefore, should have more extensive information
disclosed.
In most circumstances the funder is at an arm's length and
is not directing the litigation, in which case I would think
that disclosure is not necessary unless a judge decides so.
Mr. Issa. We now go to the Ranking Member of the Full
Committee, Mr. Nadler, for five minutes.
Mr. Nadler. Thank you, Mr. Chair.
Professor Sahani, could you walk us through why
corporations seeking to avoid being sued by individuals and
businesses who have had their patents stolen might advocate for
burdensome tort reform measures--so-called tort reform
measures--for third-party litigation funding?
Ms. Sahani. Thank you so much, Mr. Nadler.
There are many reasons why corporations might oppose other
corporations suing them with respect to patents. One of those
might be that there's a chilling effect if the litigation is
overly expensive.
Then, the much larger corporation can often avoid having to
answer for its actions if the smaller entity does not have the
financial resources to engage.
So, that's one example.
There may be other possibilities. I am not an expert on
patent law, but I can say, in general, large corporations do
prefer not to be sued by anybody, definitely, but certainly not
their smaller competitors.
So, finding ways to reduce the opportunities for those
smaller competitors to bring cases or for patent holders who
are smaller to bring cases would be beneficial to the business
of a larger entity.
Mr. Nadler. Professor Sahani, advocates for mandated
disclosure suggested that litigation is burdensome or
distracting.
Are burdensome or distracting lawsuits inappropriate for
plaintiffs to bring? Why or why not?
Ms. Sahani. Thank you so much for the question, Mr. Nadler.
Burdensome and distracting are interesting terms in this
context. I would say there's a lot of litigation that we have
that is very valid, that is burdensome. It may be expensive
because it takes a lot of resources to get at the truth.
Antitrust litigation, for one, is very expensive, but it is
important.
So, I think burden, in and of itself, isn't necessarily the
right yardstick by which to measure whether a case should be
brought.
Distracting is an interesting one. I think that a valid
claim in any circumstance is important to bring, and whether or
not it's distracting--I guess the question would be,
distracting from what? The business line of the defendant?
Well, of course it's taking you away from that.
At the same time, many of these large corporations have
many lawsuits and very busy litigation teams. So, it isn't
distracting them any more than any other lawsuit that they may
have, in my view.
Mr. Nadler. If the patents are valid and infringed, are
they still burdensome and distracting?
Ms. Sahani. Well, that--Mr. Nadler, thank you.
That's a valid claim. If the patent is infringed, that's a
valid claim, and burdensome and distracting are adjectives that
I think don't apply to a valid claim that should be heard.
Mr. Nadler. Professor Sahani, why would a plaintiff seek
out funding from a third party?
Ms. Sahani. There are a wide variety of reasons why a party
might seek out funding. One of course is, as we've been
discussing, the access to justice piece, which is where the
party may not be able to afford to bring the claim.
There are also well-resourced entities that actually prefer
to engage with third-party funders as a way to have someone
else deal with the fluctuations and the costs of litigation
rather than have that be on the company's balance sheet.
So, it's not just indigent litigants or litigants that
don't have the resources. It's also well-resourced litigants,
many of which are household names, also use third-party
funding.
So, those are a couple of reasons. I could certainly give
more if you'd like.
Mr. Nadler. So, the lack of funding, obviously, doesn't
indicate a case that shouldn't be brought in the first place?
Ms. Sahani. Yes, that's correct, Mr. Nadler.
Mr. Nadler. On the other hand, why would a third party seek
to place a bet essentially on someone else's court case?
Ms. Sahani. Thank you for the question, Mr. Nadler.
There's also a wide variety of reasons why another entity
might invest in someone else's lawsuit.
Third-party litigation funding as an industry is relatively
new in the United States, but individuals funding the lawsuits
of others is a very old practice.
That's why we had at common law the torts of champerty and
maintenance, because it used to be a very, very long time ago
something that was illegal. We removed that provision in the
United States when we instituted contingency fees.
So right now, we already allow lawyers to finance the
litigation of their clients through contingency fees, and
that's something that's allowed in all 50 States. In some
respects, that is kind of the oldest form of, quote, ``third-
party funding we have in the U.S.''
Now, we've moved to a situation in which we have nonlawyer,
nonpracticing lawyer entities that are funding litigation. They
can do so for profit, they can do so for other motives relating
to the impact that the case might have, as well as to ensure
that certain businesses have their day in court.
So, there's a wide variety of reasons. I'll stop there.
Mr. Nadler. Thank you.
My time has expired. I yield back.
Mr. Issa. I thank the gentleman.
We now go to the gentleman from Virginia, Mr. Cline.
Mr. Cline. Thank you, Mr. Chair.
Welcome to our witnesses. Good to see the former Chair.
I want to ask Mr. Taylor, U.S. companies during the
discovery process are required to share sensitive and
proprietary intellectual property with their opponents. When
undisclosed third-party litigation financing is involved in a
suit, some funders also become aware of information shared
during the discovery process.
As a new Member of the Select Committee on the Chinese
Communist Party, I'm concerned about the potential for our
Nation's intellectual property, that it could fall into the
hands of adversarial competitors.
I was pleased that the Select Committee recommended the
following in the Committee's December 12th report, to:
Determine, and then establish, what guardrails are needed to
address the possibility of foreign adversary entities obtaining
sensitive IP through funding third-party litigation in the U.S.
For litigation in Federal court, require enhanced disclosures
for foreign adversary entities and provide judges with the
authority to require enhanced disclosures for certain entities
under foreign adversary entity control regarding their funding,
and, when appropriate, ownership and connection with the
foreign adversary government and dominant political party.
Some have argued that adversaries like the Chinese Communist
Party would view TPLF as an inefficient way to conduct
espionage.
Do you believe the Chinese Government would undertake such
an effort to obtain critical information from U.S. companies?
Mr. Taylor. Sure. The opportunity is there. No matter how
tightly worded a judge's rules regarding the disclosure of
information is, within a lawsuit, lots of entities,
contractors, people who work for the contractors, end up
getting this material, exponentially enlarging the pool of
potential leakers of this stuff.
We know the Chinese Government is going to do anything it
can, exploit any opportunity it can. So, why not, if you're the
Chinese Government, try, fund as many lawsuits as you think are
strategically in your interest and see what sticks?
Not only see what sticks, see what comes through the sieve,
see what gets leaked. The more cases you file, the more
opportunities you're going to have for there to be a chink in
the system, the judge's order, the rules that otherwise govern.
You're just maximizing your opportunity to get something that
you are not supposed to have.
Mr. Cline. Do you share the Select Committee's concern
about our adversaries accessing sensitive IP through third-
party litigation? Do you support the Committee's
recommendations related to enhanced disclosures?
Mr. Taylor. Yes.
Mr. Cline. Thank you.
Is China the only foreign adversary of the U.S. attempting
to capitalize on third-party litigation funding?
Mr. Taylor. No. We have adversaries all over the world.
There's a case that just came to light recently where Russian
oligarchs who are buddies of Putin were hit with sanctions.
They weren't supposed to have any business dealings in the
United States. Turns out they were funding litigation here, and
that was unraveled by reporters.
So, you have, of course, many opportunities for this to be
exploited. We know they exist. We know they've occurred.
Unfortunately, now we only know they occur in places where
circumstance or the initiative of an individual judge, like
Judge Connolly in Delaware, who is only one of 700 district
judges, has taken the steps to bring some of this stuff to
light.
You can only imagine what else is out there in the
jurisdictions that don't have these disclosure rules in place.
Mr. Cline. Absolutely. Thank you all.
I would yield the remainder of my time to the Chair.
Mr. Issa. I thank the gentleman.
I'm going to followup on the national security question.
Ms. Sahani, I have been choosing to go to you because the
others already agree that we should have more disclosure, and I
want to find the middle ground here if we can.
From a national security standpoint, would it be correct
basically to say that if an investor has a right to see any of
the information related to the case, but is not disclosed,
that, in fact, any and all protective orders and other
information of that sort could, in fact, be negated by that?
In other words, if you're worried about Huawei getting
information and they're the investor but you don't know who
they are, do we have a real risk and should we mitigate that
risk by at least having rules that would govern the disclosure
of these individuals based on the fact that they may, as the
gentleman from Virginia cited, receive confidential information
as a result of their being investors?
Ms. Sahani. Thank you so much for the question, Chair Issa.
I think that one clarification I'd like to make regarding
the role of investors--
Mr. Issa. No, no, no. I'm sorry. I'm going to cut you off
because we're very short on time here. They've called a vote.
Ms. Sahani. Sure.
Mr. Issa. The only question is, is there a risk? I'm
assuming that your answer is there's a risk that should be
considered for mitigation, not do most investors do not
participate in that way. There is a risk. Is that correct?
Ms. Sahani. There is a risk if the investors are receiving
confidential information, which most are not.
Mr. Issa. OK.
Mr. Kochan, briefly, you've researched a lot of this. Is it
true in most cases investors want to know about the case
they've invested in and that that is typically shared.
Mr. Kochan. (a) It certainly can be. (b) The judge has no
ability to even know whether or not they should be issuing a
protective order that even can cabin that disclosure outside of
the parties themselves if they don't know what kind of
financing arrangement is there in the first place.
Mr. Issa. You don't know what you don't know.
The gentleman from Maryland.
We do have a vote, but hopefully we can get it done.
Mr. Ivey. Thank you, Mr. Chair.
Just to followup on that point, 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's sides, like counsel, maybe some of
the experts, but certainly not arm's length investors, right?
Mr. Kochan. Well, part--I assume that was to me?
Mr. Ivey. Yes. Well, to whoever.
Mr. Kochan. So, part of the problem is that if you don't
have mandatory disclosure at the outset, then the judge does
not have enough information to know whether or not to issue any
kind of protective order.
Mr. Ivey. Not the judge, but the agreement between the
parties as part of the discovery process.
Mr. Kochan. The opponent doesn't. I'm sorry. I cut you off.
Mr. Ivey. The agreement among the parties is part of the
discovery.
My understanding is that when the lawyers enter into this
litigation, they start off with protective orders that don't
even necessarily include the judge unless some kind of
enforcement is required. Isn't that right?
Mr. Kochan. So, the opponent does not necessarily know and,
in fact, oftentimes doesn't.
They also don't have a right to an accurate answer from the
plaintiff. 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're--
Mr. Ivey. If you had an agreement that said--you could
draft an agreement that excluded third parties who are not
party to the litigation. Even within the entity that's on the
plaintiff's team, you could restrict who gets access to the
information, right? That happens all the time, doesn't it?
Mr. Kochan. I don't think you could tailor that without
knowing enough about what the agreement is and the contract is
with the other side.
Mr. Ivey. Well, I've got to cut you off, because I think
that's routine, actually, in litigation, to limit those sorts
of disclosures using protective orders.
Let me ask this, because I do share the concern about the
essentially economic espionage if international information
gets to China that could be used in this inappropriate way,
assuming there's no protective orders put in place that would
limit a disclosure, but just for that purpose.
Let me ask you this, because it sounds like what you're
saying is that notice might not be enough. In other words, so
let's say your scenario, you've got Chinese shell companies
that are third party investing in a plaintiff, and then
disclosure is made.
I don't know that would necessarily derail the litigation.
We had the case in Delaware--I think there's two--where they
dropped it rather than disclose.
Isn't it possible that the litigation could continue anyway
after the disclosure is made?
Mr. Kochan. It certainly could continue if no other
regulation were in place.
Mr. Ivey. OK. So, wouldn't you--I'm not trying to put words
in your mouth--but wouldn't a ban on that make sense?
If we're saying that we don't want information--well, I
don't know, let's say it's Apple or some key information from
Microsoft--we're saying we don't want the CCP to get this
information through litigation, right? Why would notice be
enough? Don't we want to try and find ways to actually restrict
the disclosure of that information to those parties?
Mr. Kochan. I don't follow. Restrict what disclosure to
which parties?
Mr. Ivey. The confidential information you're worried
about.
Mr. Kochan. If something is needed beyond disclosure, I
suppose that's something to consider. The one thing that we
know from the existence of the disclosure requirements, you
mentioned cases have been dropped. We see at least some
evidence that the overall caseload in Delaware has gone down as
a result of this disclosure as well.
So, we will be able to deter a lot of this behavior because
people just don't want sunshine on this. To the extent that it
does provide information, there's different audiences for that
disclosure, which means that if you've got the disclosure, then
policymakers like yourself or State legislatures could use that
information to decide what the next step would be.
Right now, there's not any information to actually make
even some of the generalizations that have been made today
about what this environment looks like because we just can't
see it. So that--
Mr. Ivey. All right.
Mr. Kochan. Those generalizations are dangerous on any side
without knowing more about what's behind the curtain.
Mr. Ivey. Fair enough. I mean--OK. I'll leave it there for
that issue.
My experience with third-party funding was that they
weren't just putting up the money. Maybe China does that
because they don't care about losing the money, but entities
that are actually trying to demonstrate a return or make a
profit off it as an investment are very careful about it. I
think that's consistent with the five-percent number that Ms.
Ross mentioned.
My experience was that many of them wouldn't even--they
didn't want to talk to you until after you had gotten past the
motion to dismiss or some other big landmark in the litigation
so they were sure that they had a reasonable chance of getting
a return on their funds.
Is that something you all have looked at or how--what sort
of limits--how often are companies willing to just come in up
front and fully fund or provide large amounts of funding?
I guess, Professor Sahani, maybe I'll ask you about that.
Ms. Sahani. Thank you for the question, Mr. Ivey.
Funders can come in at any point in a case. So, there's
pre-filing third-party funding. There's also post-filing, as
you just mentioned, after the motion to dismiss or after
they've survived a motion for summary judgment, for example.
There's also post-case filing, which basically means
there's an award or judgment and a party thinks it might be
challenging to enforce, so they may sell the right to receive
the proceeds to a funder who would then--
Mr. Issa. The gentleman's time has expired, so he did have
a question that I think you're not quite getting to, which was,
how often?
Ms. Sahani. I do not have that information in terms of the
statistics. We would--
Mr. Issa. OK. The gentleman I believe has an unanimous
consent he'd like to ask for now.
Mr. Ivey. I do?
Mr. Issa. You do.
Mr. Ivey. I would like to yield back to the Chair.
Mr. Issa. Yield back?
Mr. Ivey. Yes. Oh, I'm sorry.
I ask unanimous consent to enter into the record a letter
by the Council for Innovation Promotion. A letter by inventor
Chris Jones. A letter by the International Legal Finance
Association.
Mr. Issa. Without objection.
Mr. Ivey. Thank you, Mr. Chair.
I yield back.
Mr. Issa. I thank the gentleman.
I now would ask unanimous consent to place in the record a
statement in support of third-party litigation reform funding
and disclosure by the American Property Casualty Insurance
Association; another one, a letter from Jonathan Stroud at
Unified Patents; an article by former Chair McKeon, former
Chair of the Armed Services Committee; a letter from Sysco
Systems, the previously named defendant who made great
discoveries--or plaintiff, I guess it was; a study by the
Center for Climate Integrity; a statement from the National
Association of Mutual Insurance Companies; a letter by the
Institute of Legal Reform; a statement of support by US MADE;
an article by Patrick Tiberi, former Member of Congress; and,
tenth and last, a letter from 14 State Aattorney Generals
regarding third-party litigation funding by foreign
adversaries.
Without objection, all will be placed in the record.
I'm going to be brief, because I'm going to miss the first
vote at this point most likely.
This has been good, but it hasn't been sufficient for many
reasons, and one of them is we haven't had enough time.
So, I would ask all of you if you would take additional
questions. I'm going to ask that it goes on through the next
week break, so you might get them as much as 10 or 12 days from
now, which is an exception to the normal policy, but I believe
we need that. There were Members who weren't able to get there.
I'm going to close by asking a couple of narrow questions.
Ms. Sahani, you've been very helpful, not necessarily in
agreement, but very helpful.
We never talked about in camera review by judges. Would you
support, notwithstanding all of the legislation we might
propose, that, in fact, the right of a defendant who suspects
that, in fact, a third-party investor--for example, outside the
United States, and even somebody who could be very threatening
may exist--that at least the judge should be able to have in
camera review of that with no further harm done?
As a practitioner, each of you, would you say that this is
one of those things that's a no-brainer to say yes?
Ms. Sahani. Thank you for the question, Chair Issa.
Yes, I would agree with in camera review by the judge.
Mr. Issa. OK. Then, obviously, a judge's decision about
whether that goes further is often the case after in camera
review.
Mr. Kochan?
Mr. Kochan. Yes. Because the judge, to fulfill its duties,
must determine who is in control, for example, of settlement
under the Federal Rules of Civil Procedure.
They need to do proportionality review under the Rules of
Civil Procedure. They need to assure themselves of their own
nonethical--nonconflicts for ethical purposes.
There are all kinds of reasons why the judge at the very
least should have this information.
Mr. Issa. Mr. Taylor?
Mr. Taylor. Yes, because the judge has to know the
parameters of the legal ethical obligations of the lawyers.
That includes zealous advocacy, no conflicts, and providing
competent representation. The judge has to be aware of any
limits on that imposed by a funding contract.
Mr. Issa. Chair?
Mr. Goodlatte. For all the reasons cited by my
distinguished colleagues, yes.
Mr. Issa. So as we get to a recognition, I think at the
close that there are potential national security implications,
including the 14 Attorneys Generasl who were placed in the
record, as we recognize that, notwithstanding what often
happens in the case of Sysco and others, there can be conflicts
which need to be understood to be fleshed out for the
possibility of a settlement, and because judges, in fact,
cannot make decisions if they have no information.
For all those reasons, it is fair to say, I believe, that
we've agreed that, in fact, more transparency at a base level
needs to be there.
Now the question is, can we get to a level low enough for
the gentlelady and high enough for some of the other Members of
the panel? That is a challenge for Members on both sides of
this dais. As you could see, we're a way off. This a bipartisan
Subcommittee. We have worked well so far.
Mr. Chair, when you did some of this work at the Full
Committee, you pulled an entire and very diverse Committee
together.
So, I want to thank all of you for your comments. We will
followup with questions. I intend to be producing some draft
legislation in the next 10 days, which I will be happy to send
to you. It is a discussion draft, but I want to make sure that
we begin to talk about the parameters of what can be done. My
goal, obviously, in this Congress is to get it done on a
bipartisan basis.
So, I thank all of you. For now, we stand adjourned.
[Whereupon, at 4:01 p.m., the Subcommittee was adjourned.]
All materials submitted for the record by Members of the
Subcommittee on Courts, Intellectual Property, and the Internet
can
be found at: https://docs.house.gov/Committee/Calendar/ByEvent
.aspx?EventID=117421.
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