This is the latest in the series titled “NPE Showcase,” where we discuss high-volume non-practicing entities (or as some call them, “patent trolls”). This installment will focus on NPE litigation as a whole, and what to expect in 2023.
The vast majority of patent infringement cases are filed by nonpracticing entities, or “NPEs”. These companies acquire patents with the sole intention of monetizing the patents through litigation rather than selling products or services incorporating the patented technology. Often referred to as “patent trolls,”[1] NPEs buy patents that cover ubiquitous technology in use by some of the largest technology and retail outfits in the country. “Everyone infringes” is an NPE’s dream.
So where do things stand in 2023? The first few weeks have provided a glimpse into what is yet to come, and history provides helpful insight as well. On balance, there is a mixed bag of indicators that suggest a slight decline in NPE litigation with the same household names leading the charge.
I. The Correlation of Economic Conditions and Patent Litigation
Some have argued that NPE litigation will increase this year with the expectation of a recession. But is this recession different?
The prevailing view is that litigation generally increases during a recession. Big Law lawyers find reduced opportunities with cost-cutting corporations reducing their legal spend. In one recent example, the subprime mortgage crisis of 2008 resulted in mass layoffs for over 6,000 Big Law attorneys typically situated on the defendant’s side of the fence.[2] At least some of those lawyers shifted to the plaintiffs side of the courtroom and took cases on contingency to pay the bills.
This year may be similar given the large number of layoffs in the technology industry. According to Layoffs.fyi, more than 55,000 tech employees across 150 companies have been laid off in the first three weeks of 2023.[3] Tech lawyers are likely to find reduced fees from these same companies and may be forced to switch to the plaintiff’s side to stay afloat.
Operating companies are also known to divest patents during a recession in order to increase capital. Large tech companies take a close look at their patent portfolio to determine which dormant assets may be sold off without affecting company performance. For example, the 2008 recession saw a flood of patents hit the market and land in the hands of NPEs. The same recession spurred a boom in NPE litigation, causing NPE cases to outnumber competitor patent infringement lawsuits for the first time.[4] NPE cases became the norm, not the exception, during the last recession. Business was booming.
But is this the case now? Economists are once again predicting a recession in 2023. But this recession may yield a different outcome due to the nature of the recession and the changes in IP litigation over time. The 2023 recession will involve a healthy dose of inflation that will prevent the Federal Reserve from reducing interest rates and flooding the market with capital. A broad study on the subject found “increases in T-bill and real interest rates as well as increases in economy-wide financial risk are generally correlated with significant decreases in patent suits…”[5] That study considered 15 macroeconomic factors across 25 years and found the following:
Patent litigation rates tend to increase in economic downturns characterized mostly by declines in investment and other measures of productivity, provided that credit remains freely available. Declines characterized by the converse situation…are associated with a decrease in litigation rates.[6]
Why is patent litigation so tied to the capital markets? The reason is simple—NPEs need money for two things: to purchase patents and to litigate patent lawsuits. A lack of capital may soften the patent brokerage market just as it would any other market. Fewer transactions mean fewer patents for NPEs to litigate.
A lack of capital may also prevent the funding of the lawsuits themselves. Patent litigation is an expensive endeavor with a full contingency arrangement being more rare now then in decades past. Many plaintiffs lawyers employ a mixed contingency arrangement to reduce risk. Others engage litigation finance firms to fund the lawsuit and take a cut of the damages award or settlement once the lawsuit is resolved. In fact, litigation finance provided $2.8 billion towards litigation in 2021, an increase of 11%. But a lack of capital prevents the funding of the lawsuit—be it from litigation finance or the bank account of the plaintiffs’ bar. Without capital, who is paying for the lawsuits?
The economy is sure to play a part in how NPEs operate in 2023. Will struggling tech firms divest their patents for much-needed capital and give NPEs the ammunition they need to launch swaths of lawsuits? Or will tightening credit arrangements prevent the funding of both the patent purchases and the lawsuits that would follow? The answer is likely a combination of the two, with at least a slight decline in NPE litigation due to the lack of funding to keep the lawsuits in motion.
II. The Major Players are Unlikely to Change
The household names of patent litigation are unlikely to change in 2023. Patent litigation filings were recently dominated by companies such as Cedar Lane Technologies, Bell Semiconductor, and entities owned by IP Edge and DynaIP. IP Edge has filed over 4,500 patent infringement lawsuits under one of its subsidiaries and usually resolves its lawsuits quickly.[7] Cedar Lane uses similar tactics and has filed more patent lawsuits than any other single entity over the past few years.[8]
These NPEs resolve matters quickly and rarely litigate through a Markman hearing. The shear volume of lawsuits is part of the business model—it’s all a numbers game. And there is no evidence to suggest another major player is entering the fray. There is simply not enough available capital for a significant new entrant.
Other NPEs seek larger damages awards with a smaller number of cases. Uniloc, the various Intellectual Ventures entities, some standard setting organizations, and patent-asserting universities fall under this category. These entities avoid the “nuisance lawsuit” tag and sue blue chip companies with high revenues. Here, too, there is no evidence to suggest the major players will change in 2023 in part because of the lack of available capital to bring a new entrant into the fray.
III. The Lawsuits are Likely to be Less Concentrated in W.D. Texas and D. Delaware
The busiest patent venues are likely to see some relief as plaintiffs begin to file their cases elsewhere. Two jurisdictions in particular should see a sharp decrease in volume based on recent actions of their respective chief judges.
A. The District of Delaware
The District of Delaware has long been a patent-heavy forum. In 2017, the Supreme Court’s TC Heartland case increased the District’s caseload even more by requiring plaintiffs to file in the defendant’s state of incorporation or where they have a “regular and established place of business.”[9] Many defendants are incorporated in Delaware so plaintiffs often file there to avoid a jurisdictional challenge. The District became overloaded with cases and was forced to take action to effectively adjudicate the cases.
Chief Judge Connolly issued a handful of standing orders meant to address the wave of patent cases hitting the District. One of those orders issued a rule meant to limit the burden of litigation finance discovery and required the disclosure of “The identity, address, and, if a legal entity, place of formation of the Third-Party Funder(s).”[10] At a recent hearing, Judge Connolly pressed Nimitz Technologies, LLC (“Nimitz”) for details regarding the source of funding and its ties to other NPE heavyweights such as IP Edge. Judge Connolly ordered the owner of Nimitz to appear in person and questioned him extensively on the origins of the plaintiff in the lawsuit. It was then revealed that the owner was not involved in naming the NPE, paid nothing for its patents, and only learned about settlements after the fact.[11] Nimitz later appealed the order requiring further disclosure of its origins, and the Federal Circuit quickly affirmed Judge Connolly’s order.[12]
Plaintiffs may not have the appetite to comply with Judge Connoly’s order and fully disclose the sources of finance that are driving the litigation. The Nimitz hearing was interpreted as Judge Connolly “sending a signal” to the plaintiff’s bar that financial shell games would not be tolerated. It remains to be seen whether litigants will file in the defendant’s “regular and established place of business” rather than their state of incorporation. But the Nimitz case certainly did not attract plaintiffs to Delaware.
B. The Western District of Texas
The Western District of Texas has been the busiest patent forum since the first quarter of 2020.[13] Plaintiffs have flocked to Judge Alan D. Albright’s courtroom due to his perception of favoring trials, avoiding stays, and denying jurisdictional challenges from defendants wishing to move the case to another forum. But a recent order from W.D. Texas Chief Judge Orlando L. Garcia established a new rule that came into effect in late 2022. Namely, all patent cases filed in the W.D. Texas will be randomly assigned to one of the district’s 12 judges.[14] The lack of an “Albright guarantee” has already caused a precipitous drop in patent cases filed within the Western District of Texas.[15]
IV. Conclusion
NPE litigation drives the overall patent litigation conversation. NPEs file a vast majority of all patent cases and receive significant damages awards or settlements. They have connections to litigation finance outfits who can fuel the enforcement of their patents and further connections to capital markets that fund the purchases of patents in the first place. But changing financial times and uncertain patent forums may cause NPEs to temper their enforcement efforts until market conditions become more predictable. That may result in a slight reduction of NPE activity across the country.
[1] It would be ill-informed to paint all NPEs with a broad brush and refer to each of them as “patent trolls.” Yes, a large number of patent cases are nuisance lawsuits brought by so-called “trolls” and such lawsuits are normally resolved with a modest settlement amount. Others, however, extend into the latter stages of litigation by demanding a larger payment to resolve the suit. Still other NPEs are public universities that aim to monetize the research of their professors. Not all NPEs are patent trolls.
[2] “What the 2009 Legal Layoffs Were Really Like,” https://abovethelaw.com/2016/09/what-the-2009-legal-layoffs-were-really-like/
[3] Layoffs.fyi website. https://layoffs.fyi/
[4] “What 15 Years of US Patent Litigation Data Reveal About the IP Market,” https://insight.rpxcorp.com/news/65081-what-15-years-of-us-patent-litigation-data-reveal-about-the-ip-market
[5] Marco, Alan C. and Miller, Shawn P. and Sichelman, Ted M., Do Economic Downturns Dampen Patent Litigation? (August 20, 2015). 12 Journal of Empirical Legal Studies 481 (2015).
[6] Id.
[7] RPX Insight – IP Edge. https://insight.rpxcorp.com/entity/1034412-ip-edge-llc
[8] RPX Insight – Cedar Lane. https://insight.rpxcorp.com/entity/1742191-cedar-lane-technologies-inc
[9] TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S.Ct. 1514 (2017)
[10] Judge Connolly Standing Order, https://www.ded.uscourts.gov/sites/ded/files/Standing%20Order%20Regarding%20Third-Party%20Litigation%20Funding.pdf
[11] “Judge Behind Litigation-Funding Probe Unloads After Forced Pause,” https://news.bloomberglaw.com/ip-law/judge-behind-litigation-funding-probe-unloads-after-forced-pause
[12] In re: Nimitz Technologies, LLC, Case No. 2023-103 (Fed. Cir. Dec, 8, 2022) (nonprecedential).
[13] “Judge Albright’s Place Atop the List of Busiest US Patent Judges Threatened by New West Texas Order,” https://insight.rpxcorp.com/news/71316-judge-albright-s-place-atop-the-list-of-busiest-us-patent-judges-threatened-by-new-west-texas-order
[14] Id.
[15] “2022 Patent Dispute Report: 3rd Quarter in Review,” https://www.unifiedpatents.com/insights/2022/10/3/2022-patent-dispute-report-3rd-quarter-in-review.
