Big business lobbyists are winning an obscure — but hugely consequential — battle over the future of the judicial system. If these lobbyists continue to get their way, small businesses and their workers will be the biggest losers.
The lobbyists are quietly waging their battle in state legislatures across the country and also in our nation’s capital. They recently scored another victory in Georgia, which became the latest of several states to pass legislation that makes it harder for small businesses to sue larger companies that steal their technology. And Congress is considering making a similar change at the national level through the deceptively named Litigation Transparency Act.
Proponents say these bills will increase fairness and accountability in the legal system — specifically, in patent infringement lawsuits. But in reality, the bills will tilt the playing field in favor of large corporate patent infringers — and deal a massive blow to the small innovators who drive America’s high-tech economy.
The bills make it easier for big companies to engage in “efficient infringement” — in which they make the calculated decision to steal patented technology from smaller firms and startups, instead of licensing it and paying a royalty as required by law. When the victim sues for compensation, the large company uses its resources to drag out the lawsuit until the smaller firm can no longer afford to continue.
This predatory practice is “efficient” because many infringers bet — correctly — that the smaller firms will not have money to file a lawsuit or will run out of money and have to settle the suit for pennies on the dollar. That means big companies end up spending less on legal fees than they’d spend on licensing the technology.
Essentially, they’re betting that crime does, in fact, pay. To combat these deep-pocketed efficient infringers, many inventors and small businesses have begun to enter into partnerships with investors who help fund their legal defenses.
These litigation financing agreements help ensure that infringement suits are decided on the merits of the case, instead of which side has the most money. As a result, the creators of new technologies succeed in the marketplace and earn revenue that can be reinvested into R&D or grow their businesses.
Naturally, infringers don’t want small companies to be able to defend themselves. So they’re lobbying for legislation, like the Litigation Transparency Act, that’d impose extensive disclosure requirements on inventors that seek this outside funding.
Lobbyists claim these disclosures are necessary to prevent foreign powers from providing litigation funding to gain access to trade secrets or damage U.S. businesses. Yet there’s no evidence this happens — and both the courts and the government have already implemented safeguards to block foreign investments that could harm America’s security. Moreover, American inventors often require outside funding to take on wealthy foreign infringers from countries like China.
Nor is there evidence that allowing outside funding has fueled baseless lawsuits, another common refrain from supporters of disclosure requirements. Because investors only stand to earn money if they’re on the winning side of the lawsuit, they’re incentivized to only back strong cases — not frivolous ones. In fact, patent lawsuits have been on the decline for years.
Mandatory disclosure legislation isn’t just unnecessary, however. It would actively make it harder for small innovators to take their claims to court — harming America’s entire innovation economy.
For starters, mandatory disclosure rules would discourage investors from backing innovators, even when those innovators are in the right. Investors often operate confidentially due to the risk of negative press and retaliation from businesses or the government if their identities are exposed. If disclosure of that information were required, many would stop providing support.
Disclosure rules would also force small innovators to reveal the extent of their resources, as well as sensitive legal strategies. That would provide a significant advantage to well-funded patent thieves, who can better afford to turn lawsuits into battles of attrition.
Finally, by creating new bureaucratic rules that only plaintiffs must follow, mandatory disclosure policies would make litigation more complex and costly for small companies. Again, that would only make large corporations’ legal and financial advantages even greater.
America’s small inventors already face major challenges competing with large corporations. We can’t afford to further stack the deck against them. If policymakers make it more difficult for inventors to secure justice when competitors violate their rights, it’ll only slow the pace of innovation and stifle breakthroughs that would’ve enhanced our national competitiveness.
For American innovation to thrive, we must create a system where inventors’ success is determined by the value of their creations, not by the size of their wallets. The Litigation Transparency Act would do the opposite.
Kristen Osenga, the chief policy counselor at the Inventors Defense Alliance, is the Austin E. Owen Research Scholar and Professor of Law at the University of Richmond School of Law.
