Delaware Judge Seeks to Expose Patent-Litigation Funders

Do defendants and the court have the right to ask who is funding a particular patent litigation? Chief Judge Connolly in Delaware says they do, and in In re Nimitz, the Federal Circuit denied a request to stop the judge’s inquiry.

The issue arose as a result of two standing orders issued by Judge Connolly. The first standing order requires non-governmental companies and corporations to disclose the name of every person all the way up the chain of ownership who has “a direct or indirect interest in the party.” 

The second standing order applies when third-party persons or entities are “funding [] some or all of the party’s attorney fees and/or expenses to litigate [the] action … in exchange for” a benefit such as a financial interest contingent on the result of the case. The party must identify the third-party funder and whether the third-party funder has the right to approve litigation or settlement decisions. If the third-party funder has approval rights, then the party must disclose “the terms [] relating to the approval” and a “brief description of the nature of the [third-party funder’s] financial interest” in the litigation.

In litigation against Buzzfeed, Bloomberg, CNET Media, and Imagine Learning, the district court ordered Plaintiff Nimitz Technologies LLC (“Nimitz”) to certify it had complied with these standing orders. “Nimitz failed to timely respond,” resulting in the court issuing an order “to show cause why it should not be held in contempt.”  Nimitz then filed an updated disclosure statement naming Mark Hall as the sole owner and member of Nimitz, along with representing to the court that Nimitz “has not entered into any arrangement with a Third-Party Funder ….”

Later the district court became aware that IP Edge LLC was assigning patents to various LLCs, who in turn were acting as plaintiffs in patent cases filed in the District of Delaware. An exhibit indicated that Mr. Hall had a connection with IP Edge LLC, so the court ordered Mr. Hall and Nimitz’s counsel to appear before it on November 4, 2022, to explain the connection. After the hearing, the court ordered production of documents ranging from communications between Mr. Hall, Mavexar, and IP Edge to the formation of Nimitz, its assets, its potential scope of liability from obtaining the patent, and the potential settlement of various cases.

As a result of the order for production of documents, Nimitz filed a petition for mandamus with the Federal Circuit, arguing the document production order is inconsistent with legal precedent and requires disclosure of confidential and attorney-client privileged documents based solely on the district court’s vague concerns. The Federal Circuit stayed the document production pending a review of the petition. 

The district court then issued a memorandum outlining its concerns. Specifically, the district court had a number of questions as a result of the November hearing and related documents before the court. “Did counsel comply with the Rules of Professional Conduct” and the orders of the Court? Are there other real parties in interest who were not identified? “Have the real parties in interest perpetrated a fraud on the court by fraudulently conveying [the patent] to a shell LLC” and “filing a fictitious patent assignment with the [United States Patent and Trademark Office] designed to shield those parties from potential liability.”  The district court asserted that the document production was “manifestly relevant” to resolving the court’s questions and concerns.

In reviewing the petition for mandamus, the Federal Circuit acknowledged that the relief requested by Nimitz is a “drastic and extraordinary remedy” only available when there is “no other adequate means to attain the relief,” the right is “clear and indisputable,” and the remedy is “appropriate under the circumstances.” 

In denying Nimitz’s petition, the Federal Circuit found Nimitz did not meet this test. First, the district court indicated that at the time of production documents could be designated as confidential, and Nimitz could argue that certain documents were subject to attorney-client privilege or work product protection. Therefore, Nimitz did not show “that mandamus is its only recourse to protect privileged materials” or, in light of the district court’s concerns, that Nimitz had “a clear right to preclude in camera inspection under these circumstances.” “The district court did not seek information simply in order to serve an interest in public awareness, independent of the adjudicatory and court-functioning interests reflected in the stated concerns.” The Federal Circuit, however, “took no view on whether there has been any violation of the particular legal standards that correspond to the concerns recited by the district court.”

Such orders are likely to be subject to additional challenges, and time will tell what impact such orders will have, if any, on the future structure of patent litigation funding entities.