With the litigation finance industry reporting record fundraising amid the COVID-19 recession, the impact of third-party funders on the litigation landscape looks poised for continued growth. Expect the debate over disclosure of third-party litigation funding to heat up, as an increasing number of plaintiffs launch campaigns backed by wealthy investors—and their targets argue for greater transparency into funding arrangements. Meanwhile, in recent months, two decisions in patent cases have caught the attention of those monitoring discoverability of third-party funding agreements and communications between patent holders and funders.

Midwest Athletics and Sports Alliance LLC v. Ricoh

NPE Midwest Athletics and Sports Alliance LLC (MASA) has sued each of Ricoh and Xerox multiple times, alleging infringement of more than 20 “printing-related” patents, all originating with Eastman Kodak.

On September 16, 2020, District Judge Joshua A. Wolson of the Eastern District of Pennsylvania issued an order in response to MASA and Ricoh’s joint discovery dispute letters, by which time the parties, according to Judge Wolson’s memorandum, had disputed for “nearly a year” whether certain documents in MASA’s possession are privileged, and therefore not discoverable (2:19-cv-00514).

Ricoh had sought production of documents related to MASA’s acquisition of the Eastman Kodak portfolio, also seeking to compel discovery responses and documents related to any analyses or valuation of the asserted patents.

In June of this year, following a Markman hearing, and with the parties’ discovery dispute still roiling, the court directed MASA to submit a privilege log—an amended version of which was the focus of the court’s September 16 order.

Communications with Litigation Funder Brickell Key Asset Management

MASA asserted the attorney-client privilege for every document on its log, including communications with litigation finance firm Brickell Key Asset Management, which according to the court, has provided funding to MASA (though “[it] is not clear to the Court whether Brickell funded [Masa’s] patent purchase, the instant litigation, or both”).

MASA included on its privilege log many other documents that do not constitute direct communication with an attorney, including communications with Ocean Tomo, which the NPE claims that its legal counsel, Kramer Levin Naftalis & Frankel LLP, hired to “help obtain funding for MASA pursuant to the PPA [patent purchase agreement] between MASA and Kodak”.

“For most, the inclusion of third parties on the correspondence destroys any privilege,” wrote Judge Wolson. “Even for the communications between MASA and Kramer Levin attorneys, the Court cannot determine whether the privilege applies.”

With regard to its communications with Brickell Key, MASA also asserted a common interest privilege. While Brickell provided funding to MASA, it did not acquire an interest in the asserted patents. “That relationship is not enough to create a common interest”, stated Judge Wolson, also noting that one of the documents included on the log is a communication between two Brickell employees. “The Court is hard-pressed to understand how MASA could have privilege in that communication”.

Communications with Litigation Funders Other Than Brickell Key

MASA has also withheld from its production communications with litigation funders other than Brickell Key. “To the extent the documents shed any light on the valuation of the patents at issue in this case, they are relevant to damages”, wrote Judge Wolson. “Moreover, if MASA shared them with potential funders, they are not privileged”. MASA has been ordered to identify for Ricoh the types of documents that it has withheld, “including their subject matter, so that the parties can continue to meet and confer on this issue”. The NPE has also been ordered to supplement its privilege log, with the warning that if it “withholds documents improperly and there is another motion raising similar grounds, the Court will award attorneys’ fees to the prevailing party”.

Impact Engine v. Google

In June 2019, Impact Engine, Inc. filed suit against Alphabet (Google), alleging infringement of a group of “online advertising patents” through provision of its advertising platform (e.g., Google Ads, AdSense, AdWords, Display Ad Builder, Display Network, Doubleclick, Marketing Platform, and Web Designer).

On August 12, 2020, Magistrate Judge Daniel E. Butcher issued an order on Impact Engine and Google’s joint motion for determination of discovery dispute, ruling that any litigation funding agreement(s) and related documents are relevant and ordering Impact Engine to produce all responsive documents that are not otherwise protected from disclosure (3:19-cv-01301).

At issue in the parties’ motion was Google’s Request for Production (RFP) No. 60, which seeks “[all] Documents Regarding any contracts or agreements between Plaintiff and any Third Party concerning (1) This Litigation and/or (2) any Asserted Patent or Related Patent”. Impact Engine responded that it would produce responsive documents, except for “potential agreements related to litigation funding”, which Impact Engine has asserted are not relevant.

In the joint motion submitted to the court, Google argued that litigation funding agreements and related documents are relevant to “Impact Engine’s positions on liability, validity, and damages”, but also to the themes expressed in Impact Engine’s complaint—some of which may be argued in front of a jury during trial.

Impact Engine will likely give a jury the impression “that a damages award will make Impact Engine whole and go to Impact Engine and its employees”, argued Google. “Yet, Impact Engine admits there is a litigation funder”.

Google continued:

The jury deserves to know that, if Impact Engine focuses on the harm to its business and employees in a plea to the jury’s emotions, any damages awarded would not solely go to Impact Engine. That Impact Engine is characterizing this as a competitor case and seeking lost profits increases the potential for jury confusion by this narrative without the full information. Google asked Impact Engine to commit to not making the arguments discussed above at trial in exchange for dropping its request for agreements and documents regarding its litigation funding, but Impact Engine would not do so, and still refuses to do so…

Relevance of Litigation Funding Agreements in Patent Infringement Cases

“Of particular relevance to this case, courts that have denied discovery of litigation funding agreements have also recognized that patent infringement cases present a ‘special litigation context[]’ where courts have permitted this discovery”, wrote Judge Butcher last month. “Indeed, courts have generally ruled that litigation funding agreements and related documents are relevant and discoverable in patent litigation”.

Pointing to NPE Odyssey Wireless, Inc.’s litigation against Samsung (funded, according to court documents, by the litigation finance firm Parabellum Capital LLC), Judge Butcher noted that “another judge in this district ruled [see here] that litigation funding agreements and related documents were ‘directly relevant’ to ‘the valuations placed on the . . . patents prior to the present litigation’”.

“And in Continental Circuits [see here]”, continued Judge Butcher, “the court ruled that litigation funding agreements were relevant to, among other things, ‘refute any David vs. Goliath narrative at trial,’ impeach trial witnesses, and establish ‘the value of the allegedly infringed patents’”.

Impact Engine has since submitted for the court’s in camera review its privilege log for documents responsive to Judge Butcher’s August 12 order relating to litigation funding documents, asserting in a September 22 filing that its litigation funding agreement and documents related to that agreement “are protected from discovery by the attorney work product immunity and/or the common interest privilege”. In a footnote to that filing, Impact Engine states that

[s]hould the Court find that the litigation funding agreement is not protected from disclosure by the attorney work product doctrine or common interest privilege, Impact Engine respectfully requests that it be permitted to redact privileged, irrelevant and highly sensitive fee information, and the identity of the funder from the agreement and drafts of the agreement. Impact Engine has outlined in red the portions of the agreement and draft agreements that it proposes redacting in the copy of the agreement made available for in camera inspection so that the Court may review the proposed redactions. See Priv Log Entry Nos. 2-4.

Judge Butcher has yet to issue a ruling after its in camera review, as to whether the litigation funding agreement in question is indeed discoverable or whether the court agrees with Impact Engine’s proposed redactions.

The litigation finance industry has seen explosive growth since the onset of the coronavirus pandemic, with wealthy investors—including hedge funds and private equity firms—reportedly flooding the so-called “recession-proof asset class” with capital. RPX members interested in taking a closer look at this trend, the litigation finance industry, and the potential impact of third-party litigation funding on the patent space, can learn more via a webinar available on RPX Insight here.