Federal Circuit Halts Judge Connolly’s Comprehensive Disclosure Order
- November 18, 2022
Category: TPLF, Top InsightTag: TPLF
The rapidly escalating battle over disclosures in Delaware has suddenly hit a wall. In April 2022, Chief Judge Colm F. Connolly issued two new standing orders that required parties before him to reveal information related to funding arrangements and corporate control, thereby pushing many plaintiffs to file new or updated disclosures. Among those plaintiffs were entities associated with Texas monetization firm IP Edge LLC, which have frequently named individuals with no discernible connections to patent monetization as managers or managing members. Yet those relationships soon came under the microscope after Judge Connolly flagged several of its plaintiffs’ disclosures as insufficient and forced a variety of individuals linked to those NPEs to testify in person on November 4 and 10. Those hearings left Judge Connolly with “concern[s]” over the “accuracy of statements” made in the filed disclosures from three of the plaintiffs, and over “whether the real parties of interest are before the Court”—leading him to order those NPEs to disclose a range of information related to their legal representation, corporate ownership and control, assets, and potential liabilities. However, the Federal Circuit has now stayed one of those orders while it considers a mandamus petition from one of the impacted plaintiffs, Nimitz Technologies LLC, leading to stays in cases from the other two.
IP Edge Files New Disclosures—and Judge Connolly Finds Them Lacking
Questions have long surrounded IP Edge over its entity formation structure: What role, if any, does the named managing member play with respect to his or her LLC and its activities? Is IP Edge’s role limited in any way? What contracts govern the relationship between IP Edge, each of its litigating LLCs, and each of the managing members, with respect to control and dispensation of any proceeds from each campaign?
However, it was not until Judge Connolly issued his April standing orders that answers to those questions appeared forthcoming—partly as a result of a subsequent series of events triggered in part by Amazon, which alerted Judge Connolly to possible noncompliance issues in a case brought against it by IP Edge plaintiff Longbeam Technologies LLC (1:21-cv-01559). In that proceeding, Amazon lodged an objection to Longbeam’s updated disclosures (filed in July), flagging the fact that the plaintiff had made no reference to IP Edge despite their apparent relationship—citing, in part, a May 2022 RPX article that highlighted the monetization firm’s aforementioned entity formation pattern—and querying the impact such a practice has on the control and management of those entities. On August 17, Judge Connolly granted Amazon’s request to conduct early discovery on issues of standing and third-party funding, finding that the plaintiff’s filed disclosures were lacking. He also stayed the case in all other respects.
Two weeks after the court issued that decision, Nimitz Technologies and the three other plaintiffs here at issue—Backertop Licensing LLC, Lamplight Licensing LLC, and Mellaconic IP LLC—filed updated disclosures of their own that similarly failed to mention IP Edge. Now, though, Judge Connolly appeared to be paying attention: later that month, he scheduled a series of evidentiary hearings for early November, expressing concern, in several memorandum orders, about whether those plaintiffs (and two other, similarly situated IP Edge entities, Creekview IP LLC and Swirlate IP LLC) had complied with his standing order regarding third-party funding and/or about the accuracy of corporate disclosure requirements.
Evidentiary Hearings Reveal New Details but Raise New Questions
As detailed separately in RPX’s coverage here, the hearings involving those four plaintiffs—held on November 4 for Nimitz Technologies, Lamplight Licensing, and Mellaconic IP, and November 10 for Backertop Licensing—touched upon a wide range of related issues, including ethical considerations surrounding engagement with a party that litigation counsel has never met, concerns about the corporate form where an LLC maintains no bank account and its sole member receives payments directly deposited into a personal account, and the differences between a post office box in Texas and a suite in Delaware.
However, one of the key topics discussed was the nature and extent that the plaintiffs’ litigation efforts involved MAVEXAR LLC, a Texas entity formed in January 2013 by IP Edge principals Gautham Bodepudi, Sanjay Pant, and Lillian Woung that has been disclosed as a nonparty with an interest in the outcome of several IP Edge campaigns.
Certain attorneys testifying at the hearings in their capacity as the plaintiffs’ counsel characterized MAVEXAR as a “consulting company”—but, allegedly, not a law firm—retained by said plaintiffs to advise them on patent matters. Yet their testimony indicated that MAVEXAR’s role was far greater than merely advisory, with its role also purportedly including negotiating retainer agreements with counsel, structuring deals with plaintiffs through which they acquired patents and allocated liability for their assertion, and even made all decisions related to the patents’ assertion. The individual managers/owners, meanwhile, appear to have played a more limited role. For instance, Nimitz Technologies owner Mark Hall, a fulltime account manager and salesman with “energy analytic software” company Enverus, testified that Nimitz’s attorneys and MAVEXAR made all litigation decisions while he assumed liability for the patent, in exchange for 10% of the proceeds—a deal he viewed as “an investment, just like stocks”. Testimony from the plaintiffs’ owners and counsel, meanwhile, indicated further overlap between MAVEXAR and IP Edge beyond its control by the latter’s principals, with IP Edge office manager Linh Dietz allegedly recruiting the owners, receiving retainer agreements, and even making travel arrangements for one owner to attend the hearing.
Another area of focus at the hearings was whether the plaintiffs had made sufficient disclosures related to litigation financing in light of Judge Connolly’s requirement that litigants disclose nonrecourse funding arrangements with third parties. At several points during the hearings, Judge Connolly engaged in a back-and-forth with the plaintiffs’ attorneys and owners over whether any financing of their litigation efforts is recourse or nonrecourse. That distinction is key, as litigation funding agreements usually employ nonrecourse investment structures—meaning that the funder sees a return only in the event of a successful outcome and has no further recourse against the client borrower, which typically has no obligation to repay the funder if litigation is unsuccessful. In contrast, recourse financing (or debt) is financing that allows the lender, in the event of default, to pursue full satisfaction from the borrower even after any collateral securing the debt has been collected (in presumably partial satisfaction of the debt), with the borrower’s other assets at risk.
Judge Connolly’s questioning of the plaintiffs’ counsel and owners/managers suggested, at best, some confusion over the distinction between recourse and nonrecourse funding, and in turn what types of funding must be disclosed under the court’s standing order. For instance, while Nimitz Technologies’s attorney, George Pazuniak of O’Kelly & O’Rourke, LLC, attempted to assert a narrower definition of “interested party” based on an interest in the asserted patent, Judge Connolly countered that counsel contingency arrangements would “clearly” have to be disclosed. The testimony of Ronald Burns of Fresh IP, PLC, an attorney for Backertop Licensing, received an even stronger reaction from Judge Connolly, who appeared to suggest that Burns Google the difference between the two after Burns tried to explain his understanding of “nonrecourse”. Additionally, the court’s questioning of Mellaconic IP’s owner Hau Bui, also the owner of a food truck as well as a “fried chicken joint”, revealed that Bui appeared unable to distinguish recourse versus nonrecourse funding with respect to Mellaconic IP.
The questioning also repeatedly bumped up against issues of privilege as asserted by counsel to protect communications involving MAVEXAR—which, again, is allegedly a consulting company providing nonlegal services and not a law firm. While these discussions were not always clear, Judge Connolly did repeatedly overrule objections concerning questions directed to communications in these arguably gray areas.
For instance, Lamplight attorney Jimmy Chong of Chong Law Firm P.A. sought to assert attorney-client privilege over communications related to MAVEXAR’s negotiation of a retainer agreement between Lamplight and Chong, attempting to analogize the situation to a management company negotiating a lease between a landlord and a tenant—to which Judge Connolly pushed back, suggesting that such conversations would not be privileged. Additionally, Nimitz Technologies’s attorney Pazuniak sought to assert the same privilege over conversations apparently involving MAVEXAR and related to the nature of plaintiff’s funding, to which Judge Connolly expressed doubts over the privilege’s applicability “if you’re dealing with the client through a nonlawyer third party”, and potential concerns over the unauthorized practice of law. Moreover, Judge Connolly rebuffed an attempt by Backertop attorney Burns to assert what appeared to be a common interest privilege objection to prevent the plaintiff’s owner, Lori LaPray, from testifying about conversations with MAVEXAR employee Papool Chaudhari, with the court noting that the contract with MAVEXAR says that the company is “is providing only nonlegal services”.
Judge Connolly Orders Additional Disclosures
Judge Connolly followed those hearings by ordering three of the plaintiffs under scrutiny—Lamplight Licensing, Mellaconic IP, and Nimitz Technologies, but not Backertop Licensing—to provide a sweeping range of materials, all related to the various topics of questioning, that are under the “possession, custody, and control” of the plaintiffs, their individual managers, and counsel, due in each case by December 8.
For example, the memorandum order against Nimitz Technologies encompassed material held by the plaintiff itself; Hall, its owner/manager; and O’Kelly & O’Rourke, LLC, the plaintiff’s law firm. Among the requested documents were “[a]ny and all retention letters and/or agreements between Nimitz” and that law firm as well as “[a]ny and all communications and correspondence, including emails and text messages, that Mark Hall had with Mavexar, IP Edge, Linh Dietz, Papool Chaudhari, and/or any representative of Mavexar and/or IP Edge regarding” Nimitz’s formation; Nimitz’s assets, including patents, and its potential acquisition of other assets; the “nature, scope, and likelihood of any liability, including but not limited to attorney fees, expenses, and litigation costs, Nimitz could incur as a result of its acquisition of and/or assertion in litigation of any patent”; the asserted patent itself; “the retention of O’Kelly & O’Rourke, LLC to represent Nimitz in these cases”, as well as the dismissal or settlement of those cases; and the hearing, including the travel arrangements made for Hall.
Communications and correspondence falling into those same categories were also ordered from “George Pazuniak and/or any employee or representative of O’Kelly & O’Rourke, LLC had with Mavexar, IP Edge, Linh Dietz, Papool Chaudhari, and/or any representative of Mavexar and/or IP Edge”. Further sought by the court were Nimitz Technologies’s bank statements, as well as “documents related to Nimitz’s use, lease, purchase, and/or retention” of its office space in Frisco, Texas.
On November 15, Nimitz Technologies filed a mandamus petition with the Federal Circuit (2023-0103), asking the appellate court to reverse the above memorandum order and to “terminate its judicial inquisition of the Petitioner”. None of the other plaintiffs subjected to the hearings have yet filed petitions of their own.
Nimitz Technologies’s Mandamus Petition
In its mandamus petition, filed by Pazuniak, Nimitz Technologies challenges the legal basis for Judge Connolly’s underlying standing order on funding and financial interests, laying out a legal theory that the appellant then cites to call into question his subsequent inquiries through the hearing and memorandum order.
The petition begins by sidestepping the definitional issues related to such interests raised during the hearing—arguing instead that those interests are altogether irrelevant, because courts cannot inquire into real parties in interest at all (and, indeed, the petition itself discloses no real party in interest). According to Nimitz Technologies, this stems from the provisions of the Patent Act establishing that a patentee (including the original assignee and successors in title) has the right to sue for patent infringement (35 USC §§ 100 and 281), which the petitioner characterizes as requiring that the “legal title holder to a patent, and only the legal title holder, could enforce a patent”; while Federal Rule of Civil Procedure (FRCP) 17(a)(1) provides that “[a]n action must be prosecuted in the name of the real party in interest”, and that a party “authorized by statute” may sue in its own name “without joining the person for whose benefit the action is brought” (emphasis in petition).
Nimitz Technologies argues that as a result, Congress has established that “only the legal title holder of a patent—the patentee—can sue and is the only real party in interest” (emphasis added), that a “‘person for whose benefit the action is brought’ was not the proper plaintiff”, and that “‘person[s] for whose benefit the action is brought’ are inconsequential in patent enforcement” (emphasis added). This means, the petitioner contends, that “courts cannot consider facts relating to who might be the beneficiaries of patent enforcement . . . because where the statutes and rules clearly define the sole real party in interest, the district court has no right to choose to pursue other parties in interest”. (Note, however, that recent caselaw acknowledges the propriety of a court directing parties to supplement the record on issues related to the right to sue, standing, and jurisdiction—including one cited in the petition, the Federal Circuit’s 2019 opinion in Uniloc USA v. Apple.)
Per Nimitz Technologies, this reasoning also establishes that there is no “abuse or threat to the judicial system” when a patent holder files patent litigation “without disclosing who might be other parties in interest or who might be making litigation decision”—simply because, in its view, “that is what Congress has demanded. The only threat and abuse of the judicial system occurs is when anyone defies Congress’ choice and attempts to rewrite patent law”. Taking this argument one step further, the petition indicates that Judge Connolly is actually the one causing the exact type of harm that he laments: “The only threat and abuse of the judicial system occurs is when anyone defies Congress’ choice and attempts to rewrite patent law”.
The petitioner cites these arguments—that based on its reading of relevant statutes, Congress has barred the lower court’s inquiry into funding and interested parties—in support of the position that Judge Connolly has thus committed a “usurpation of Congress’ judgment” through that inquiry. This theme of “usurpation” is further carried over into a set of separate objections into Judge Connolly’s ordering of Hall, Nimitz Technologies’s owner, to come to Delaware and testify, which the petition called a “sua sponte inquisition of the Petitioner”.
That purported “inquisition” provides an independent basis for mandamus review, the petitioner argues, based on the Supreme Court’s 1965 decision in Schlagenhauf v. Holder. In that case, the Court found that mandamus review was appropriate to address whether a district court had the power to order a litigant to submit to a physical or mental examination, deemed a “substantial allegation of usurpation of power” (emphasis added), where the question was one of first impression.
The petitioner further contends that this same “usurpation” also extends to the realm of patent policy: According to Nimitz Technologies, courts may only cite patent policy to interpret statutes but may not invoke them to “change the course promulgated by Congress”, the judgment of which purportedly reflects a desire to “avoid the disruptions and invasion of privacy that would be incurred in trying to divine who might have ‘real interests’ in a patent as reflected by the district court’s Orders”. Judge Connolly’s inquiries into Nimitz’s formation and funding was indeed an improper attempt to rewrite patent policy, the petitioner asserts—an “[u]nprecedented [c]rusade” to replace Congress’s patent policy with a “newly created ‘real party in interest’ patent policy”, the novelty of which is purportedly further confirmed by the fact that Judge Connolly solicited briefing from amici on the underlying issues.
The petitioner further argues that Judge Connolly’s “newly created” policy is “inconsistent with” certain “judicial policies” not explicitly defined, though it warns that defendants would now feel free to make baseless requests for similar materials related to plaintiffs’ “finances and strategies” for the real party in interest inquiry—a “concept”, it argues, that “should bring fear to every litigant and the bar”.
Nimitz Technologies also objects to the memorandum order’s mandated disclosure of materials that it argues fall under attorney-client privilege, another topic of debate during the evidentiary hearing. Here, the petitioner argues that the communications, as allegedly “manifestly made in confidence for the purpose of obtaining or providing legal assistance for the client and were made between privileged persons”, are protected as to MAVEXAR because the company was acting as Nimitz’s “consulting agent”—citing certain Third Circuit caselaw (purportedly reflecting the “unchallenged law in all jurisdictions”) as establishing that “‘[p]rivileged persons’ include the client, the attorney(s), and any of their agents that help facilitate attorney-client communications or the legal representation” (emphasis in petition; citations omitted). In addition, the petitioner cites FRCP 26(b)(3)(A) as providing that “work product immunity applies to work conducted by the agents or consultants for counsel or the client”: “Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent)” (emphasis in petition).
The Federal Circuit Stays Judge Connolly’s Memorandum Order
While the Federal Circuit has not yet ruled on Nimitz Technologies’s mandamus petition, it has now stayed Judge Connolly’s memorandum order requiring disclosures from that plaintiff during the pendency of this appeal. The appellate court has also set a relatively tight timeline for briefing, ordering the defendants in the underlying district court actions—Bloomberg, BuzzFeed, CNET Media, and Imagine Learning—to respond to the petition by November 30, whether they “fully defend, partly defend, or decline to defend the challenged order”. Any reply from the petitioner must be submitted within three business days of the defendants’ filing—unless the latter falls on November 24-27, in which case the petitioner’s reply is due on December 5 (still before Judge Connolly’s order would have taken effect).
Meanwhile, Judge Connolly has since granted motions from Lamplight Licensing and Mellaconic IP to stay their active cases before him, including his memorandum orders mandating disclosure, pending the outcome of the Nimitz Technologies mandamus petition. Nimitz had also filed a motion to stay on November 17 but withdrew it after the Federal Circuit issued its stay ruling later that day.
For more on Judge Connolly’s standing orders and the ensuing back-and-forth in the IP Edge cases discussed above, including a detailed overview of the evidentiary hearings, see “Recent Delaware Evidentiary Hearings Characterized as ‘Perverse Prying’ by a ‘Lone-Wolf Prosecutor’ Were Wide-Ranging” (November 2022).