Disclosure of Patent Ownership and Litigation Funding – What Is Really Going On In Delaware?
[Disclaimer: This note does not necessarily reflect the views of Osha Bergman Watanabe & Burton LLC or anyone else; it asks more questions than it answers.]
If you’ve been reading the legal news relating to U.S. patent litigation since April 2022, you are familiar with the dispute in progress in Delaware courtroom of U.S. Chief District Judge Colm Connolly regarding patent ownership and litigation funding disclosure requirements in patent infringement cases. The District of Delaware is perennially at or near the top of the list of venues for new patent infringement cases filed, particularly those cases filed by Non-Practicing Entities (NPE).
Before last April, it had been revealed in various court papers filed by different NPEs in unrelated law suits alleging infringement of different patents against different accused infringers, that there was some apparent connection or relationship between a potentially significant number of otherwise seemingly unrelated NPEs that had filed hundreds – actually probably thousands – of patent infringement cases across the United States in recent years, many of those cases filed in the District of Delaware. Chief District Judge Connolly noticed this pattern as well, and issued a series of unusual orders (including “standing” orders applicable to all patent infringement plaintiffs and specific orders directed to the NPEs in certain cases pending in his court). Among other things, these orders require parties to disclose any non-party person or entity that is providing any litigation funding on a non-recourse basis in exchange for “a financial interest that is contingent upon the results of the litigation” or “a nonmonetary result that is not in the nature of a personal loan, bank loan, or insurance.” Another order requires disclosure of every owner and member of the parties, “proceeding up the chain of ownership until the name of every individual and corporation with a direct or indirect interest in the party has been identified.”
What emerged from the required disclosures was that plaintiffs’ lawyers from different law firms seemed to be connected by some network or web of communication between themselves and at least one coordinating entity that, significantly, is not a law firm. In addition, it was revealed that many of the NPEs appeared to be part of chains of interrelated shell companies having no assets other than the patents in suit, and that, at some deeper level, share at least one owner, director, officer, agent, or the like. Chief District Judge Connolly seems determined to peel away the layers of ownership and funding structures until he exposes their basic nature.
The NPEs involved in this dispute have fought hard to resist making the sorts of disclosures required by the Delaware district court’s orders, including filing petitions for mandamus to the U.S. Court of Appeals for the Federal Circuit (CAFC). The NPEs have argued that Chief District Judge Connolly has exceeded the district court’s authority, that the orders invade the attorney-client privilege, and are essentially none of the district court’s business. In a truly extraordinary brief filed with the CAFC by Chief District Judge Connolly, he stated the following reasons for issuing the disclosure orders:
(1) Did counsel comply with the Rules of Professional Conduct?
(2) Did counsel and Nimitz comply with the orders of the District Court?
(3) Are there real parties in interest other than the actual plaintiff that have been hidden from the District Court and the defendants?
(4) Have those real parties in interest perpetrated a fraud on the court by fraudulently conveying the patent in suit to a shell company (having no assets), and then filing a fictitious patent assignment with the U.S. Patent and Trademark Office designed to shield those real parties in interest from the potential liability they would otherwise potentially face in asserting patents in meritless and/or frivolous patent litigation?
The CAFC has repeatedly declined to intervene to stop the processes in Chief District Judge Connolly’s courtroom. Patent infringement lawsuits – even apparently winning ones – have been dismissed with prejudice by some NPEs in order to avoid complying with the district court’s disclosure requirements. At least one NPE has asserted that it cannot comply due to existing confidentiality agreements. It appears that a more accurate statement would be that the NPE will not comply as a result of agreements entered into by the NPE itself, not that compliance is actually impossible. Chief District Judge Connolly likely has very little sympathy for an NPE that enters into private commercial agreements that the NPE itself then says prevent it from complying with court orders.
Many companies and interested law associations have commented on this unusual dispute. Some support the disclosure requirements with generalized criticism of the current U.S. patent infringement litigation landscape, comparing the overwhelming prevalence of NPE-filed cases to a sort of private tax on industry. Others assert that the public has a right to know who is using and benefitting from use of the U.S. judicial system, although it is not clearly stated why the interest is any greater in patent infringement cases than in other types of commercial litigation.
On the other hand, some assert that complete transparency would inadvertently harm some inventors, start-up, and universities in unspecified ways. This criticism seems weak, at best.
While there is much debate over the authority for, and wisdom and effects of, the Delaware district court’s disclosure requirements, one question has been noticeably absent from the briefing and discussion in the IP legal press: exactly what are the NPEs (or their masters, owners, funders, etc.) afraid of?
Completely separate and apart from the statutory requirements, what difference does it make to an NPE whether the public knows the true owner of the patent? Why is strict secrecy needed for patent ownership and litigation funding sources? NPEs have vigorously argued that they are entitled to maintain such secrecy, but have not – as far as this author can tell – explained why they need it. Who are the secretive patent owners? Is it possible that there is only one secretive owner, or a small group of secretive owners, behind the modern patent litigation landscape? Is there a “master puppeteer” of sorts? Whether one or multiple individuals, why are they afraid to be identified? Are the secretive owners U.S. citizens or foreign nationals, and does that even matter? A range of other plausible and reasonable questions may be asked, none of which are being asked or answered in the current proceedings.
Commentators have written that NPEs having no assets are becoming a real problem in European patent litigation where the general rule is that the loser pays the winner’s attorneys’ fees. Although European patent litigation is orders of magnitude less expensive than U.S. patent litigation, zero assets is still zero assets, leaving winning defendants to pay their own legal fees and costs and expenses. In the United States, attorney fee shifting from the losing to winning party is exceptionally rare, even in what many disinterested observers would agree are objectively baseless patent infringement assertions, so the issue that the winning defendant cannot hope to recover its fees, expenses, and costs is at least somewhat less of a real concern.
So, we still have the basic unanswered question: what is really going on?