Judge Connolly Nixes Disclosure Pushback As “Devoid Of Merit”, Floats Possible Sanctions – Patent

Litigants have been closely watching the “Series of Extraordinary Events” that have
been playing out in Delaware as the result of a pair of standing
orders issued by Chief Judge Colm F. Connolly in April, which
require the disclosure of details on funding and corporate control
for parties in his courtroom. Recent weeks have seen a group of
related plaintiffs taken to task by Judge Connolly for their
noncompliance with these orders, including their failure to
disclose links to monetization firm IP Edge LLC and purported consulting firm MAVEXAR LLC—subjecting the NPEs to a
series of revelatory evidentiary hearings and imposing a set of
sweeping orders requiring some of those plaintiffs to produce a
wide-ranging ream of information on their ownership/control,
assets, and legal representation. Judge Connolly has now denied a
motion to withdraw one of those production orders from one of those
plaintiffs, Nimitz Technologies LLC—rejecting it as
“devoid of merit”, and ordering it to show cause why he
should not sanction the entity for failure to provide the required
evidence, as a parallel fight over his probing plays out before the
Federal Circuit.

How We Got Here: The Escalating Back-and-Forth Between Nimitz
and Judge Connolly

The two standing orders at the heart of this dispute were issued
by Judge Connolly in April 2022, one requiring litigants to disclose details
related to any nonrecourse funding arrangements with third parties,
and the other requiring all “nongovernmental
joint ventures, limited liability corporations, partnerships or
limited liability partnerships” to include in disclosure
statements “the name of every owner, member and partner of the
party, 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”. Since then, parties have been
filing new disclosures (addressing the funding question) and
updated disclosures (addressing the corporate disclosure question),
as well as filing voluntary dismissals in cases over
which Judge Connolly presides.

It was not until three months later that the court became aware
that certain parties were filing disclosures that appeared to fall
short of these newly heightened disclosure requirements—in
particular, plaintiffs associated with IP Edge, which has
frequently named individuals with no discernible connections to
patent monetization as managers or managing members but had not
been disclosing those individuals in its filings in the wake of the
standing orders. Yet in July, this noncompliance came to the
court’s attention as the result of a brief filed by
Amazon, citing an RPX article that highlighted IP Edge’s
aforementioned entity formation pattern in litigation filed by
affiliated plaintiff Longbeam Technologies LLC.

Alerted to the issue, Judge Connolly then calendared a series of
evidentiary hearings to explore the extent of this noncompliance
with his new standing orders, roping in several plaintiffs linked
to IP Edge; patent advisory firm Dynamic IP Deals, LLC
(d/b/a DynaIP); or global investment manager Fortress Investment Group LLC. The court held
two such hearings, one on November 4 with respect to Lamplight Licensing LLC, Mellaconic IP LLC, and Nimitz Technologies and
another on November 10 with respect to Backertop Licensing LLC, each a plaintiff tied
to IP Edge. Also set were evidentiary hearings with respect to the
disclosures made by Missed Call, LLC and SAFE IP LLC, both entities associated with
DynaIP (on November 30); by Creekview IP LLC, Swirlate IP LLC, and Waverly Licensing LLC, all also tied to IP
Edge (on December 6); and by VLSI Technology LLC, an entity connected to
Fortress (on December 14—though as noted at the end of this
article, that hearing has since been delayed).

The extraordinary evidentiary hearings held on
November 4 and 10 were wide-ranging, delving into ethical
considerations surrounding the plaintiffs’ engagement with a
party—MAVEXAR—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, among many other issues, big
and small, all the while bumping up against objections concerning
whether the questioning called for the disclosure of communications
covered by attorney-client privilege. Those hearings left the court
with expressed “concern[s]” over the “accuracy of
statements” made in the plaintiffs’ filed disclosures and
over “whether the real parties of interest are before the
Court”—leading Judge Connolly to hand down those extraordinarily sweeping orders, requiring
production to the court of a range of documents related to the
plaintiffs’ legal representation, corporate ownership and
control, assets, and potential liabilities.

Those production orders, in turn, led Nimitz to file a petition
for a writ of mandamus, using extraordinary language to
describe the inquiries underway in Judge Connolly’s courtroom
and prompting the Federal Circuit to stay the district court’s
disclosure order “pending further action” from the
appellate court. Another set of petitions from Creekview IP,
Swirlate IP, and Waverly Licensing soon followed, triggering stays
in those plaintiffs’ district court suits as well. The Federal
Circuit denied Swirlate’s petition two days after its filing,
briefly laying out some of its rationale in a December 2 order.

Nimitz Files Motion to Withdraw—and Judge Connolly
Doubles Down in Response

On November 8, the same day that the Federal Circuit denied
Nimitz’s petition and lifted the stay, the plaintiff filed a
district court motion to withdraw Judge Connolly’s
production order, challenging each of the broader concerns that the
court used to justify that order through its ensuing explanatory
memorandum.

As detailed in RPX’s recent coverage, Nimitz objected to Judge
Connolly’s questioning over whether its counsel had complied
with professional rules, asserting that Delaware attorneys may
properly interact with their client through a nonlawyer
intermediary (i.e., MAVEXAR) as long as the client gives consent
(here, allegedly provided by Nimitz’s owner/manager Mark Hall).
The plaintiff further pushed back on Judge Connolly’s concerns
over whether it had made sufficient disclosures: for those related
to funding sources, Nimitz asserted that it had no funding that
fell under the court’s definition of “non-recourse”.
As for whether it had failed to disclose a hidden real party in
interest, the NPE contended that under a proper reading of the
Patent Act and related rules, the identity of a real party in
interest is irrelevant to patent infringement and cannot be probed
by the court at all. Nimitz additionally disagreed with Judge
Connolly’s concern that IP Edge and MAVEXAR had committed fraud
on the court through the assignment of a patent to a shell LLC
(i.e., Nimitz) to insulate themselves from liability—opting
to read this language as referring to the propriety of the
assignment’s recordation and arguing that the assignment is
valid because it was neither a “forgery” nor
“procured by fraud”.

Nimitz further raised challenges to the court’s authority to
issue the orders in the first place, including that Judge
Connolly’s so-called “inquisition” was not, as the
court asserted, a permissible use of its inherent power. Another
issue, per Nimitz, is that it is allegedly not bound by the
underlying standing orders because they do not apply to limited
liability companies, as the text of the order only
mandates disclosure by each “nongovernmental joint venture,
limited liability corporation, partnership, or limited
liability partnership” (emphasis in original quote);
“[n]othing in the Standing Order requires any disclosure by an
LLC which is not named in the Standing Order”. Nimitz
additionally contends that it is not bound to file a disclosure
under Rule 7.1, cited by Judge Connolly as the basis for the
ownership/management standing order, because that rule allegedly
just binds a “‘nongovernmental corporate party,’ and
does not apply to limited liability companies or LLCs as a matter
of law”. Yet another purported basis for the reversal of the
production order was Judge Connolly’s alleged bias: Nimitz
insists that he has drawn so many conclusions through his inquiry
that he is not sufficiently impartial and must therefore recuse
himself.

On December 14, Judge Connolly issued a brief order that “summarily” denied
Nimitz’s motion to withdraw, deeming the request “devoid
of merit”. While the court thus did not rebut all of the
plaintiff’s arguments in detail, he addressed two issues that
“have also been raised in related actions”. First, Judge
Connolly rejected Nimitz’s argument that the standing orders do
not apply to limited liability companies; to the contrary, he
observed that courts, “including the United States Supreme
Court and the Federal Circuit, routinely refer to limited liability
companies as ‘limited liability
corporations'”—citing numerous examples from both
courts, including, for the Federal Circuit, cases dealing with that
corporate form in Delaware, Texas, Nebraska, Michigan, and Texas.
Indeed, Judge Connolly noted that “[t]he last four Chief
Judges of this Court all referred to limited liability companies as
‘limited liability corporations'”. That courts have
treated these terms as interchangeable, Judge Connolly bluntly
underscored, “makes sense because the terms are
synonyms”, noting that the latest edition of Black’s Law
Dictionary defines a “company” as “[a]
corporation—or, less commonly, an association, partnership,
or union—that carries on a commercial or industrial
enterprise”.

Judge Connolly also addressed Nimitz’s allegations that his
impartiality was in doubt, as it also claimed in the
mandamus petition denied last week, based on the fact
that—according to the plaintiff—he “has already
publicly adjudged Nimitz and its counsel guilty of fraud and
unethical conduct”. The problem with that characterization,
found Judge Connolly, is that it directly contradicts portions of
the explanatory memorandum that he issued alongside the production
order, in which he stated that he “purposely did not repeat .
. . [his] concerns about counsel’s professionalism and
potential role in the abuse of the Court because [he had] made no
definitive conclusions about those issues, and [he] did not want to
unnecessarily embarrass counsel”.

That same day, Judge Connolly also issued an order requiring Nimitz to “show cause as
to why it should not be sanctioned for failure to comply with the
November 10 Memorandum Order” requiring production of
evidence—noting that the Federal Circuit had denied its
mandamus petition and lifted its stay of that order on
December 8, on what would have been the original deadline for
production. Yet Nimitz had not requested an extension, which Judge
Connolly states he “would have granted”. However, he
indicated that the door may still be open for the plaintiff:
“[I]f Nimitz shows cause for its failure to comply with the
November 10 Memorandum Order, I would still be inclined to grant
such a request”. Nimitz has not yet made any filings in
response to the show cause order, or the order denying its motion
to withdraw, as of this article’s date of publication.

Petitioners Respond in Related Mandamus Proceedings

With the rejection of Nimitz’s latest district court motion,
and the Federal Circuit’s denial of its mandamus
petition, the next developments in this saga may come in the
remaining mandamus proceedings brought by Creekview IP and
Waverly Licensing, in which parties and amici have been briefing
the issues at play.

The briefs from defendant-appellees AT&T (AT&T
Mobility), Granite River,
Jabra, and Skullcandy, all filed
by the court’s December 9 deadline, each either declined to
defend the production order or otherwise opted not to participate,
with AT&T and Jabra citing a settlement and dismissal with
prejudice, respectively, as foreclosing any further participation
on their part.

Concurrently, amici have begun to weigh in as well,
Intel filing briefs in both proceedings, as has
the US Chamber of Commerce, together with Lawyers for Civil Justice
(LCJ). Intel—facing an upcoming hearing in the VLSI
litigation—acknowledges that its amicus briefs
largely track the one filed in the Nimitz proceeding, again arguing
that Judge Connolly’s new standing orders on litigant
disclosures “serve important purposes, including helping the
court screen for potential conflicts and promoting the public
interest in transparency”. Intel characterizes both of these
goals as “critical in an era of opaque litigation funding and
hedge-fund driven litigation, in which investors gamble on inflated
damages awards and serial litigation, while concealing their
identities and involvement behind shell NPEs”.

The US Chamber of Commerce and LCJ weigh in “to address a single narrow (but
fundamental) question raised by the Petition: whether issuance of
the challenged Standing Order Regarding Third-Party Litigation
Funding Arrangements (‘Standing Order’) was an abuse of
discretion warranting the issuance of a writ of
mandamus“. Their answer is no, arguing that Judge
Connolly, through that particular order, “properly did what a
growing number of courts are doing, which is inquiring whether
cases over which he is presiding are being funded through
third-party litigation finance (‘TPLF’)—the practice
by which non-parties pay money to a litigant or his counsel in
exchange for a contingent interest in proceeds from the
litigation”. The goals achieved by such disclosure, according
to these amici, are to avoid the improper use of
litigation, to reduce potential conflicts of interest, to ease
settlement, and to “unearth potential threats to U.S. national
and economic security to the extent that a case is being funded by
foreign money—e.g., sovereign wealth funds, which are
increasingly a source of lawsuit funding in this country”.

On December 13, Creekview IP and Waverly filed virtually
identical briefs in reply to the amici (see here and here), challenging both the underlying
procedural bases for their arguments as well as their positions on
public policy. As to the former, the petitioners argue that under
Federal Rule of Civil Procedure 83(b), standing orders may only
“be entered when there is no other controlling law . . . and
the Federal Rules are silent on the issue”—whereas here,
Rule 7.1 governs disclosures. Per the Advisory Committee behind
those rules, the petitioners allege, Rule 7.1 can only be
supplemented via a local rule, the establishment of which requires
a district court to “‘act[] by a majority of its district
judges’ and only after ‘giving public notice and an
opportunity to comment'”. As a result, since the standing
orders were implemented by a “lone district court judge”
with no “public notice or opportunity to comment”, their
issuance was an “abuse of discretion”. The petitioners
further argue that the standing orders exceed the proper reach of
the court’s inherent power, countering claims to the contrary
from amici Intel, the US Chamber of Commerce, and LCJ.

Additionally, the petitioners contend that the standing order
related to disclosure of corporate control (the “Rule 7.1
order”) is “a poster child for requiring too much”
due to the breadth of information required. The covered entity
types would be burdened with excessive production, they argue,
while “allowing other types of entities to skate by without
any disclosures (e.g., corporations, limited liability companies,
and trusts)”. For example, they claimed that a limited
liability partnership would have to “disclose every
stockholder and potentially take discovery from stockholders who
are also partnerships to determine their owners”; in contrast,
“publicly traded corporations would only need to comply with
the disclosures of Rule 7.1 (any parent corporation and any
publicly held corporation owning 10% or more of its stock) and
privately held corporations would disclose nothing”. (Of
course, this argument stands in direct contrast to Judge
Connolly’s with respect to limited liability companies, which
he defines as synonymous with limited liability corporations.) As
for the funding-related standing order, they allege that if its
purpose is really to help the court avoid conflicts, the name of a
covered party would be sufficient, indicating that the other
information sought (address, place of formation, whether approval
is needed for litigation or settlement decisions, terms and
conditions of the funding, and a description of the funder’s
interest) exceeds what is needed in this context.

The petitioners further argue that the orders’ limited scope
undercuts their intended purpose from a policy perspective: by only
requiring disclosures from certain types of entities, they are
“not seeking who controls the litigation”. Additionally,
they contend that the standing order related to third-party
funding, in particular, does not adequately promote transparency
because it does not require the disclosure of third parties who
control litigation but “don’t provide non-recourse funding
or receive a financial interest”.

Rather than promoting the policy goals highlighted by the
amici, the petitioners allege, the orders “are
biasedly attacking entities the district court has deemed to be
villains while ignoring entities who do not bother the district
court’s sensibilities”. Those “villains”, per
the petitioners, are the “two classes of parties” that
are purportedly the sole focus of the orders’ interest:
“(1) those who do not have the financial ability to fund the
litigation without such non-recourse funding and (2) risk averse
entities”. Allegedly excluded from the funding orders’
reach, they explain, are funding arrangements for defendants and
situations where a company secretly funds litigation against a
competitor without expectation of financial gain:

Notably, the Third-Party Funding Standing Order is not
interested in whether defendants are receiving financial
assistance, or an unknown third party is controlling the defense of
a litigation. . . . For example, a third-party may approach a
defendant who is financially unable or unwilling to defend the case
and offer to control and fund the defense for the sole purpose of
secretly attacking a plaintiff. The Third-Party Funding Standing
Order is also not interested in companies secretly ganging up on a
competitor. For example, a third-party may fund an unrelated
company to sue a mutual competitor but, if the third party does not
have financial interest in the litigation, then it would not need
to be disclosed under either Standing Order or Federal Rule.

Note that the standing orders make no reference to plaintiffs or
defendants, extending their requirements to every “party”
in Judge Connolly’s court.

The Federal Circuit has not yet ruled on the Creekview IP and
Waverly mandamus petitions. In the meantime, those pending
proceedings may continue to impact other litigation affected by
Judge Connolly’s disclosure orders. The most immediate example
is the VLSI litigation; while an evidentiary hearing was scheduled
in that case for December 14, as noted above, Judge Connolly
postponed the hearing two days before that date, ordering that it
“will be rescheduled” until after the Federal Circuit
rules on those mandamus requests. He has also allowed the
parties to submit further responsive briefing to the parties’
prior memoranda addressing the disclosure issue, due by January
13.

More on those latest arguments in the VLSI case, as well as
additional recent history in the IP Edge and DynaIP matters
impacted by the April standing orders, can be found here.

Originally published on December 16, 2022

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