Federal Circuit Denies Request to Block Disclosure of Litigation Funding Information

By: Bryan A. Kohm , Jonathan T. McMichael

Patent assertion entities make up a significant portion of patent litigation practice today. Many of these entities form just days or weeks before acquiring a patent and filing a complaint. Just as often, these entities’ registered addresses point to empty buildings or post office boxes. This practice allows high-volume patent assertion entities to shield themselves from liability for bad faith or frivolous litigation. It also leaves defendants, courts and the public unable to determine who is behind the curtain in a lawsuit.

A dramatic series of events playing out in Delaware district court and escalating to the Federal Circuit puts these practices in the spotlight. In In re Nimitz Technologies LLC, the Federal Circuit denied a plaintiff’s petition for writ of mandamus seeking to halt disclosure of its corporate relationships and litigation funding. While non-precedential and light on substantive legal holdings, this decision suggests that district courts have the authority to require disclosure of all individuals and entities over whose lawsuits they preside, and may shed light on the full extent to which a handful of high-volume patent assertion entities drive patent litigation nationwide.

Some District Courts, Including Judge Connolly in Delaware, Require Disclosure of Interested Parties and Litigation Funding

The appeal arose from district court cases pending before Judge Connolly in the District of Delaware. The Federal Rules require litigants to disclose parent corporations or publicly held corporations owning 10% or more of their stock. But in April 2022, Judge Connolly issued standing orders going a step further. Judge Connolly’s standing orders require all parties to identify “every owner, member, and partner of the party, proceeding up the chain of ownership” to include every individual or corporation “with a direct or indirect interest” in the party. The standing orders likewise require disclosure of litigation funding arrangements where, for example, a third party pays some or all of the attorneys’ fees in exchange for a financial interest in the results of the litigation. These disclosures must identify the third-party funder, describe their financial interest, and state whether their approval is necessary for litigation or settlement decisions. Judge Connolly’s standing orders are not the first of their kind; other courts, including in New Jersey and California, require disclosure of litigation funding or entities with a financial interest in the proceedings.

This is where the plaintiff, Nimitz Technologies, comes in. Beginning in August 2021, Nimitz filed a series of lawsuits in Delaware and Texas alleging infringement of a patent related to data streaming technology. After Judge Connolly issued his standing orders in April 2022, the parties to the Delaware cases were ordered to certify compliance with the new disclosure requirements. Nimitz missed the deadline to do so. And when Nimitz eventually submitted a disclosure identifying only its sole LLC member, the district court set an evidentiary hearing to determine whether Nimitz had complied with the full scope of its standing orders. At the hearing, Judge Connolly focused his attentions on Nimitz’s ownership and control. The hearing revealed that (1) the sole member had been approached by a third party, Mavexar LLC, with an investment opportunity under which he would take ownership of a patent with no money changing hands; (2) Mavexar—not the sole member of Nimitz—controlled the litigation; and (3) Nimitz’s formation documents listed a corporate “suite” address that was a “post office box” that the sole member had never visited. Judge Connolly also learned that Nimitz was not a one-off. Mavexar worked with well-known patent monetization firm IP Edge, and together, these entities were finding and controlling the litigations.

Following the hearing, Judge Connolly expressed concern with what had been revealed:

I think the testimony has to give pause to anybody who really is concerned about the integrity of our judicial system, the abuse of our courts, and potential abuse, lack of transparency as to who the real parties before the court are, about who is making decisions in these types of litigation.

Judge Connolly ordered Nimitz to produce to the court additional information, including retention letters between Nimitz and its counsel; communications between Nimitz, counsel and Mavexar; and information about Nimitz’s finances and presence at its registered “suite” address.

Nimitz Challenges Disclosure Orders as Inquisitorial and Illegal

Nimitz filed a petition for writ of mandamus seeking to avoid the disclosures ordered by the court. According to Nimitz, the district court had embarked on an unlawful “inquisition” to pursue irrelevant issues, exceeding its authority under the Patent Act and the Federal Rules. The defendants responded to the petition, arguing that the district court was fully within its authority to determine the identities of the true litigants before it, and to investigate whether a fraud had been committed on the court.

In a rare turn of events, the district court also weighed in further. Judge Connolly issued a 78-page opinion directly responding to the mandamus petition and detailing his concerns leading up to his order for Nimitz to disclose further information. The order can be described only as blistering: It outlined concerns about counsel’s professionalism and role in abuses of the court; suggested violations of the Rules of Professional Conduct; described a chain of events leading the court to discover that multiple cases pending before it were related in previously undisclosed ways; explained the need to understand whether real parties in interest—such as Mavexar—had been hidden from the court; and questioned whether those real parties in interest had engaged in their activities to try to shield themselves from liability they would otherwise face if they appeared in litigation.

The brewing controversy also attracted many amici, including the Electronic Frontier Foundation, the Public Interest Patent Law Institute, Engine Advocacy, High Tech Inventors Alliance, Computer & Communications Industry Association, the Alliance for Automotive Innovation, Intel, Acushnet, Garmin International, Red Hat, SAP America, SAS Institute, Symmetry, Power Integrations, DISH Network, the ASSA ABLOY group and even the U.S. Chamber of Commerce. All amici supported denial of mandamus and upholding Judge Connolly’s disclosure rules.

The Federal Circuit Denies Relief and Suggests Disclosure Rules Will Be Upheld

The Federal Circuit denied Nimitz’s mandamus petition on December 8, 2022. In its decision, the Federal Circuit disposed of each of Nimitz’s arguments against disclosure. The Court recognized that Nimitz was not required to disclose its confidential or privileged materials on the public docket. But the Court found that—because Nimitz had not yet been found in violation of the standing orders—mandamus relief was premature.

The Federal Circuit stopped short of endorsing Judge Connolly’s standing orders or disclosure rules. The court specifically “express[ed] no view on whether there has been any violation of the particular legal standards that correspond to the concerns identified by the district court or, if so, what remedies (e.g., against Nimitz, its counsel or others) would be appropriate.” Instead, the Federal Circuit relied on the “drastic and extraordinary” nature of mandamus relief to deny the petition in full.

Key Takeaways for Practice

The Federal Circuit’s decision suggests that district courts may require disclosure of litigation funding agreements and behind-the-scenes entities who play a role in litigation. Litigants can expect the trend of increased disclosures to continue—which likely comes as welcome news for defendants facing opportunistic litigation by patent assertion entities.

The decision also has implications for Delaware patent practice. Delaware has long been a favored venue for patent assertion entities, with roughly 20% of patent cases filed there. Filing in Delaware can avoid venue disputes—as many technology companies are Delaware corporations—and also allows patent assertion entities to avoid California courts, where many defendants are based. The Federal Circuit’s refusal to intervene in the Delaware court’s disclosure process may deter future filings in Delaware from plaintiffs hoping to shield the identity of their real owners, or to avoid liability for litigation misconduct.