United States: Disclosure Of Third-Party Litigation Funding Arrangements: An Overview Of Recent Decisions From Top Patent Venues

Recent developments concerning disclosure of third-party litigation funding arrangements in patent litigation could further impact strategic considerations for patent holders and accused infringers alike. Specifically, recent decisions and developments touching on the discoverability of third-party funding arrangements could impact litigants' choices to bring patent infringement lawsuits in certain venues, or whether to seek transfer to a different venue. This article highlights the different approaches courts have recently taken regarding disclosure of litigation funding arrangements.¹

District of Delaware

The District of Delaware has made headlines recently as parties have begun challenging Chief Judge Connolly's standing order requiring parties in all civil cases to identify third-party litigation funders along with certain terms and conditions relating to the funders' relationship with the party.²

For background, the Third-Party Funding Order provides that "where a party has made arrangements to receive from a person or entity that is not a party (a 'Third-Party Funder') funding for some or all of the party's attorney fees and/or expenses to litigate this action on a non-recourse basis in exchange for (1) a financial interest that is contingent upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal loan or insurance," the party receiving funding must, within 30 days of filing an initial pleading or transfer of the matter to the District of Delaware, file a separate statement containing:

1. the identity, address, and, if a legal entity, the place of formation of the Third-Party Funder(s);
2. Whether the Third-Party Funder's approval is necessary for litigation or settlement decisions in the action, and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval; and
3. A brief description of the nature of the financial interest of the Third-Party Funder(s).³

Parties may also seek additional discovery of the terms of a party's arrangement with a Third-Party Funder upon a showing that the Third-Party Funder has the authority to make material litigation decisions or settlement decisions, the interests of any funded parties or the class (if applicable) are not being promoted or protected by the arrangement, conflicts of interest exist as a result of the arrangement, or other such good cause exists.⁴

In November 2022, Nimitz Technologies LLC, a plaintiff-patentee to four patent infringement cases in the District of Delaware, filed a petition for a writ of mandamus seeking to reverse an order from Judge Connolly further inquiring into the plaintiff-patentee's litigation funding arrangements. Further discussion and analysis of the Memorandum Order, Nimitz's petition, and the responses from defendants and amici are discussed here.

Days after Nimitz Technologies filed its petition, the Court issued an 80-page Memorandum explaining "more fulsomely . . . the reasons [it] issued the [November] Memorandum Order."⁵ In addition to explaining its concerns involving possible breaches of the Rules of Professional Conduct, the Memorandum outlines the Court's concerns with Nimitz's arrangements with a non-party, Mavexar LLC—a consulting agency assisting Nimitz with the litigation and licensing of the patent asserted across all of Nimitz's cases.⁶ The Order also explains that the Third-Party Funding Order was issued to "promote additional transparency in th[e] Court's proceedings" and is appropriate in light of Third Circuit law and the roughly 25% of district courts that require disclosure of litigation funders' identities.⁷

The Federal Circuit ultimately denied Nimitz's petition, holding:

Notably, the Federal Circuit "express[ed] no view on whether there has been any violation of particular legal standards that correspond to the concerns recited by the district court."⁹

Earlier this year, the Court convened special evidentiary hearings in previously-settled patent infringement cases to determine whether the plaintiff-patentees in those matters, who were represented by the same counsel, had complied with the Third-Party Funding Order.¹⁰ According to the Court, the special evidentiary hearings were prompted by counsel's conduct in other cases pending before Chief Judge Connolly, namely Nimitz Technologies, which caused the Court to question the accuracy of statements filed by counsel in its other patent infringement lawsuits.¹¹ Objecting to the Court's Orders as an impermissible inquiry, the two plaintiffs, Creekview IP LLC and Backertop Licensing LLC, filed similar "Objection[s] to and Non-Participation in Judicial Inquisition[s]," in which they claimed the Court was engaging in an impermissible inquiry that exceeded the scope of the court's inherent authority. ¹² On August 1, 2023, Chief Judge Connolly held contempt proceedings against Creekview, Backertop, and their respective owners, who did not appear.¹³

In light of these recent developments, there are likely to be both additional challenges to Chief Judge Connolly's Third-Party Funding Order and additional decisions from Chief Judge Connolly further delineating the scope and requirements of the Order. Importantly, the Third-Party Funding Order remains in effect, and parties should expect to disclose the required information within thirty days of filing an initial pleading or transfer to the district.¹⁴

Eastern District of Texas

While parties with cases before Chief Judge Connolly should expect to disclose the identities of any third-party funders as well as additional details of funding arrangements as outlined in the Chief Judge Connolly's standing order—recent rulings in the Eastern District of Texas have allowed such arrangements to remain confidential.

In two 2022 rulings, Chief Judge Gilstrap denied discovery of third-party funding agreements in two separate patent infringement cases.

The first ruling, in Fleet Connect Solutions LLC v. Waste Connections US, Inc.,¹⁵ denied the defendant's motion to compel litigation funding agreements related to the asserted patents on grounds that the agreements bore no relevance to the claims or defenses in the lawsuit. According to the defendant, the agreements were necessary for determining who owns the asserted patents. Specifically, the defendant argued that information regarding whether the plaintiff-patentee had negotiated away its ownership interest in the asserted patents was relevant to whether the plaintiff-patentee could meet its burden to show standing.¹⁶ Chief Judge Gilstrap rejected defendant's arguments, characterizing them as "attempts to engage in a fishing expedition that serves only to shift the burden of establishing proof of standing to Plaintiff" when no good-faith challenge to standing existed.¹⁷

The second ruling, in Hardin v. Samsung Electronics Co., Ltd.,¹⁸ granted the plaintiff-patentees' motion for a protective order regarding documents shown to potential third-party funders. The documents were considered to contain "core work product and . . . memoranda analyzing the patents-in-suit and legal issues related to them."¹⁹ After conducting an in camera review of the documents, the Court found that the documents contained attorneys' impressions and analyses of the asserted patents and were protected under the work-product doctrine. Relying on prior Eastern District of Texas case law, the Court reiterated that "[l]itigation funders have an inherent interest in maintaining the confidentiality of potential clients' information and, therefore, [Plaintiffs] had an expectation that the information disclosed to the litigation funders would be treated as confidential."²⁰

In addition to these rulings, Chief Judge Gilstrap's Standing In Limine Orders explicitly preclude parties "from introducing evidence, testimony, or argument regarding funding of the litigation or regarding any comment on attorney-fee compensation including amounts or structure."²¹

Notwithstanding parties' obligations to produce corporate disclosure information outlined in Federal Rule of Civil Procedure 7.1, deeper inquiries into litigation funding arrangements in the Eastern District of Texas will likely be unsuccessful if challenged for relevance to any claims or defenses.

Northern District of California

California federal courts have also grappled with the issue of disclosing litigation funding arrangements. The Northern District of California has a local rule requiring disclosure of non-parties having a financial interest in the case.²²

The district's Local Rule 3-15 provides, in relevant part:

For purposes of Local Rule 3-15, "financial interest" is given the same definition as 28 U.S.C. § 455(d)(4), the same statute upon which judicial disqualification is determined.²⁴

Despite having local rules requiring additional disclosures probing parties' litigation funding arrangements, case decisions in the district have sided with patentees and prevented further disclosure of funding arrangements.

For example, in January 2019, Judge Illson of the Northern District of California rejected defendant Micron Technology's efforts to obtain discovery regarding persons or entities having a financial interest in the litigation, including the identities of any third-party funders.²⁵ There, Micron argued that the discovery was relevant to uncover potential biases among witnesses and jury members. In response, the plaintiff argued that the discovery was unnecessary because it had already fully complied with Local Rule 3-15 and no potential witnesses or jurors were funding the litigation.²⁶ The Court agreed with the plaintiff, concluding that the discovery Micron sought was irrelevant to any of its claims or defenses.²⁷ The Court curatively added that "if th[e] case proceeds to trial, the Court can question potential jurors in camera regarding relationships to third-party funders and potential conflicts of interest."²⁸ As such, the information into the plaintiff's litigation funding remained private.

Western District of Texas

The nation's busiest patent jurisdiction—the Western District of Texas—does not yet have a local rule requiring disclosure of third-party funders in patent cases, however, the district's Local Rule CV-33 allows parties to use interrogatories to identify publicly-owned non-party companies that have financial interests in the outcome of the litigation.²⁹ While the Court has not yet relieved a party of its obligation to respond to a Rule CV-33(b) interrogatory for exceptional circumstances, disputes challenging parties' compliance with Rule CV-33 are almost assuredly on the horizon. For now, however, parties should make themselves aware of Rule CV-33 and understand the potential effects that requesting or responding to such interrogatories can have on their overall litigation strategies.

Final Thoughts and Considerations

With recent developments highlighting the variety of approaches district courts have taken to address the discoverability of litigation funding arrangements, litigants should take note of their districts' local rules and standing orders regarding the arrangements. With a myriad of factors to consider when evaluating whether to litigate in (or seek transfer from) a particular jurisdiction, adding the discoverability of litigation funding arrangements to the mix could substantially impact the favorability of certain forums.

Footnotes

1. It is worth pause to remember that, at the outset of litigation, Federal Rule of Civil Procedure 7.1 requires nongovernmental corporate parties or nongovernmental corporate intervenors to promptly file a statement with the district court identifying any parent corporation and any publicly held corporation owning 10% or more of its stock (or certifying that no such corporation exists). See Fed. R. Civ. P. 7.1.

2. Standing Order Regarding Third-Party Litigation Funding Arrangements (D. Del. April 18, 2022) (Connolly, C.J.) ("Third Party Funding Order"), accessible via https://www.ded.uscourts.gov/sites/ded/files/Standing%20Order%20Regarding%20Third-Party%20Litigation%20Funding.pdf.

3. Id.

4. Id. at 2.

5. Nimitz Techs. LLC v. Bloomberg L.P., No. 1:22-cv-00413-CFC, Dkt. 23 (D. Del. Nov. 30, 2022).

6. Nimitz Techs. LLC v. Bloomberg L.P., No. 1:22-cv-00413-CFC, Dkt. 23 (D. Del. Nov. 30, 2022).

7. Id. at 6-8.

8. In re Nimitz Technologies LLC, No. 23-103, at 5 (Fed. Cir. 2022) (quotations omitted).

9. Id. at 5-6.

10. The cases are Backertop Licensing LLC v. Canary Connect, Inc., No. 1:22-cv-00572-CFC; Backertop Licensing LLC v. August Home, Inc., 1:22-cv-00573-CFC, Dkt. 28, at 1 (D. Del. Mar. 31, 2023); Creekview IP LLC v. Jabra Corp., No 1:22-cv-00426-CFC; and Creekview IP LLC v. Skullcandy Inc., No. 1:22-00427-CFC.

11. Backertop Licensing LLC v. August Home, Inc., 1:22-cv-00573-CFC, Dkt. 28, at 1 (D. Del. Mar. 31, 2023). The other cases include Backertop Licensing LLC v. Canary Connect, Inc., No. 1:22-cv-00572-CFC; Creekview IP LLC v. Jabra Corp., No 1:22-cv-00426-CFC; and Creekview IP LLC v. Skullcandy Inc., No. 1:22-00427-CFC.

12. Backertop Licensing LLC v. August Home, Inc., 1:22-cv-00573-CFC, Dkt. 52 (July 12, 2023); Creekview IP LLC, No. 1:22-00427-CFC, Dkt. 22 (July 19, 2023). In Backertop's Objection, Backertop alleges that "the Court took it upon itself to contact [Backertop's owner's] non-party employer, with apparently no record of that communication, for the stated purpose of having [the owner]'s employer explain . . . why she can submit to a court order compelling her to appear in person." Backertop, No. 1:22-cv-00573, Dkt. 51, at 18.

13. Leslie A. Pappas, Judge Connolly Weighs Contempt After IP Owners' No-Show, IP Law 360 (Aug. 1, 2023), accessible via https://www.law360.com/articles/1702570/judge-connolly-weighs-contempt-after-ip-owners-no-show.

14. Standing Order Regarding Third-Party Litigation Funding Arrangements, at 1.

15. No. 2:21-cv-00365-JRG, Dkt. No. 59, 2022 WL 2805132, at *2-3 (E.D. Tex. June 29, 2022).

16. Id. at *2.

17. Id. at *5.

18. No. 2:21-cv-00290-JRG, Dkt. #119, 2022 WL 14976096, at *1 (E.D. Tex. Oct. 25, 2022).

19. Id. at *1.

20. Id. at *4 (quoting United States v. Ocwen Loan Servicing, LLC, No. 4:12-cv-00543, 2016 WL 1031157 (E.D. Tex. Mar. 15, 2016).

21. Standing Order on Motions In Limine In Cases Involving Allegations of Patent Infringement and/or Breach of FRAND Obligations, as well as Declaratory Judgment Actions Which Relate to the Same, (E.D., Tex. Aug. 11, 2023) (Gilstrap, C.J.), accessible via https://www.txed.uscourts.gov/sites/default/files/judgeFiles/8.11.23%20Patent%20Standing%20Limine%20Order.pdf.

22. The Northern District of California's local rule is L.R. 3-15. The Central District of California's local rule is L.R. 7.1-1.

23. N.D. Cal. L.R. 3-15(b)(2).

24. Section 455(d)(4) provides, in relevant part: (4)"financial interest" means ownership of a legal or equitable interest, however small, or a relationship as director, adviser, or other active participant in the affairs of a party, except that:

(ii)An office in an educational, religious, charitable, fraternal, or civic organization is not a "financial interest" in securities held by the organization;

(iii)The proprietary interest of a policyholder in a mutual insurance company, of a depositor in a mutual savings association, or a similar proprietary interest, is a "financial interest" in the organization only if the outcome of the proceeding could substantially affect the value of the interest;

(iv)Ownership of government securities is a "financial interest" in the issuer only if the outcome of the proceeding could substantially affect the value of the securities.

25. MLC Intellectual Property, LLC v. Micron Technology, Inc., No. 1:14-cv-03657-SI, 2019 WL 118595, at *1-2 (N.D. Cal. Jan 7, 2019).

26. Id. at *2.

27. Id.

28. Id.

29. Specifically, Rule CV-33 states that the court will not consider objections made to the five listed interrogatories without a showing of exceptional circumstances. The five interrogatories are:

W.D. Tex. Local Rule CV-33(b).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.