United States: Judge Connolly Nixes Disclosure Pushback As "Devoid Of Merit", Floats Possible Sanctions

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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