When Judges Court Transparency and Integrity
Alex Moss | December 12, 2022
Amidst debates over transparency and integrity in the U.S. Supreme Court, some district court judges are working overtime to stand up for these principles. Unsurprisingly, entities that want to use courts to rack up profits in patent cases without revealing their identities are fighting tooth and nail to stop them. The recent efforts of one district judge have led patent owners seeking secrecy to push back relentlessly on multiple fronts. That fight is ongoing, but already, it has shed invaluable light on the machinations and beneficiaries of massive patent assertion entities.
The origins of this battle date back to April of 2022, when Chief Judge Connolly of the District of Delaware put in place a Standing Order requiring litigants to disclose third-party funding arrangements. Modeled after a local rule in the District of New Jersey, the order requires parties to identify third-party funders, describe the nature of their interest in the case, and state whether they have control over litigation decisions. Given the lack of litigation over New Jersey’s rule, it would have been reasonable for Judge Connolly to expect the same for his standing order.
But in recent months, the Standing Order is making a splash. In one patent infringement case that patent assertion entity VLSI Technology brought against Intel, Judge Connolly made plain his dissatisfaction with VLSI’s attempt at compliance. VLSI identified its owners as “seven LLCs and three limited partnerships,” stated that one of the LLCs "is wholly owned by a closed end investment fund family comprised of six individual funds," and said that the remaining six LLCs and three partnerships "are investment funds,” all without identifying any of these LLCs or partnerships by name. VLSI did specify, however, that the six individual funds which own that one LLC have combined assets of nearly $2 billion and include “sovereign wealth funds.”
Judge Connolly concluded this disclosure failed to comply with his order and stayed the case—freezing proceedings until VLSI identified the entities funding and benefiting from the litigation. Judge Connolly was also “troubled” by VLSI’s attempt to keep the disclosures it did provide hidden from public view by filing them entirely under seal. He refused to keep the disclosures secret, explaining, “VLSI identifies, and I can think of, no reason that would justify hiding from the public this information.” Instead of complying, VLSI is arguing Judge Connolly’s Standing Order as void.
VLSI is not alone. At least three other patent plaintiffs have failed to disclose what that Standing Order requires. After Judge Connolly ordered them to disclose more information, they asked the Federal Circuit to grant extraordinary relief—a writ of mandamus—and overturn that order. In those cases, the parties did not disclose any third parties with interests in the litigation, but jaw-dropping hearings before Judge Connolly revealed that a third party, Mavexar, had effective control over the litigations and stood to gain the lion’s share of any settlement or litigation proceeds. As others have reported in great detail, witness testimony strongly suggested that Mavexar is a front for a notorious prolific patent acquisition (and covert assertion) entity, IP EDGE. If true, controlling the litigation secretly through Mavexar, would allow IP EDGE to reap the benefits without exposing itself to the negative consequences—both reputational and financial—of filing enormous numbers of meritless lawsuits with the goal of extracting settlements for less than the cost of litigation.
In one of those cases, In re Nimitz, PIPLI, the Electronic Frontier Foundation, and Engine Advocacy filed a brief urging the Federal Circuit to let Judge Connolly’s orders stand. We argued that Judge Connolly’s Standing Order, like New Jersey’s local rule, is a proper and essential means of addressing the explosion of litigation funding seen in recent years. The public has a right to know who is using and benefitting from the use of publicly-funded courts. Allowing entities to do so behind the veil of shell corporations would turn the public’s right of access to court proceedings into a dead letter. It would also render mechanisms for deterring frivolous and vexatious litigation toothless by making it next to impossible to impose penalties on the entities responsible for and motivated to engage in it.
Judge Connolly also weighed in with a 78- page opinion. That opinion is a tour de force. (Although well worth reading, it is also well summarized here .) It makes clear that Judge Connolly’s specific orders in Nimitz are based on his concerns that attorneys may have violated Delaware’s rules of professional responsibility and that Mavexar (and possibly IP EDGE) committed fraud on the Patent Office.
Those concerns are well-founded. For example, with respect to potential fraud on the Patent Office, it seems Mavexar may have transferred patents from one shell corporation to another—all while it maintained substantive control over litigation and licensing decisions—which would be no transfer of ownership at all.
Fraud on the Patent Office is one of many problems that occur when the entities controlling and reaping the benefits of patent assertion are permitted to keep their identities secret. Such secrecy conceals the role unnamed foreign entities are playing in the patent and judiciary systems; the extent to which patent assertion and acquisition entities are exploiting individuals without knowledge of the patent system to shake down technology developers, manufacturers, and users in the U.S.; and evidence of tax avoidance or evasion.
For example, the hearings before Judge Connolly revealed that no money changed hands when the patents were (supposedly) transferred between Mavexar-aligned entities. Instead, the (purported) transferor was promised approximately half of the proceeds from future litigation and settlements. This arrangement might allow tax payments to be deferred until the proceeds exceed the patent’s estimated value. Depending on how high the patent’s estimated value, future litigation and settlement proceeds might never exceed that loss. If that were to happen, those proceeds would never be taxed. We do not know if this is occurring, but the possibility reveals how strong the public’s interest is in transparency about patent ownership.
Patents are not supposed to facilitate secrecy. The word patent comes from the Latin word patere, which means “to be open.” Patents are government grants designed to encourage investment in and disclosure of innovation. The fact that patent owners are trying to conceal their identities from the Patent Office is a sign the patent system is not working as intended. Thankfully, judges like Judge Connolly (among others) are not permitting them to use publicly-funded courts to facilitate covert schemes. Although challenges to his Standing Order are still in progress, the Federal Circuit denied one of the petitions for mandamus of his order requiring more information from Mavexar-aligned entities.
That is a step in the right direction, but there is a long road ahead. We will continue doing all we can to support the commendable and crucial work judges are doing on the public’s behalf.