Delaware judge justifies litigation funding ‘inquisition’ in thriller order

The judge's chair, the witness stand and stenographer's desk are seen in court room 422 of the New York Supreme Court at 60 Centre Street. Picture taken February 3, 2012. REUTERS/Chip East

Reuters) - It’s not often that 80-page judicial orders can fairly be described as page-turners. But if you start reading a Delaware federal judge’s step-by-step explanation of how he came to suspect that dozens of patent suits in his district had been filed by shell entities in a possible fraud on the court, you won’t be able to stop.

U.S. District Judge Colm Connolly of Wilmington filed the Nov. 30 order in response to a mandamus petition at the U.S. Court of Appeals for the Federal Circuit from patent holding company Nimitz Technologies LLC.

As my Reuters colleague Blake Brittain reported last month, Nimitz’s lawyers at O’Kelly & O’Rourke are challenging a Nov. 10 order in which Connolly directed Nimitz to produce all kinds of records documenting how it came to own the patents at issue in four cases before the judge; Nimitz’s actual role in the litigation; and the plaintiffs’ ties to self-described patent monetizer IP Edge.

Nimitz told the Federal Circuit that the trial judge is engaged in an irrelevant “inquisition” that compromises its confidentiality and client privilege. Connolly, it said, kicked off the probe because he suspected that Nimitz – and other patent holders with apparent ties to IP Edge – failed to comply with a standing order mandating the disclosure of any third-party litigation funding.

But Nimitz argued in its mandamus petition that Connolly’s standing order is itself contrary to patent law, which allows only patent owners to prosecute infringement suits. Nimitz also said that the judge has no authority to police how patent owners distribute any recovery.

The mandamus proceeding has attracted considerable attention. At the Federal Circuit’s direction, the defendants in Nimitz’s four infringement suits filed a joint brief defending Connolly’s investigation as an appropriate exercise of the judge’s right to avert bad-faith litigation. An array of amici -- including the Electronic Frontier Foundation, the U.S. Chamber of Commerce, Intel Corporation and trade groups for big tech companies -- have weighed in, urging the Federal Circuit to uphold Connolly’s litigation funding disclosure rule. Otherwise, they argued, the court and defendants don’t know who is really driving litigation brought by shell patent-owning entities.

The joint Federal Circuit brief from defendants CNET Media Inc, BuzzFeed Inc, Bloomberg LP and Imagine Learning LLC asserts that the company for which Nimitz is allegedly operating as a straw man, IP Edge, has secretly “directed the filing of thousands of cases by hundreds of patent-assertion entities in federal courts across the country,” without ever revealing itself as the litigation puppeteer.

Connolly nevertheless puzzled out the apparent links between IP Edge and a handful of shell companies, including Nimitz. His Nov. 30 order explains how he and his clerk did it.

I should point out here that IP Edge did not respond to my query. Nimitz counsel George Pazuniak of O’Kelly & O’Rourke declined to comment but told the Federal Circuit in a reply brief filed on Friday that his client has done nothing even “legally objectionable,” much less fraudulent.

Even if straw-man allegations from Connolly and the defendants were true, Nimitz told the appeals court, they amount to nothing more than “titillating gossip.” (The brief also denies that the allegations are true.)

The judge, meanwhile, said in this week’s order that his concern is broader than patent law or even third-party funding disclosures: He’s worried, he said, about whether companies secretly pulling the strings in patent cases are fraudulently abusing the judicial system. Connolly said his inherent authority to investigate such a potential abuse “cannot be seriously disputed.”

The judge’s suspicions were first aroused, according to his order, in a patent case brought by a limited liability company with no apparent ties to Nimitz’s lawsuits. Amazon.com Inc, the defendant, told Connolly that it had found evidence – specifically an email in the patent's chain of ownership – suggesting that the purported plaintiff was associated with IP Edge.

At around the same time, a Delaware lawyer who was local counsel in scores of patent suits attempted to withdraw from several cases before Connolly. The judge said that lawyer offered inconsistent and incomplete answers to questions about his clients. Eventually, Connolly said, he and his clerk found apparent connections between those plaintiffs, the plaintiff in the Amazon case and Nimitz. (Connolly detailed their investigation in this week's order.)

The probe culminated in a Nov. 4 hearing filled with Perry Mason moments, as the judge recounted. Connolly had ordered appearances by the individuals who purportedly own Nimitz and two other companies prosecuting patent cases before him. One of them did not show up, citing poor health. But Connolly questioned the other two purported patent owners under oath.

Nimitz’s owner, Mark Hall, disclosed that he had paid nothing for the patent he was litigating to enforce. He said he had been approached by a middleman “consultant” that offered him an “opportunity” to acquire the patents at no cost. The consultant’s representative, Hall said, has an IP Edge email address.

Hall testified that under his agreement with the consultant, he is entitled to only 10% of any recovery from Nimitz's lawsuits. The other plaintiff at the Nov. 4 hearing, a food truck owner who also paid nothing for the patents he “owns,” said his deal with the same middleman calls for him to receive only a 5% share.

Both plaintiffs told Connolly that they have no decision-making role in the litigation being prosecuted in their names. Hall said he was not even aware that lawsuits had been filed. The food truck owner said the first time he talked to his purported counsel was to prepare for the Nov. 4 hearing.

Connolly was so disturbed by the hearing’s revelations that he ordered Nimitz and other plaintiffs to produce more information about the web of relationships. That’s the order Nimitz is now challenging.

It’s unusual for a trial judge to produce an order like Connolly’s, laying out his own behind-the-scenes reasoning and investigation. But this was no ordinary judicial inquiry. Read the order and see for yourself.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.