“With the increase in patent litigation funding nationally, counsel need to prepare their clients for the possibility that mandatory disclosure orders could arise in other jurisdictions, especially if the Federal Circuit upholds Judge Connolly’s Standing Order.”
Heightened mandatory initial disclosures in patent litigation may affect a client’s decision to pursue litigation in a forum, especially if there is a risk (real or perceived) of having to disclose sensitive company information from the outset of litigation. In the District of Delaware, there has been much attention on recent requirements for transparency regarding litigation funding and company and/or patent ownership issued by Chief Judge Colm Connolly. The Chief Judge’s fervent enforcement of those requirements has prompted a writ of mandamus and potential review by the Federal Circuit. Although the propriety of the third-party litigation funding order may be reviewed by the Federal Circuit, best practices for complying with both the third-party litigation funding and Rule 7.1 Standing Orders will be discussed, along with potential impact of those orders on patent litigation in the long term, and considerations of whether certain information could be sealed.
Delaware Disclosures and Enforcement of those Orders
To identify real party-in-interest issues, Chief Judge Connolly has instituted several requirements in patent cases, including requiring heightened Rule 7.1 disclosures and disclosures of third-party litigation funding. Shortly after filing the complaint, plaintiffs must disclose the identity and financial interest of any third-party funding, including disclosing their role in the litigation, along with fees and expenses. Plaintiff companies must also disclose the name of every owner, member, and partner with a direct or indirect interest in the party. Chief Judge Connolly is currently the only judge in the District of Delaware with these Standing Orders; perhaps other judges are waiting to see how the test drive shakes out before adopting them.
Since issuing the orders in April 2022, Chief Judge Connolly has progressively enforced compliance with his Standing Orders, from issuing jurisdictional discovery to evidentiary hearings. Chief Judge Connolly has been issuing orders requiring counsel to certify compliance with the Rule 7.1 and litigation funding orders. On August 17, 2022, in Longbeam Tech. LLC v. Amazon.com, Inc., Chief Judge Connolly issued an oral order in response to a parties’ Rule 7.1 disclosure and third-party funding statements. No. 21-cv-1559-CFC (D. Del. Aug. 17, 2022). The court stated, “I have concerns about Longbeam’s standing to pursue this action and whether it has complied with the court’s standing order regarding third-party litigation funding arrangements.” Upon revelation of public information that called the plaintiff’s disclosure into question, the court granted the defendant’s request to conduct discovery on third-party litigation funding and stayed the case. So, rather than moving forward with its case, Longbeam is now faced with added expense and will lose the opportunity to get the case scheduled for trial because of not complying with the court’s disclosure requirements.
Litigation Funding Standing Order Pending Before Federal Circuit
In addition to staying cases, Chief Judge Connolly sua sponte directed several non-practicing entity plaintiffs to appear at evidentiary hearings on the accuracy of corporate disclosure requirements and compliance with the litigation funding orders. In Nimitz Tech. LLC v. Bloomberg L.P., the court ordered the managing member of one of these plaintiffs, Nimitz LLC to appear on November 4, 2022, “to determine whether Plaintiff has complied with the court’s standing order regarding third-party litigation funding.” The court then stayed the case pending the outcome of the evidentiary hearing. No. 22-cv-413-CFC (D. Del. Sept. 13, 2022).
After the hearing, citing concern about “the accuracy of statements in the filings”, the court issued a Memorandum Order requiring Nimitz to produce to the court: (1) retention agreements between plaintiff and Delaware counsel; (2) all communications that plaintiff’s managing member had with notorious entities Mavexar, IP Edge, and Linh Dietz regarding several topics, including the formation of plaintiff, plaintiff’s assets, the patent asserted, settlement or potential settlement, and the hearing the court ordered, including travel arrangements of the managing member; (3) monthly statements for the bank accounts held by plaintiff; and (4) documents relating to plaintiff’s use, lease or ownership of its residence in Frisco, Texas.
Nimitz filed a petition for a writ of mandamus with the Federal Circuit asking for reversal of Chief Judge Connolly’s Memorandum Order and to “terminate its judicial inquisition of the Petitioner.” Instead of limiting its challenge to the Memorandum Order, the Petitioner further argued that Chief Judge Connolly’s Standing Order regarding third-party litigation funding is an abuse of discretion in of itself. Despite Chief Judge Connolly’s repeatedly voiced concerns in Nimitz and other non-practicing entity cases over confirming the real party in interest, the petition shrugged off those concerns, arguing that the Standing Orders are prohibited by the Patent Act and the Federal Rules of Civil Procedure.
The brazen petition accuses Chief Judge Connolly of conducting “the hearing in a manner of a prosecuting attorney examining an adverse witness at trial.” The petition further accuses the court of pursuing “its own crusade to enforce its own version of patent policy without regard that its policy defies governing law.”
The specific issues before the Federal Circuit are: (1) whether the district court abused its discretion by entering its Standing Order requiring disclosure of third-party litigation funding as it is irrelevant to issues before the court; (2) whether the Memorandum Order contradicts the Patent Act and Rules of Civil Procedure by seeking to identify the real party in interest that Congress deemed irrelevant; and (3) whether the Memorandum Order violates Petitioner’s attorney-client privilege and work product immunity? The Federal Circuit issued an order staying Chief Judge Connolly’s Memorandum Order pending further action from the Federal Circuit and issued a briefing schedule.
Although the survival of Chief Judge Connolly’s Standing Order is at issue in the Federal Circuit, only the Memorandum Order requesting alleged confidential information is stayed, not the Standing Order requiring disclosure of third-party litigation funding generally. So, for now, clients still need to consider what needs to be disclosed. Further, there have been no appellate challenges to Chief Judge Connolly’s heightened Rule 7.1 disclosure Standing Order.
Judge Chief Judge Connolly’s Standing Orders are not novel. Currently, in addition to Delaware, litigation third-party funding disclosures are mandatory in the Districts of New Jersey and Northern California. In fact, Chief Judge Connolly’s Orders closely resemble the District of New Jersey’s. Any decision by the Federal Circuit on the legality of litigation funding order disclosure requirements would have implications on all courts with those requirements.
In addition to other courts having similar mandatory disclosure rules to Delaware, other federal courts have required the production of litigation funding agreements in the course of discovery. See 3rd Eye Surveillance 158 Fed. Cl. 216, 232 (Fed. Cl. Feb. 9, 2022);Security Point Holdings, Inc. v. United States, 2019 WL 1751194, at *5 (Fed. Cl. Apr. 16, 2019) (ordering in camera review of litigation funding agreement to avoid work-product immunity issues); but see In re Valsartan (NDMA) Contam. Prods. Liab. Litig., 405 F. Supp. 3d. 612, (D.N.J. 2019) (finding litigation funding irrelevant to the claims and defenses in a products liability litigation and therefore holding that the plaintiffs’ litigation funding is not discoverable).
In 3rd Eye Surveillance, LLC v. United States, in response to the defendants’ motion to compel, the Court of Federal Claims required the plaintiffs to produce any litigation funding agreements as well as documents provided to those funders for in camera review. 158 Fed. Cl. 216, 232 (Fed. Cl. Feb. 9, 2022).
The court rejected the plaintiff’s arguments that the information is irrelevant. At a status conference hearing, the court directed the parties to FastShip, LLC v. United States, where the court stated that disclosure of litigation funding agreements can help to identify real parties in interest and “encourage[s] transparency and ensure[s] a shadow broker is not using litigation as a form of harassment or for multiple bites at the same apple.” FastShip, LLC v. United States, 143 Fed. Cl. 700, 716-17 (2019) (emphasis omitted), vacated and remanded on other grounds, 968 F.3d 1335 (Fed. Cir. 2020).
The Federal Circuit weighing in on the propriety of these mandatory disclosures could have an effect not only on courts’ adoption of those mandatory disclosures, but possibly a judge’s willingness to order production of the litigation funding agreements themselves.
What Do Plaintiff Clients Need to Disclose?
As has been made clear by Chief Judge Connolly’s enforcement, Delaware parties need to take the disclosure requirements seriously to avoid negative consequences. Although the patent disclosure requirements are likely aimed at high volume non-practicing entities, given the targets of the recent enforcement orders, all plaintiffs must comply.
In practice, the language of the heightened Rule 7.1 disclosure requirement raises questions. The Order states that a party that is a “nongovernmental joint venture, limited liability corporation, partnership, or limited liability partnership” must disclose “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 the party has been identified.” Parties may have to decipher exactly what qualifies as an indirect interest required to be disclosed. For example, does a security interest in a patent qualify as an indirect interest that must be disclosed? If evidence of a potential indirect interest surfaces later in the litigation, a party may face adverse consequences like the plaintiff in Longbeam and Nimitz. The best practice is to err on the side of disclosure.
Counseling Clients on Sealing the Disclosure Information
Once a client understands that company or litigation funding information must be disclosed, it is possible the client will want to know whether they can keep the information redacted or sealed from the public. As discussed herein, the District of Delaware recognizes the importance of public access to judicial records and parties requesting sealing of information have to provide more than vague assertions of confidentiality or harm. Therefore, that begs the question—are direct or indirect company interests and litigation funding information likely to be treated as information to be sealed from public access?
Federal courts, including the District of Delaware, recognize the presumptive right of public access to judicial proceedings. In re Avandia Mktg., Sales Practices and Prods. Liab. Litig., 924 F.3d 662, 672 (3d Cir. 2019). A party seeking to seal part of the judicial record bears the burden of showing “that the material is the kind of information that courts will protect, and that disclosure will work a clearly defined and serious injury to the party seeking closure.” Id. The District of Delaware routinely denies motions to seal without a showing of clearly defined and serious injury, presuming the public has a right of access to judicial records.
The District of Delaware has not yet answered definitively whether third-party litigation funding disclosures may be sealed. In a non-patent litigation case, Odette Blanco de Fernandez v. Seaboard Corp, the plaintiffs filed an opposed motion to seal its third-party litigation funding disclosure concurrently with the disclosure arguing that the statement contains confidential and proprietary business information. Plaintiffs argued that there was good cause to seal the information as litigation funding is not of general importance to the public. In support of their position, plaintiffs argued that other courts have found that third-party litigation funding agreements are irrelevant to the underlying litigation. The plaintiffs further argued that, since the third-party litigation funding statement expressly indicated that the third-party lender had no authority over the litigation or the settlement, the funding statement was of no interest to the public and of no relevance to the litigation. In this case, the court did not rule on whether the litigation funding information would be sealed as the case was stayed prior to the need to rule on the motion.
The District of Delaware has granted motions to seal confidential and proprietary business information when a party provides specific evidence of clearly defined injuries a party may face if the information were to remain public. For example, in Personal Audio, LLC v. Google LLC, the court granted Google’s unopposed motion to seal specific provisions of a Mobile Application Agreement between Google and a third-party, which had a confidentiality provision in the Agreement. The motion also sought to seal information related to Google’s source code. Google understood the high burden of overcoming the presumption of public access and provided the court specific examples for each redaction it sought. Despite being an unopposed motion, Google’s motion and appendix containing all proposed redactions and explanations of why those redactions were necessary was almost 50 pages.
While it remains to be seen whether the District of Delaware will seal third-party funding litigation information or Rule 7.1 disclosures, it is safe to assume that a motion to seal will not be granted if the party does not provide the court with information showing a clearly defined and specific harm the party will face as required by Third Circuit law. Reputational injury will not suffice, nor ambiguous assertions of financial harm.
Bracing for Possibility of Nationwide Increase of Mandatory Disclosures
With the increase in patent litigation funding nationally, counsel need to prepare their clients for the possibility that mandatory disclosure orders could arise in other jurisdictions, especially if the Federal Circuit upholds Judge Connolly’s Standing Order. As early as 2014, there have been calls on the Advisory Committee on the Civil Rules of Federal Procedure (“Committee”) to adopt an amendment to Rule 26(a)(1)(A) that would require disclosure of third-party litigation investments at the outset of a lawsuit. These requests to the Committee, echoing Chief Judge Conolly’s concerns, warned that, without initial disclosures of this information, federal judges or a juror may unknowingly be involved in deciding a case where they have a financial interest, which may violate the ethical rules. So far, the Committee has not amended the Rule, but with the on-going proliferation of third-party litigation funding in complex federal civil litigation, perhaps such an initial disclosure requirement may be federally mandated.
As enforcement of these mandatory orders by Chief Judge Connolly increases in Delaware and with the spotlight now on the litigation funding order in the Federal Circuit, it will be interesting to monitor whether non-practicing entity filings decrease and whether other District of Delaware Judges adopt similar disclosure requirements. Clients need to be aware of the potential effects of these of these Orders and potential for having to disclose information relating to funding and company structure that it may otherwise want confidential.
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