United States: The Impact Of A Del. District's Procedural Shift On Disclosures

Within the last year, Chief U.S. District Judge Colm F. Connolly of the U.S. District Court for the District of Delaware has issued standing orders regarding Rule 7.1(a)¹ that require the disclosure of nonrecourse, i.e., unsecured, litigation funding, as well as the corporate ownership disclosure already required by the Federal Rule.

These standing orders were designed to give Judge Connolly greater insight into the parties in interest to litigation before him, allowing him to properly recuse himself if he has a conflict of interest.

These changes to corporate ownership and funding disclosure requirements have had significant impacts on practice in Judge Connolly's court. Through ongoing hearings and requests for in camera document productions, Judge Connolly has investigated the accuracy of such disclosures. And, he has explored the ethical implications of litigation control revealed through the disclosures.

Even outside of Judge Connolly's court, his procedures have affected how patent assertion entities, or PAEs, organize and file cases. And, disclosures resulting from Judge Connolly's procedures have placed some targets on the backs of entities that control PAE litigation.

As Judge Connolly's procedures gain popularity, they will likely influence PAE litigation in ways that have long evaded policymakers. This article explores the hands-on approach to Rule 7.1(a) disclosure statements and how they will likely change district court practice for PAE litigation.

Operation of Judge Connolly's New Standing Orders

Judge Connolly's standing orders, which align with Rule 7.1(a) of the Federal Rules of Civil Procedure, aim to enhance transparency and accountability in the legal system. By requiring disclosure of specific information, such as the identification of parent corporations and any publicly held corporations owning 10% or more of a party's stock, judges can assess potential conflicts of interest or ethical issues.

Judge Connolly's standing orders enhance this benefit by providing insight into litigation funders that may be controlling cases before him. This level of transparency facilitates fair proceedings and maintains the integrity of the legal system.

Direct Impacts of Judge Connolly's Standing Orders

One notable advantage of these orders is their effectiveness in curbing abusive litigation tactics employed by PAEs. PAEs often use frivolous patent lawsuits to pressure small businesses and individuals into settlements. The use of anonymous shell companies allows them to hide their identities, obfuscate who is in control and shield² themselves from liability.

However, the standing orders eliminate this anonymity by demanding disclosure of third-party financing and associated conditions. This increased transparency enables Judge Connolly to identify potential conflicts of interest and prevent the abuse of legal proceedings.

Judge Connolly's commitment to transparency is exemplified through his November 2022 hearing,³ in which he questioned PAE owners and their counsel regarding litigation funding and control in relation to Rule 7.1(a) disclosures.

During⁴ and after⁵ the hearing, Judge Connolly asked counsel how it could represent a client without meeting that client, how a consulting agency can make unilateral litigation decisions on behalf of its clients without engaging in the unauthorized practice of law, and whether the PAEs perpetrated a fraud on the court and defendants by hiding real parties in interest to the proceedings.

Since these hearings, the U.S. Court of Appeals for the Federal Circuit has affirmed⁶ Judge Connolly's authority to require the production of documents explaining control over the PAEs' lawsuits, through denial of mandamus requests to bar his orders.

Judge Connolly has kept pressing. He's asked one PAE's owner to attend an in-person hearing regarding whether the PAE perpetrated a fraud on the court through its noncompliance with the Rule 7.1(a) disclosures. In response, the PAE dropped its suit, and the owner has refused⁷ to attend in-person hearings or to further participate in Judge Connolly's investigation of this potential fraud, leading Judge Connolly to order a $200 per day civil contempt⁸ fine until the owner appears in person.

Throughout these proceedings, the PAEs before Judge Connolly have repeatedly questioned⁹ his authority¹⁰ to request information about the real parties in interest to proceedings before him. Judge Connolly has overruled¹¹ these concerns, finding that he has the authority to manage cases before him by requiring disclosure of information that may implicate his ethical obligations and potential fraud upon the court.

The Widening Reach of Judge Connolly's Standing Orders

While the Federal Circuit did deny mandamus requests to bar Judge Connolly's hearings, Judge Connolly's interpretation of his authority has not yet been directly tested on appeal. And, procedures like Judge Connolly's, requiring detailed disclosures about litigation funding, have not been widely adopted.

But, Judge Connolly's procedures and proceedings have already affected PAE litigations. Armed with information from Judge Connolly's hearings, accused infringers have filed suit¹² against the controlling PAE entities alleging that the companies have engaged in an "aggressive campaign to harass and threaten" them. Meanwhile, PAEs have become hesitant¹³ to file suit in the District of Delaware, hoping to avoid these procedures.

Shifting popularity of venues in patent litigation is nothing new.¹⁴ And, practitioners must expect changes¹⁵ to Rule 7.1′s disclosure requirements. But, as Judge Connolly's hearings and procedures gain attention, other courts may implement similar procedures, which will materially affect patent litigation.

A widespread change in Rule 7.1(a) requirements may significantly hamper PAE litigation by requiring transparent disclosure of real parties in interest to patent litigation. Forcing plaintiffs to disclose the entity making litigation decisions limits a PAE's ability to hide behind shell companies, which may curb some arguably abusive litigation practices, including harassing defendants and hiding assets from attorney fees determinations.

And, more stringent disclosure standards may help judges assess whether counsel has complied with their ethical obligations to provide counsel to their clients — rather than an unrepresented and legally separate controlling entity.

Efforts to limit abusive PAE litigation have evaded¹⁶ policymakers. Yet, widespread adoption of Judge Connolly's procedures may do just that. And, increased scrutiny of these statements will enable judges to assess conflicts of interest, identify abusive litigation practices, confirm compliance with ethical standards, and ensure compliance with disclosure requirements.

Applications to Daily Practice: Embracing or Avoiding Transparency

Patent practitioners — especially those with active cases in Delaware — are watching Judge Connolly's proceedings with interest. If procedures like Judge Connolly's Rule 7.1(a) disclosure requirements spread, patent practitioners will have to closely observe how they are applied.

Judge Connolly's procedures may reduce abusive litigation practices and may limit patent litigation by PAEs. As his procedures are applied and assessed, careful practitioners should explore how they will affect patent practice, including litigation filing decisions, the organization of litigation control and client relationships.

Outside counsel will need to work closely with both practicing and nonpracticing clients to decide how stringent ownership and funding disclosures will affect litigation decisions.

Original published in Law360

Footnotes

1 https://www.law.cornell.edu/rules/frcp/rule_7.1.

2 https://www.flastergreenberg.com/newsroom-articles-nimitz-patent-fight-offers-peek-behind-npe-liability-curtain.html.

3 https://ipde.com/blog/2022/11/04/a-wild-hearing-chief-judge-connolly-flips-over-rock-finds-mavexar-llc-crawling-around-controlling-patent-litigation-and-giving-hapless-patent-owners-just-5-10/.

4 https://ipde.com/blog/2022/11/04/a-wild-hearing-chief-judge-connolly-flips-over-rock-finds-mavexar-llc-crawling-around-controlling-patent-litigation-and-giving-hapless-patent-owners-just-5-10/.

5 https://ipde.com/blog/2022/12/01/chief-judge-connolly-comes-out-swinging-issues-searing-80-page-opinion-rebutting-petition-for-writ-of-mandamus/.

6 https://ipde.com/blog/extra-extra-federal-circuit-denies-nimitz-petition/.

7 https://ipde.com/blog/2023/08/06/were-back-with-a-mavexar-update/.

8 https://www.law360.com/ip/articles/1713580?nl_pk=d1b6b239-0c3b-47c4-8b9f-6c2e74416549&utm_source=newsletter&utm_medium=email&utm_campaign=ip&utm_content=2023-08-22&read_main=1&nlsidx=0&nlaidx=0.

9 https://ipde.com/blog/mavexar-entity-petitions-for-writ-of-mandamus-to-prevent-further-discovery-by-the-court/.

10 https://news.bloomberglaw.com/ip-law/patent-owner-refuses-to-participate-in-judicial-inquisition.

11 https://ipde.com/blog/2023/07/11/shocker-the-mansplaining-brief-fails-court-compels-mavexar-llc-member-involved-in-97-patent-cases-to-attend-hearing/.

12 https://ipde.com/blog/2022/11/30/the-real-effect-of-the-mavexar-hearings-accused-infringer-files-suit-against-mavexar-ip-edge-alleging-an-aggressive-campaign-to-harass-and-threaten/.

13 https://www.jdsupra.com/legalnews/npe-showcase-district-of-delaware-update-9368059/.

14 https://www.iam-media.com/article/us-patent-case-filings-are-falling-the-eastern-district-of-texas-bucks-trend.

15 https://semmes.com/law-updates/new-disclosure-requirements-under-federal-rule-of-civil-procedure-7-1/.

16 https://hbr.org/2022/09/its-time-for-the-u-s-to-tackle-patent-trolls.

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