Blog April 13, 2021
Judge Connolly's New Standing Order Requiring Disclosure Behind Patent Assertion Entities Is Showing It Has Teeth
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On August 17, 2022, Chief Judge Colm F. Connolly of the District of Delaware issued an order in which he questioned the sufficiency of the plaintiff's disclosure of financially interested parties in Longbeam Technologies LLC. v. Amazon.com, Inc. et al., Case No. 1:21-cv-01559 (D. Del. Aug. 17, 2022).
Public records suggest that plaintiff, Longbeam Technologies, LLC, is an entity associated with patent monetization firm IP Edge, LLC, but its disclosures filed in the case do not indicate that IP Edge has a financial interest. Judge Connolly's order shows that he is enforcing one of several recent standing orders that aim to shed light on the financiers behind patent litigation.
Judge Connolly recently issued a standing order on April 18, 2022, for all his cases, requiring all "nongovernmental joint ventures, limited liability corporations, partnerships or limited liability partnerships" to include in corporate 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."
The order is poised to shed light on the network behind certain non-practicing entities (NPEs) that are frequent filers of patent litigation cases. These NPEs form new entities for each specific litigation campaign, usually focused on asserting a single patent or patent family as their only asset.
IP Edge follows this NPE strategy. IP Edge was formed in Texas in July 2015 by Gautham Bodepudi, Sanjay Pant, and Lillian Woung. Its early litigation campaigns recognized these individuals as owners of the named plaintiff in corporate filings. But it quickly developed a new modus operandi: incorporate a new LLC for each campaign naming an individual unknown to the patent monetization world as the sole managing member. This named individual has no recognizable experience in the field of managing IP assets. Oftentimes, this person has no online presence by which they could even be identified. The listed headquarters for the entity is typically a virtual office in the judicial district where the lawsuit is filed, shared with other anonymous shell companies likely associated with IP Edge.
According to RPX, IP Edge-associated entities have filed thousands of patent infringement cases using over 200 different entities. When an entity associated with IP Edge files a lawsuit, this link is not readily apparent. Public records must be scoured to determine whether there is a possible association. This may require looking for clues through corporate filings, patent assignment records, or property records, and identifying relationships to other IP Edge-related NPEs. Sometimes, the link may not even be discoverable unless the case proceeds sufficiently far into discovery to compel the plaintiff to produce this information.
Although Rule 7.1 of the Federal Rules of Civil Procedure requires disclosure of parent organizations financially interested in the litigation, a plaintiff associated with IP Edge would only state that it had no such parent.
Some judicial districts require a more detailed disclosure. The Northern District of Texas, for example, requires a "Certificate of Interested Persons" identifying "all persons, associations of persons, firms, partnerships, corporations, guarantors, insurers, affiliates, parent or subsidiary corporations, or other legal entities that are financially interested in the outcome of the case." See N.D. Tex. Local Rule 7.4. Where an IP Edge-associated NPE has filed such a certificate, it has almost always identified no other interested party. Interestingly, the sole managing member is often not even listed as having a financial interest in the outcome of the litigation.
In just a few occasions, the plaintiff has explicitly identified IP Edge as "Plaintiff's consultant." See, e.g., Tunnel IP LLC v. Edifier USA LLC, Case No. 3:20-cv-03720-M, D.I. 2 (N.D. Tex. Dec. 23, 2020); Stormborn Techs. LLC v. Tecore, Inc., Case No. 6:21-cv-00367-CEM-DCI, D.I. 8 (M.D. Fla. Mar. 10, 2021). In a handful of cases, the NPE identified MAVEXAR LLC as an interested party. See, e.g., Swirlate IP LLC v. Corning Optical Commc'ns LLC, Case No. 3:20-cv-01033-K, D.I. 2 (N.D. Tex.). Public records indicate that IP Edge's three principals are behind MAVEXAR.
This lack of consistent disclosure is problematic. A 2016 study conducted by the Federal Trade Commission explained some of the challenges posed by this lack of transparency in who may be controlling patent litigation campaigns:
First, some PAEs [patent assertion entities] may obscure the identity of related LLCs when negotiating with a prospective licensee. In other words, the licensor may not disclose the identity of the controlling entity and other related Affiliates. This may create a problem if the prospective licensee already has a license to the Affiliate's patents through an earlier license from a related entity, or desires a license that extends to the patents held by related Affiliates. Second, some PAEs may obscure the identity of the individuals and entities that share in their licensing proceeds. When there are loose affiliations between related entities, it may be difficult for the prospective licensee to identify the beneficial party or true party-in-interest, which will frustrate the licensee's ability to determine whether it has already licensed the claimed technology through a cross-license or other arrangement with another party.
A 2018 blog post by the authors analyzed additional problems associated with anonymous shell companies, including avoiding fee-shifting awards through undercapitalization, hiding information about relevant witnesses or company principals, or trying to obstruct the efficient collection and analysis of patent licensing and enforcement activity, and legislative attempts to provide more transparency into the real parties in interest of these companies.
Enforcement of Judge Connolly's Standing Order
Chief Judge Connolly's standing order stands to change the status quo. Unlike previous corporate disclosure rules, his standing order explicitly requires publicly unravelling the corporate structure to identify the principal individuals or corporations behind these shell companies.
In Longbeam, the defendant filed objections to the sufficiency of Longbeam's corporate disclosure. Judge Connolly felt that Longbeam, which listed only the unknown managing member and its contingency fee counsel as interested parties, may not have complied with the standing order. In his August 17 ruling, he stated: "I have concerns about [plaintiff’s] standing to pursue this action and whether it has complied with the Court’s standing order regarding third-party litigation funding arrangements." Judge Connolly granted the defendant's request to conduct threshold discovery on these matters and stayed the case in all other respects.
It will take some time to determine the practical implications of this standing order, but Judge Connolly has shown he is actively enforcing it. This may help curb abuses of the judicial process, of which NPE's use of anonymous shell companies have long taken advantage. In the coming months, entities like IP Edge may be routinely forced to come out of hiding.
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
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