In April 2022, Delaware federal court Judge Colm F. Connolly introduced a standing order requiring that all parties appearing in his court disclose any third-party funding. This was in an attempt to address “potential abuse of our courts,” as he explained in a November 2022 memorandum. A year after Judge Connolly’s mandate went into effect, I commented on two Delaware cases and concluded that, “last year’s standing order is getting results… Connolly’s repeated insistence that parties adhere to his order is proving valuable.”
This November, Judge Connolly issued another lengthy opinion. He found that lawyers associated with IP Edge LLC and Mavexar LLC had violated professional conduct rules by using “shell” companies – Nimitz Technologies, Mellaconic, and Lamplight Licensing – as a shield to hide IP Edge and Mavexar’s involvement in more than 60 patent infringement suits. The lawyers also failed to disclose real parties in interest – a clear violation of Judge Connolly’s April 2022 standing order. Judge Connolly referred four lawyers associated with the LLCs to the Justice Department, the U.S. Patent and Trademark Office, and state bar ethics officials.
Judge Connolly’s opinion detailed the strategy behind IP Edge’s scheme. First, lure “relatively unsophisticated individuals” into conversation and then recruit them to serve as owners of the LLCs in exchange for 5-10% of the proceeds of the patent infringement suit. For three individuals detailed in the opinion – a food truck operator, a software salesman, and a surgeon’s assistant, all from Houston, Texas – the pitch was successful. They came in as individuals with no experience with intellectual property or patent litigation and left as owners of LLCs and with a new form of passive income… or so they thought.
While the arrangements outlined in Judge Connolly’s opinion are certainly concerning, it’s the recently released texts, internal documents, and private communications between the LLCs’ staff and patent owners that lay bare just how much patent trolls and litigation funders have distorted legal processes. The texts, which led Connolly to describe the LLCs as “shell companies,” detail a coercive relationship between the patent owners and the LLCs. In that relationship, as Connolly describes, there is an “obvious disparity in the sophistication of the LLC plaintiffs as opposed to Mavexar and IP Edge.” In one exchange between one of the LLC owners and an office manager of IP Edge, the owner explains that she doesn’t feel comfortable testifying in federal court, texting that, “I have nightmares almost every night thinking about it and so stressed.” In the end, she did not appear in court citing serious health issues.
Connolly’s investigation is startling—not only because it revealed the extent to which third-party funding was present in these litigations, but also because it outlines a scheme in which individuals who have no legal background or expertise were essentially tricked into becoming owners of shell LLCs and the patent portfolios that come with them.
While the owners were promised only 5-10% of the proceeds of the patent infringement suit, they accepted all the liability. This is undoubtedly a high price to pay. Judge Connolly’s opinion also reveals that the four lawyers rarely communicated with the patent owners and instead, essentially acted as lawyers for IP Edge and Mavexar. Given that IP Edge and Mavexar assumed no risk while the patent owners assumed all of it, the lawyers’ disinterest in the owner’s well-being is jarring—and quite possibly violates the rules of professional ethics for lawyers.
This case emphasizes that we don’t know just how often litigation investors are pulling the strings in patent infringement cases. How often do “patent owners” not even know what their patents cover or the details of the lawsuits they are supposedly initiating? Given that this scheme was only revealed after Judge Connelly’s transparency order went into effect, these issues appear to be much more common than we might have expected in the past.
While the operations of the litigation finance industry might be murky, one thing is clear: we need basic protections for our courts. That starts with more judges issuing transparency requirements like the one Judge Connolly put into effect. Only then will courts be able to rein in and expose malicious litigation investors, wherever and whenever they are operating.