I flagged on Wednesday that Chief Judge Connolly planned to hold an evidentiary hearing today regarding compliance with his litigation funding and entity ownership orders in three cases. Well, I went, and it was one of the most remarkable hearings I've seen in a patent case.
The purpose of the hearing was to dig into whether the parties complied with Chief Judge Connolly's standing orders regarding litigation funding and entity ownership.
But the Court's statements at the hearing offered some insight into what motivated those orders in the first place: Chief Judge Connolly believes (as he has said before) that the District Court is not a "star chamber," and that the public has a right to know who is litigating in the Court.
The three cases all involve patent assertion entities: Lamplight Licensing LLC, Nimitz Technologies LLC, and Mellaconic IP. In each case, the Court had ordered the owners of the entities and/or the attorneys involved to show up and attend the hearing in person.
So many interesting things happened at this hearing, it's hard to distill it down—but I'll sort them into three categories, one for each plaintiff.
Lamplight: With the Owner a No-Show, the Court Grills the Attorney Instead
As expected, two of the individuals did not show. One, out-of-town counsel for Mellaconic, had recently tested positive for COVID. The other, the sole member of Lamplight LLC, had mostly unspecified "medical issues," although counsel filed a letter the day before the hearing setting forth some more detail.
In the absence of Lamplight's sole member, the Court pressed the attorney for the story of how he got the case, how he knew the sole member of the LLC, and why the she could not be here.
Smartly, the attorney had brought copies of medical records, which he passed up to the Court. Those seemed to more or less satisfy the Court and gave some more credibility to the claims of medical issues.
Chief Judge Connolly directed Lamplight to let the Court know when the sole member is able to travel, or to file a status report within 30 days to explain the situation.
Based on the lawyer for Lamplight's answers to the Court's questions, it appears that he deals primarily with a company called MAVEXAR LLC, who is a "representative" of Lamplight and "advises" them on asserting patents. MAVEXAR signed the attorney's fee agreement, and the attorney had never met Lamplight or had discussions with them prior to that agreement.
Chief Judge Connolly came prepared with questions about Lamplight's business address. He pointed out that their various addresses, some of which were stated in filings to be their "principal place of business," were merely mail drops.
Judge Connolly made very clear that, in cases before him, it is not truthful to represent that a post office box is a "principle place of business" of an entity. He pointed out that he had prosecuted fraud cases against folks engaged in telemarketing schemes using suite numbers that were actually PO box addresses.
The Court also came prepared to point out that the same attorney had filed complaints on behalf of Lamplight both here and in Texas, just two months apart, and had provided different physical addresses for the principal place of business in each filing.
The Court also picked through the attorney's engagement letter with Lamplight in real time, pushing for the attorney to explain certain terms. He asked, for example, how he could have advised them of their right to be represented by separate counsel in agreeing to an arbitration provision, as the letter stated, if he had never talked to them directly (instead communicating through MAVEXAR).
The Court continued to question the attorney on how he could be sure of the litigation funding information and various other facts. The answers seemed to largely boil down to "because MAVEXAR told me."
Nimitz and Mellaconic: MAVEXAR Recruited Plaintiffs, Organized Suits, Selected Targets and Attorneys
Next up, the Court briefly questioned counsel for Nimitz, and then heard quite a bit of testimony from the principals of both Nimitz and Mellaconic.
Spoiler alert: MAVEXAR seems to be driving the litigation in all three sets of cases.
The principles both told similar stories. The gist all of the testimony seemed to be that someone from MAVEXAR reached out to them about an "investment" opportunity or a chance to make "passive income."
All they had to do was become the owners of a patent assertion entity, and accept the "liabilities" that come along with that.
The sole member of Nimitz said he was a full-time sales person. After discussions with MAVEXAR, he set up his own LLC—one of several he owns—and they transferred somewhere between 50 and 100 patents to it. He said that he gets 10% of the settlement values, and that so far his LLC has made around $4,000.
The sole member of Mellaconic said that he is a restaurateur who owns a food truck. He was approached with a "passive income" opportunity. It was unclear who set up the Mellaconic IP entity, and the restaurateur did not know what the name meant. He said that he gets 5% of the settlement values, and that so far his LLC has made around $11,000.
The Court pressed both owners regarding what they had paid for the patents; both eventually conveyed that their LLCs paid nothing, and only accepted the "liabilities" from suit.
Both seemed to indicate that they were not represented by lawyers for these transactions.
Neither sole member was an attorney. The Nimitz sole member said he had at least read the patent, although he didn't know its name; it was less clear that the Mellaconic IP sole member had gone that far.
The Nimitz sole member hedged about whether his LLC had any real estate, but eventually seemed to recognize that its address was just a postal address, not office space.
The restaurateur who owned Mellaconic truly seemed to be a fish out of water on the stand, but he had a couple of points he wanted to make. He emphasized that he could "deny" a litigation decision by Mavexar (although he never had) and that the funding was "recourse" (although he seemed unsure of the difference between "recourse" and "non-recourse").
In short, it looks like both of these witnesses signed up to be the fall guys for the assertion of these patents, in exchange for either 5% or 10% of the profits. (Perhaps the restaurateur will renegotiate his deal now that he knows that the other guy gets!)
These facts are from memory and from my notes; it's possible that the transcript may read differently when it comes out. There was also a lot more that was said. This will definitely be a transcript worth reading if you're defending these cases.
So, MAVEXAR Is Pulling the Strings?
We'll have to see what the Court determines. But watching these witnesses testify, it seems clear that it is MAVEXAR who is driving these actions. MAVEXAR controlled the retention of the attorneys, the selection of targets, the pleadings, the litigation strategy, and the settlements. The "owners" of the patents just sign off, and collect their 5 or 10%.
Incredibly, MAVEXAR's role was described as "advisory," but not in the capacity of attorneys representing the clients. The Court raised numerous concerns about this, although those will have to be the subject of another post.
None of the Court's questions drew direct privilege assertions. In fact, privilege hardly came up at all; the attorneys seemed content to let this all out.
MAVEXAR Has an IP Edge Connection
Chief Judge Connolly asked some specific questions about IP Edge (a well-known patent assertion entity). The witnesses did not seem overly familiar with IP Edge, but one of them recognized the name because their contact at MAVEXAR used an IP Edge e-mail address.
Last month, attorneys from Fish and Richardson pointed out in a blog post that public records "indicate that IP Edge’s three principals are behind MAVEXAR."
Only the Court Could Do This
The Court truly flipped over a rock here and revealed the inner workings of these three NPE plaintiffs in a way that the parties themselves probably never could.
If the defendants had tried to dig into these machinations, they likely would have been stymied at every step by privilege assertions, instructions not to answer, and "I don't know" or "I'm not sure" responses.
And even if a defendant had been able to somehow dig this information out of these entities, it would all have been locked behind a confidentiality wall (either via a protective order or Local Rule 26.2), and it would have gone nowhere. No one beyond the immediate parties and perhaps a JDG would know. Now it's all public record.
More to Come
We'll likely have additional posts on this in the coming week—particularly if we are able to get the transcript and confirm a few things. There were plenty of other interesting points in the hearing, including an in-person pro hac motion after an out-of-town attorney who wasn't admitted in the case tried to ask questions of the witness (!!). Chief Judge Connolly also raised the possibility of amici briefing. Stay tuned.
[Update: This post got some play at Hacker News! Anyone who is interested can see the comments here]