Fee awards and PAE disclosures

Readers may recall that, about a decade ago, the USPTO and Congress considered imposing additional requirements on patent owners to disclose the identify of other persons or entities with a financial interest in the patent or patent litigation at issue.  In 2014, for example, the USPTO proposed a  rule that would have required every patent applicant to identify the assignee, any “entity necessary to be joined in a lawsuit in order to have standing to enforce the patent,” the “ultimate parent entity” of either of the preceding entities, and any entity that used any arrangement to temporarily divest itself or prevent the vesting of attributable ownership.  The applicant also would have needed to update as necessary the disclosure during prosecution, as well as upon payment of postgrant maintenance fees and in connection with any postgrant USPTO proceedings.  The Office abandoned the initiative, however, following the submission of mostly unfavorable comments on the part of patent owners, who argued (among other things) that the requirements were too burdensome.  Congress thereafter considered a similar proposal, albeit one that would have been applicable only to patents that are asserted in litigation, but it too was never enacted.  (Congress also never went forward with a bill that would have required any entity submitting more than twenty demand letters involving the same patent within a single year to disclose its ultimate parent entity to the USPTO.)  Within the USPTO, therefore, the status quo remains in place, under which a patent application must disclose the name of the inventor and, if the application is being made by the assignee, the assignee’s identity, see 37 C.F.R. §§ 1.46, 1.76, but without any obligation to provide additional information or to record subsequent assignments.  Similarly, Federal Rule of Civil Procedure 7.1 requires any nongovernmental corporate party in a federal civil action to identify “any parent corporation and any publicly held corporation owning 10% or more of its stock,” and to update this information as necessary; and parties to USPTO administrative proceedings such as IPRs must disclose the “real party in interest,”  a term that the rule leaves undefined but which has been interpreted to require consideration of various factors identified in other contexts to determine if a judgment precludes another party from litigating a matter again.   None of these existing rules expressly requires the identification of “grandparent” corporations or beyond, however, or of subsidiaries or sister companies; and Rule 7.1 does not apply at all to noncorporate entities.

Policymakers’ interest in these matters in the 2010s was attributable to the perceived abuses by patent assertion entities, which were (and still are) often enmeshed within a network of limited liability corporations (LLCs) or similar vehicles.  In particular, advocates of greater transparency argued that such measures might reduce the risk of holdup resulting from the “disaggregation” of a portfolio of patents among multiple shell corporations, as well as the ability of the beneficiaries of these arrangements to shield their assets in the event a particular assertion was found to be not only meritless but sufficiently “exceptional” to call for an award of attorneys’ fees. 

These issues are coming into prominence once again.  Earlier this year, for example, Chief Judge Colm Connelly of the District of Delaware issued two standing orders relating to litigation financing.  One is directed to implementation of Rule 7.1, the other to third-party funding.  The latter states, in relevant part, that “where a party has made arrangements to receive from a person or entity that is not a party (a ‘Third-Party Funder’) funding for some or all of the party’s attorney fees and/or expenses to litigate this action on a non-recourse basis in exchange for (1) a financial interest that is contingent upon the results of the litigation or (2) a non-monetary result that is not in the nature of a personal loan, bank loan, or insurance,” the party must disclose “(a) the identity, address, and, if a legal entity, place of formation of the Third-Party Funder(s); (b) whether the Third-Party Funder’s approval is necessary for litigation or settlement discussions in the action, and if the answer is in the affirmative, the nature of the terms and conditions relating to that approval; and (c) a brief description of the nature of the financial interest held by the Third-Party Funder(s).”  In addition, “Parties may seek additional discovery on the terms of a party’s arrangement with any Third-Party Funder upon showing that the Third-Party Funder has authority to make material litigation decisions or settlement decisions, the interest of any funded parties or the class (if applicable) are not being promoted or protected by the arrangement, conflicts of interest exist as a result of the arrangement, or such other such good cause exists.”  In this regard, and as reported in numerous other media, Chief Judge Connelly recently ordered Nimitz Technologies LLC to turn over for his inspection documents of potential relevance to third party funding, asserting his inherent authority to do so.  See Nimitz Techs. LLC v. CNET Media, Inc., 2022 WL 17338396 (D. Del. Nov. 30, 3022).  The Federal Circuit last week denied Nimitz’s petition for a writ of mandamus to vacate the order.

Where this will ultimately come to rest remains to be seen, but it is useful background information to have in mind in considering a couple of short articles recently published on Bloomberg Law and Law360.  The Bloomberg piece, authored by Richard Frenkel and Ceclia Sanabria and titled How Litigation Funding Disclosure Rules Affect NPE Filings, notes that litigation funding rules are also in place in the Northern District of California and the District of New Jersey, and asserts that courts in Illinois “have also ordered discovery relating to litigation funders, explaining that in patent cases such discovery could be relevant to the patents’ value.”  The Law360 piece, by Adam Shartzer and Josh Carrigan and titled Patent Fee-Shifting Often Leaves Prevailing Parties Unpaid, reports the results of a “survey and study of Section 285 attorney fees awards against patentees from June 2017 through June 22.”  According to the authors, there were 82 such cases, and “[t]hrough docket analysis and anonymized survey data through counsel of record” they were able to determine the outcome of 58 of these.  The  authors report that in 21 (that is, 35%) of these cases the fees assessed went unpaid, and that NPEs account for 18 (86%) of these.  They suggest that the use of the LLC form and the cost and difficulty of collecting a judgment are reasons for these results; they also note that some state anti-troll laws permit courts to require patent owners under some circumstances to post a bond (an aspect of anti-troll laws that I have never given much thought to before, but will need to look into).  Two other recent Law360 posts on Chief Judge Connelly's efforts also are worth a look; see Del. Judge's Tough Stance on Disclosure Roils Patent Bar and IP Forecast: Del. Judge to Keep Probing Patent Biz Ownership.