Intellectual Property

Delaware Disclosure Dance

The changes to Rule 7.1 disclosure have led to the recent drama roiling the patent litigation world. 

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Intellectual PropertyFor what seems like the entire past month, all eyes in the patent litigation world have been on Delaware. In particular, on the events transpiring in the courtroom of Chief Judge Colm Connolly. So far, we have seen a number of blockbuster hearings, a series of mandamus petitions to the Federal Circuit, a long explanatory opinion by the court,  and at least one recent threat of sanctions against counsel. What is especially interesting about the pending developments is that two very different types of patent assertion approaches are implicated, even as the issues at hand revolve around the court’s focus on making sure that patent litigants comply with the more robust disclosure requirements recently enacted in cases pending before it. Behind that effort is the court’s interest in harmonizing disclosure requirements with those already in place in other district courts, including in New Jersey. While Connolly’s new standing orders include a revised approach to patent case scheduling, as well as new disclosure requirements around litigation funding, it has been the changes to Rule 7.1 disclosures that have led to the recent drama roiling the patent litigation world.

For those as yet unaware, Connolly issued the following standing order relating to Rule 7.1 disclosures:

In all cases assigned to Judge Connolly where a party is a nongovernmental joint venture, limited liability corporation, partnership, or limited liability partnership, [each] party must include in its disclosure statement filed pursuant to Federal Rule of Civil Procedure 7.1 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.

In most patent cases nationwide, litigants have been conditioned to making very limited disclosure, consistent with FRCP 7.1 and applicable local rules. In a typical case involving a patent plaintiff structured as an LLC, as an example, that disclosure would simply say that the LLC is privately owned, with no further information proffered. That no longer passes muster before Connolly, even as the precise contours of how far up the “chain of ownership” a litigant’s disclosures must reach in order to comply with his new order are still a bit uncertain. What we have seen so far, however, is that compliance for certain categories of patent plaintiffs can be a challenging endeavor.

In light of the challenges the new disclosure rules present for patent plaintiffs, it is no surprise that sophisticated defendants are pressing their advantage. Leading the charge is Intel — itself no stranger to patent monetization efforts — which has asked Connolly to dismiss with prejudice one of VLSI’s cases pending against it, as a sanction for VLSI’s ostensible failure to identify far-upstream investors in the entity owning VLSI. In response, VLSI has argued that it has already disclosed more than enough information about its ownership to give the court comfort that no conflicts or improprieties would impact on the court’s ability to fairly adjudicate the case. While the parties hotly contest whether VLSI has complied with the court’s disclosure requirements — and even whether the court’s order was properly issued — there is no real dispute that the upstream investors Intel wants disclosed have no control, operational or otherwise, on VLSI’s litigation efforts. Still, with the hearing on Intel’s motion postponed pending further Federal Circuit consideration of Connolly’s issuance of the standing order in other cases, there is still the possibility that Intel’s aggressive approach could bear fruit. In short, Intel is looking for a kill on what amounts to a technicality, which is not necessarily a bad gamble in light of the low-stakes and high-reward potential of the maneuver. More is surely to come in this closely watched situation involving litigants engaged in today’s most valuable patent cage match.

And what of the other cases where the court’s requirements remain under Federal Circuit review? There, we have what I consider an almost unprecedented level of rhetoric being leveled at a district court judge by a patent plaintiff, including multiple accusations that Connolly is conducting an “Inquisition” against the patentees with his demands for full disclosure. (Not the greatest reference in my opinion, considering that I am a Sephardic Jew and don’t think invoking events like the auto-da-fe are pleasant reminders.) At the same time, we have already linked above to the court’s well-reasoned opinion as to why he thinks aligning Delaware’s disclosure requirements with those already in place in other districts is justified. As we have already seen, the issue has gotten a lot of attention based on the numerous mandamus petitions presented in the Federal Circuit, with numerous amici briefs on file urging for more transparency when it comes to patent ownership.

Adding fuel to the fire is the combustible testimony that arose out of the first few hearings that the court conducted, which included revelations about the use of naive plaintiffs to serve as LLC owners, as well as the fact that an undisclosed consulting unit was getting the vast majority of revenue generated by settlement of the patent cases. Considering the fact that the entity operating behind the scenes is responsible for a measurable amount of the patent litigation filed in the United States each year, it is perhaps less surprising that their tactics are coming under such scrutiny at this time. At minimum, it will be very interesting to see what happens when Connolly is ready to issue his rulings on the matters presented, especially since the federal circuit has so far evidenced little interest in stopping proceedings as they unfold.

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Ultimately, this ongoing Delaware saga is yet another incremental step in the evolution of our collective thinking as to what is truly important when it comes to patent litigation. For a long time, the focus has been on the strength of the patents at issue in patent cases, from both a technical and damages perspective. In this age of sophisticated patent plaintiffs and litigation funding, however, we are starting to see a shift in focus. No longer is the only inquiry whether the asserted patents pass muster on the triad of damages, infringement, and validity. Now, it is just as important, if not more so, to know the true strength of the entity(ies) behind the patents being asserted if you are a defendant — for a variety of good reasons, but primarily because the accurate assessment of an adversary’s strength is a predicate to forming a successful strategic response to the threat presented. In the meantime, we will continue to monitor the Delaware disclosure dance to see how much the rules of the game may be changing in a key patent litigation jurisdiction.

Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.

Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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