If you get sued, you should be able to figure out who sued you. Remarkably, though, people and companies who are accused of patent infringement in federal court often have no idea who is truly behind the lawsuit. Patent trolls, companies whose main business is extorting others over patents, often hide behind limited liability companies (LLCs) that serve to keep secret the names of those who profit from their activities.
This shouldn’t be the case. Earlier this week, EFF filed a brief seeking to protect an ongoing investigation of one of the nation’s largest patent-trolling companies, IP Edge.
In recent weeks, Delaware-based U.S. District Court Judge Colm Connolly asked that owners of several patent-holding LLCs, which have filed 69 lawsuits in his court so far, testify about their histories and financing. The hearings conducted in Judge Connolly’s courtroom have provided a striking window into patent assertion activity by entities that appear to be related to IP Edge.
Judge Connolly has also filed his own 78-page opinion explaining the nature and reasoning of his inquiries. As he summarizes (page 75), he seeks to determine if there are “real parties in interest” other than the shell LLCs, such as IP Edge and a related “consulting” company called Mavexar. He also asks if “those real parties in interest perpetrated a fraud on the court” by fraudulently conveying patents and filing fictitious patent assignment documents with the U.S. Patent Office. Judge Connolly also wants to know if lawyers in his court have complied with his orders and the Rules of Professional Conduct that govern attorney behavior in court. He has raised questions about whether a lawyer who files and settles cases without discussing the matter with their supposed client is committing a breach of ethics.
Given the growth of patent trolling in the last two decades, these questions are critical for the future of innovation, technology, and the public interest. Let’s take a closer look at the facts that led EFF to get involved in this case.
Owner of “Chicken Joint” Puts His Name On Patent Troll Paperwork
Hearings conducted by Judge Connolly on Nov. 4 and Nov. 10 revealed that the LLCs are connected to a shadowy network of partial-owners and litigation funders, including IP Edge, a large patent-trolling firm. The hearings also showed that the official “owners” of the LLCs have little or no involvement in litigation decisions, and collect small fractions of the overall settlement money that is collected.
The owner of record of Mellaconic IP LLC, for instance, was Hau Bui, who described himself as the owner of a food truck and “fried chicken joint” in Texas. Bui was approached by a “friend” named Linh Dietz, who has an IP Edge email address and offered a “passive income” of a mere 5% of the money Mellaconic made from its lawsuits—about $11,000. He paid nothing to get the patent that his company acquired from an IP Edge-related entity.
The owner of record of Nimitz Technologies LLC is Mark Hall, a Houston-based software salesman. When the judge asked Hall about what technology was covered in the patent he had used to sue more than 40 companies, Hall said, “I haven’t reviewed it enough to know.” He was “presented an opportunity” by Mavexar, a firm he called a “consulting agency” where Linh Dietz was his contact. Again, it was Linh Dietz who arranged the transfer of the patents. Hall told the judge he stood to get 10% of the proceeds from the patent, which has totaled about $4,000. However, Hall agreed that “all the litigation decisions are made by the lawyers and Mavexar.”
After those hearings, Judge Connolly was concerned that the attorneys involved may have perpetrated a fraud on the court, and violated his disclosure rules. He asked for additional records to be provided. Instead of complying, the patent troll companies have asked the nation’s top patent appeals court to intervene and shut down Judge Connolly’s inquiry.
The Public Has A Right To Know Who Benefits From Patent Lawsuits
That’s why EFF got involved in this case. This week, together with Engine Advocacy and Public Interest Patent Law Institute, we filed a brief in this case explaining why Judge Connolly’s actions are “proper and commendable.”
“The public has a right—and need—to know who is controlling and benefiting from litigation in publicly-funded courts,” EFF writes in the brief. Parties who conceal this information undermine the promise of open courts. What’s more, patent-owning plaintiffs can hide behind insolvent entities, in order to avoid court rules and punishments for litigation misconduct.
If the U.S. Court of Appeals for the Federal Circuit were to stop Judge Connolly from moving forward with enforcing these transparency rules, it will “encourage meritless suits, conceal unethical conduct, and erode public confidence in the judicial process.” There are circumstances where a privacy right or another interest can limit transparency. But those circumstances aren’t present here, where the identity of the party getting the lion’s share of any damages (and which is potentially the true patent owner) are concealed.
The disclosure requirements being enforced by Judge Connolly aren’t unusual. About 25% of federal courts require disclosure of “any person or entity… that has a financial interest in the outcome of a case,” which often includes litigation funders.
Patent trolls often hide behind limited liability companies that are merely “shells,” which serve to hide the names of those who profit from patent trolling. When these LLCs have few or no assets, they can also serve to immunize the true owners against awards of attorneys’ fees or other penalties. This problem is widespread—in the first half of this year, nearly 85% of patent lawsuits against tech firms were filed by patent trolls.
It’s also possible that in these cases, Mavexar or IP Edge may have structured the LLCs to insulate itself from penalties such as being required to pay litigation costs. That could create a structure in which sophisticated patent lawyers behind those firms make 90% or 95% of the profits, while a food truck owner with little knowledge of the patents or litigation could be stuck paying any penalties. In the past several years, fee shifting has become more common in patent litigation, due to Supreme Court rulings that have made it easier to get attorney’s fees paid in the most abusive patent cases.
Even now, Mavexar-connected plaintiffs are continuing to file new lawsuits based on software patents they claim will compel a vast array of companies into paying them money. Mellaconic IP has filed more than 40 lawsuits, including some this week, claiming that basic HR software functions, like clocking in and out, infringe its patent.
EFF got involved in the patent fight nearly 20 years ago because of software patents like these. These patents interfere with our rights to express ourselves, and perform basic business or non-commercial tasks in the online world. They make it harder for small actors to innovate and disrupt entrenched tech companies. And they often aren’t new “inventions” at all. The people who profit from lawsuits over these patents, and hide their identities while doing so, are long overdue for this type of investigation.
Documents related to this case:
- Amicus Brief by EFF, Engine, and PIPLI
- Opinion by Judge Connolly
- Petition for a Writ of Mandamus by Nimitz Technologies
- Response brief from defendant Bloomberg
- Amicus Brief by Acushnet, Garmin International, Red Hat, SAP America, SAS Institute, and Symmetry LLC
- Amicus Brief by U.S. Chamber of Commerce
- Amicus Brief by Intel
- Complaint in Mellaconic IP v. Hi Bob, Inc.
- Complaint in Mellaconic IP v. Paychex, Inc.
- Transcript from Nov. 4 hearing
- Transcript from Nov. 10 hearing
Categories: Electronic Frontier Foundation