Context: IP Edge is one of the most litigious patent monetizers. Filing large numbers of patent infringement actions is not per se illegal, and patent holders may set up new entities for that purpose. But with a view to standing and for other reasons, they must make truthful representations as to who actually controls the patents-in-suit.
What’s new: Today the Federal Circuit entered a precedential appellate ruling on the question of whether a person “owning” shell companies that asserted IP Edge patents in more than 100 lawsuits must testify in person. The appeals court affirmed a contempt order by Chief Judge Colm F. Connolly of the United States District Court for the District of Delaware.
Direct impact: Civil contempt is one thing, fraudulent litigation conduct another. Based on today’s Federal Circuit decision, the investigation will continue with in-person testimony by an uncooperative witness.
Wider ramifications: It is noteworthy that the Federal Circuit designated this decision as precedential, given that it applies regional circuit law to non-patent-specific procedural questions such as in this case.
The unsucessful appeal was brought by Backertop Licensing LLC, which is one of various entities asserting patents assigned by IP Edge, and Mrs. Lori LaPray, formally the sole owner of Backertop as well as other LLCs that collectively filed more than 100 U.S. patent lawsuits.
Today was not the first time for the Federal Circuit to make a decision relating to the district court’s concerns over potentially fraudulent litigation conduct. The Federal Circuit previously denied a mandamus petition against a discovery order (at the time, it was about document production).
While not parties to this appeal, it’s really about IP Edge and a non-legal consulting firm named Mavexar that has a working relationship with IP Edge. Here’s how the Federal Circuit summarizes the district court’s concerns:
In the District Court’s detailed memorandum, it found that IP Edge and Mavexar appear to have created all of the plaintiff LLCs; recruited outside individuals to serve as their sole owners; assigned patents to the plaintiff LLCs for little or no consideration; retained the rights to the majority of royalties and settlement proceeds; and reported a complete assignment to the United States Patent and Trademark Office (PTO)—all without disclosing IP Edge’s ongoing rights in any patent-related proceedings. […] The District Court found that IP Edge and Mavexar then directed infringement litigation asserting those patents—including overseeing the attorneys and agreeing to settlements—with seemingly little to no input from the plaintiff LLCs’ owners. […]
The District Court developed concerns that this arrangement may conceal from the court the real parties in interest: IP Edge and Mavexar. […] see also Fed. R. Civ. P. 17(a)(1) (“An action must be prosecuted in the name of the real party in interest.”). The District Court was also concerned whether “those real parties in interest perpetrated a fraud on the court by fraudulently conveying to a shell LLC [the patents] and filing a fictitious patent assignment with the PTO designed to shield those parties from potential liability they would otherwise face in asserting [the patents] in litigation.” […] Further, the District Court noted that the plaintiff LLCs and their counsel may have violated local disclosure rules by failing to disclose IP Edge’s or Mavexar’s funding for the litigation. […] Finally, the District Court explained that plaintiff LLCs’ attorneys may have violated the Rules of Professional Conduct by filing, settling, and dismissing litigation at the direction of Mavexar, a non-legal consulting firm, without the informed consent of the plaintiff LLCs’ owners. […]
This passage is closely related to the passage quoted above:
The cases involving Backertop Licensing LLC (Backertop), and the orders that are the subject of this appeal, are part of the District Court’s inquiry. Ms. LaPray is the sole owner of Backertop. In 2022, Backertop filed at least twelve patent infringement cases in federal district courts in California, Colorado, New York, Texas, and Delaware. […] Ms. LaPray is also the managing member of six other LLCs that have filed at least ninety-seven patent infringement cases in federal district courts. […] In the Backertop cases, the District Court identified the same pattern of potential misconduct seen in the other IP Edgelinked and Mavexar-linked cases.
The seriousness of those allegations may have been the primary reason for which the Federal Circuit decided to designate its opinion as precedential. In legal terms, the Federal Circuit had to apply Third Circuit law, and it had to deal with the rare circumstance of an attorney having withdrawn because he “[was] unable to effectively communicate with [Backertop] in a manner consistent with good attorney-client relations.” The Federal Circuit held that the district court had the inherent authority to enter a sua sponte order requiring Mrs. LaPray to appear in person, despite her argument that continuing childcare obligations prevented her from traveling to a district in which she had actually chosen to bring litigation.
This judicial investigation could have various ramifications. It could affect pending lawsuits that were brought over IP Edge patents. There could be claims by companies that were sued and settled. It could also impact IP Edge’s reputation, which in turn could make it harder to acquire patents. This was not the first and may not be the last time that the Federal Circuit has to make a decision in that regard.