Sources at funders, law firms and an NPE debate what chief judge Colm Connolly’s standing order means for discovery and settlements in Delaware
Managing IP
By Rani Mehta
April 27 2022
It’s well known that patent litigation funding has become a bigger deal in the US.
Managing IP reported earlier this year on how COVID, lucrative tech, big-ticket damages awards and virtual litigation had spurred an uptick in the number of large corporates seeking lawsuit investment over 2021 and the first part of this year.
But amid this funding rise, some attorneys have argued that there ought to be more transparency around outside money sunk into patent cases – and it seems some high-ranking judges agree.
The District Court for the District of New Jersey amended its rules to require parties using third-party litigation financing to file disclosure statements in June 2021. The District Court for the Northern District of California made a similar change long ago in January 2017.
And earlier this month, chief judge Colm Connolly at the District Court for the District of Delaware released a standing order using similar language to New Jersey’s updated rules. This order, issued on April 18, required litigation funding disclosures for all cases assigned to him.
Connolly succeeded Leonard Stark – who went to the Court of Appeals for the Federal Circuit earlier this year – as chief judge in July 2021.
Unlike the rule changes in California and New Jersey, Connolly’s order doesn’t affect the other full-time district judges in Delaware (both of them).
Nonetheless, Connolly is the chief judge, and the fact that this order has come down from the top might encourage the other judges to eventually issue similar standing orders or get behind a wider rule change.
Wendy Verlander, CEO of non-practising entity (NPE) Blackbird Technologies and managing partner of Verlander LLP in Boston, says it doesn’t surprise her that the issue came up in Delaware given that it already arose in New Jersey.
But she notes that Connolly’s order is important because a lot of patent cases are filed in Delaware, much more than in New Jersey. Delaware is the second most popular court for patent litigation in the US behind the District Court for the Western District of Texas.
Not just size
Litigators and funders say there are several other reasons this order matters, however.
For one thing, having access to information about third-party funders can help shape defendants’ settlement strategies.
Richard Hung, co-chair of Morrison & Foerster’s intellectual property litigation group in San Francisco, says it’s helpful for defendants to know whether they’re dealing with a plaintiff they can fend off with a smaller settlement or whether said defendant has the cash for a longer haul.
If a plaintiff is being financed by a sophisticated funder, the defendant would have to adjust its strategy accordingly, says Hung.
Attorneys say the standing order could also affect discovery strategies and compel parties to file in courts other than the District of Delaware.
Sources add that they’re not sure whether these types of standing orders will multiply across the US and form a larger trend, but that they wouldn’t be surprised if more judges followed suit.
Parties could prepare for this possibility by avoiding certain problematic funders that would be likely to be subjected to extra scrutiny under these standing orders, they add.
Under the latest standing order from Delaware, parties using funders must disclose the identity, address and place of formation of the third party, as well as reveal whether any funder’s approval is necessary for litigation or settlement decisions.
They must also include a brief description of the nature of the financial interests of the third-party funders.
Connolly’s order also specifies that a party can seek additional discovery of an opponent’s arrangement with a funder if that funder has decision-making authority, the interests of the funded parties aren’t being protected by the arrangement, the arrangement causes conflicts of interests, or there’s other good cause.
Why it matters
One way this change could affect litigants’ strategies in the immediate term is by allowing them to spend less time on certain types of discovery – at least when they’re in front of Connolly – say counsel.
Matt Rizzolo, partner at Ropes & Gray in Washington DC, points out that defendants usually seek access to material related to lawsuit investments and plaintiffs often don’t want to disclose said information.
“But these sorts of standing orders take all of that off the table,” he says.
That being said, parties could still butt heads over other funder-related discovery issues, say counsel.
Verlander at Blackbird notes that the standing order requires a brief description of the nature of the financial interests of the third-party funder, yet it’s not clear how broad that might be or why that would be relevant if the funder had no decision-making authority.
“It could be fodder for additional unnecessary discovery, which is a waste of time at best,” she says.
Driving away
Verlander notes that she doesn’t expect this order to have much effect on her company’s strategy because it would never use a funder that would have any authority over any decision-making in court.
But attorneys say some NPEs may feel differently.
Rizzolo at Ropes & Gray says it’s certainly possible that this order could dissuade some entities from filing in Delaware if they could file elsewhere.
Syed Fareed, partner at Baker Botts in Austin, adds that some entities may be uncomfortable with the fact that they must disclose whether any funder’s approval is necessary for litigation or settlement decisions, and that this factor could lead to a decrease in the number of cases backed by such funders in Delaware.
Some funders don’t agree this would be the case, however.
Sarah Tsou, investment manager and legal counsel at Omni Bridgeway in New York, says she expects this process will show that a lot of claimants, including large corporate clients, use funding and that funders are appropriately investing in cases with merit.
“We view this as a positive because it will disabuse people of misconceptions that funders exert control unduly or enable frivolous suits,” she says.
Not everyone in the litigating funding industry is as pleased with this standing order though.
Gary Barnett, executive director of the International Legal Finance Association in Washington DC, says he understands the need to review these agreements in limited circumstances, such as in instances of conflicts of interest or when it’s needed to determine standing.
“But without a particular need present, disclosure requirements risk revealing sensitive legal strategies or unnecessarily increasing motions, legal costs and the duration of cases,” he says.
Tricky trends
Some sources say it’s likely that this standing order could spur similar ones, although probably from other Delaware judges to start.
Rizzolo at Ropes & Gray points out that Delaware litigants only have to disclose investment information if they get Connolly as a judge. At some point, he adds, the other Delaware judges may look at this inconsistency and make their own orders to help lessen the burden of discovery across the court.
“I would expect that to happen sooner rather than later,” he says, adding that there’s a good chance that judges outside the District of Delaware will also follow suit.
Attorneys add that this standing order could be relevant even if more judges don’t adopt similar policies.
Hung at Morrison & Foerster says counsel could still cite this standing order in front of other judges when trying to get discovery on third-party litigation funding information.
Perfect prep
If this standing order becomes part of a wider trend, litigants will have to prepare and adjust.
Counsel say that because the order allows additional discovery when third-party funders have control over cases, litigants should try to stay away from funders that want to have a say over their disputes.
Verlander at Blackbird says a lot of the issues should go away if litigants avoid such investors.
Sources add that these funders might also want to rethink their strategies.
Tsou at Omni Bridgeway says reputable funders won’t have anything to hide, but financers that put in controlling provisions should take this new order as a wake-up call and avoid using such clauses in the future.
Attorneys should also be prepared for the fact that defendants and plaintiffs may disagree on whether juries should have access to information about third-party litigation funding.
Verlander says she expects defendants may try to get this information in front of juries if they have access to it.
“I don’t think it should be in front of a jury though. It could be prejudicial, particularly if the jury has no similar information about the defendant, such as its litigation budget, or has negative feelings about funders,” she says.
Litigants will have to contemplate this issue, among others, as they grapple with the implications of Connolly’s standing order and look to see whether other courts follow.