Federal Circuit Confirms Contempt Finding for Patent Litigation Funder

The Federal Circuit has affirmed a lower court’s contempt orders against the sole officer of a patent-owning plaintiff entity who failed to appear at multiple court-ordered evidentiary hearings.

The case is Backertop Licensing LLC v. Canary Connect, Inc.

Backertop Licensing LLC and Lori LaPray appealed the Delaware federal court’s order requiring Ms. LaPray to appear in person before the District Court for testimony regarding potential fraud on the court, as well as the order of monetary sanctions against Ms. LaPray for subsequently failing to appear.

As the court noted,

Over the past year and a half, the Chief Judge of the District of Delaware has identified potential attorney and party misconduct in dozens of related patent cases… The plaintiffs in these cases are limited liability companies (plaintiff LLCs) that seem to be associated with IP Edge, a patent monetization firm, and Mavexar, an affiliated consulting shop.

As the Federal Circuit explained,

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 Delaware District Court

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 was concerned that “this arrangement may conceal from the court the real parties in interest” in the patent cases.

In addition,

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.

And finally,

the District Court explained that the 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.

In response to these concerns, in 2022, the district court held evidentiary hearings and required the plaintiff LLCs and their lawyers to provide documents on the patents transferred to the shell LLCs.

In April 2023, Backertop’s local counsel filed a motion to withdraw as counsel, explaining that he “[was] unable to effectively communicate with [Backertop] in a manner consistent with good attorney-client relations.”

The same day, Backertop’s other attorney also sought to withdraw as counsel because he couldn’t get a response from the other local counsel. Backertop opposed its attorney’s motion to withdraw.

On May 1, 2023, the District Court set a hearing for June 8, 2023, “[t]o sort through [the] morass.” The District Court ordered Ms. LaPray and the two attorneys to attend the hearing in person.

Ms. LaPray told the court that she was unable to attend the June 8, 2023, hearing in person because she had preexisting travel scheduled. She also said she was a paralegal and (without providing details) had “a number of trials and hearing[s] through the entire summer,” and that “parental obligations continue to make travel difficult.” She asked to appear via phone or videoconference.

As the Federal Circuit noted,

In denying the motion, the District Court noted that it was “sympathetic to the childcare burdens that business and court-related travel can impose on working parents,” but observed that Ms. LaPray had voluntarily agreed “to serve as the sole natural person affiliated with Backertop” and to file “the dozen patent infringements suits . . . last year in district courts across the country, including four suits in Delaware.”

After Ms. LaPray refused to attend another hearing, the District Court held a show cause hearing on August 1, 2023, to provide Ms. LaPray with an opportunity to show why she shouldn’t be held in civil contempt. Ms. LaPray also didn’t appear at that hearing.

The District Court found Ms. LaPray in civil contempt of court and imposed a fine of $200 per day until Ms. LaPray appeared in court.

Backertop and Ms. LaPray appealed.

The Federal Circuit held that the District Court’s order requiring Ms. LaPray to appear at an in-person hearing fell squarely within its inherent powers.

The Federal Circuit found that

The District Court’s order to compel Ms. LaPray’s attendance was an appropriate means to investigate potential misconduct involving Backertop, a corporate party of which she is the sole representative. More specifically, the District Court’s stated concerns include that Backertop may have concealed certain third-party funding and the real parties in interest, that those real parties in interest may have perpetrated fraud on the court, and that Backertop’s counsel may have failed to comply with the Rules of Professional Conduct.

Also,

The District Court stated that Ms. LaPray’s attendance in person was required to assess her credibility given (1) “the representations and positions of counsel and Ms. LaPray” and their apparent lack of communication, especially in light of the counsels’ motion to withdraw; and (2) the District Court’s “questions for Ms. LaPray about [Backertop’s document] production…. As the Third Circuit recognizes, it is particularly important to observe witnesses in person when making credibility determinations. …While another district court may have found that a telephonic or videoconference hearing was sufficient, it was reasonable for the District Court here to require in-person testimony in furtherance of its authority to investigate attorney and party misconduct.

In addition,

the District Court had already rescheduled the hearing once to accommodate Ms. LaPray’s preexisting travel and expressed willingness to accommodate similar specific conflicts, with proposed alternative dates. … Ms. LaPray never identified other specific conflicts, other than continuing childcare obligations making travel at any time difficult, nor did she propose alternative dates.