More Than Just “Inventory”: Some Professional Responsibility Implications of Third Party Patent Assertion Entity Funding

Guest Post by Jordan Duenckel. Jordan is a third-year law student at the University of Missouri and a registered patent agent. He has an extensive background in chemistry, food science, and economics. 
Law is a noble profession destined to be marred by the activities of attorneys behaving badly. On November 27 th , Chief Judge Colm Connolly of Delaware released a blistering opinion reprimanding counsel for inexcusable and willful lapses in professional responsibility, misrepresentations to the USPTO, and potential unauthorized practice of law all associated with the patent assertion entity IP Edge LLC (IP Edge) and its affiliate Mavexar LLC (Mavexar). Disciplinary, administrative, and potential criminal referrals result for the counsels of record for plaintiffs for this conduct. For other practitioners, this is a cautionary tale about third-party litigation and candor to the Court.  
Even when clients are viewed as mere “inventory”, they are still owed the renowned “punctilio of an honor the most sensitive.” Huber v. Taylor, 469 F.3d 67, 81 (3d Cir. 2006) (quoting Meinhard v. Salmon, 249 N.Y. 458, 464 (N.Y. 1928) (Cardozo, J.))
Judge Connolly’s 102-page opinion is thorough and supplies extensive examples of attorney (and non-attorney) coercive misbehavior through a pattern of activity spanning three plaintiffs that display shocking disregard for professional responsibility stemming from third party litigation funding. An in-depth look at Mellaconic IP is representative of Nimitz and Lamplight’s comparable situation. Mellaconic IP is a sole member LLC organized under the laws of Texas. That sole member is Hau Bui, a food truck and restaurant operator by day. At the hearing, Mr. Bui told how Linh Deitz, the office manager for Mavexar, formed Mellaconic in August 2020 with the limited assets of seven patents. Mr. Bui’s testimony about his ownership of the patents begins to supply insight:
Q: Okay. How much did you pay for the patents?                                                                 A: I didn’t pay for the patents.                                                                                                   Q: So how do you come to own patents if you don’t pay for them?                                   A: I was- came up–someone pushed me with the opportunity, selling the patents.     Q: Who was that? Mellaconic?                                                                             A:Mellaconic-no, Mavexar. Sorry.
When asked about the actual business of Mellaconic, Bui stated:
Q: Did you have to take on any responsibilities to assume ownership of the patents? A: As far as, just like, viewing the litigations and everything that come through.         Q: Oh, so you do review the litigations?                                                                                 A: Yeah.                                                                                                                                           Q: Tell me about what you do in that regard?                                                                       A: So Mavexar will send me the litigations of what’s going on or the, you know, attorney engagements. And then I, essentially, if l sign-I approve of them or disapprove of them.                                                                                                                     Q: How do you know whether to approve or disapprove of an attorney?                       A: I mean, I chose Mavexar and they’re-they’re-what is it? -they’re good. Like, you know, they haven’t done me wrong.                                                                                       Q: Well, so do you get a share, then, of lawsuits or settlements that are brought using these six patents? Is that how you make money, passive income, as you call it?  A: Yeah.
Mellaconic “acquired” the patent via a patent assignment from another company, Empire, and subsequently filed an assignment at the PTO and entered a “Consulting Services” agreement with Mavexar on August 11, 2020. At the time Mellaconic filed with the PTO an assignment that stated that Mellaconic’s “right, title, and interest” in the seven assets listed in the assignment “includ[ed] all income, royalties, damages and payments now or hereafter due or payable with respect thereto,”* Mavexar was contractually entitled to 95% of the profits generated from licensing or litigating those assets. Mellaconic subsequently filed 44 different patent infringement cases nationwide asserting a single patent , 9,986,435 (the #435 patent).  Maxevar located and contacted attorney Jimmy Chong to be counsel for Mellaconic in these lawsuits and filed the suits as well as voluntary dismissals with cocounsel’s firm Sand and Sebolt.  
A slight issue arose when it became clear that Bui was unaware that Chong’s firm was Mellaconic’s counsel, even failing to identify Mr. Chong in person from 20 feet away, with the first direct contact via email on November 30 th , weeks after the hearing. Bui replied, “Yes, you can continue to communicate to Mavexar team directly.” At the hearing, it became clear that Mr. Bui did not review any complaints before being filed or even that he was apprised of settlement offers in the litigation. Up to thirteen complaints had been filed and voluntarily dismissed before Mr. Bui even communicated with his counsel of record. Chong and Sebolt’s attorneys would often communicate with Maxevar to confirm settlement offers without asking for Bui’s consent.

Omnipresent in any attorney-client representation are the requirements of the rules of professional responsibility that are codified by the Model Rules. Rule 1.2 (allocation of authority), Rule 1.4 (Communications), Rule 1.7(Loyalty), and Rule 1.8f (Third Party Funding) were all implicated in Connolly’s opinion. Rules 1.2 and 1.4 are important but self-evident in this context. The more pernicious, and less visible, problem is the implications of third-party funding creating a conflict of interests that results in a de facto denial of independent representation.  The potential for a conflict of interest is clear when profits (or a substantial portion of them) are assigned to one party and the risk is assigned to another. Third-party litigation in general carries increased risks of conflicts of interest and non-practicing patent assertion entities (PAEs) enhance the risks even more. 
The structure that Mavexar created assures that the only risk Mavexar assumes when an attorney files at Mavexar’s direction an infringement case in Mellaconic’s name is the potential that Mellaconic will not follow its contractual obligation to reimburse Mavexar for the fees and costs Mavexar advances to that attorney that exceed any gross recovery. In other words, Mavexar has virtually nothing to lose and everything to gain (i.e., 95% of everything) from asserting the patent in infringement suits. Mellaconic, by contrast, receives a tiny fraction of the litigation gains but it, and potentially Mr. Bui, personally have lots to lose if the litigation results in an adverse decision, sanctions, or fees and costs that exceed the gross recovery. PAEs, like Mavexar, represent rent-seeking behavior (extraction of wealth without any reciprocal contribution of productivity), and the related Tullock Paradox, at work: increased marginal utility at a fraction of the marginal cost.  
Considering these vastly different profit and risk profiles, Mavexar’s and Mellaconic’s interests were significantly different when it came to deciding to file or to settle the lawsuits Mr. Chong and co-counsel brought in Mellaconic’s name. Repeatedly, Chong and others insisted that they do not represent Mavexar as counsel but rather that Mavexar acts as a consultant to Mellaconic. However, Mavexar is the guiding force behind the entirety of the assertion of patent infringement claims despite explicitly requesting to keep their name out of any of the litigation that was filed despite being the real party in interest. Mavexar was actively involved in the creation of shell companies, finding “targets” to assert patents against, hiring attorneys to represent Mellaconic, and actively managing settlement discussions.**  
Much ink can and has been spilled discussing the economic and societal merits of third-party litigation funding. Regardless of the future direction, a bedrock legal principle must remain: truly independent representation of all parties is core to informed decisions and fair dealing. Mr. Bui, and many others like him nationwide, are deprived of that fundamental principle when conflicts of interest are disguised and perpetrated by PAEs at the expense of clients. This is beyond an academic review of best practices: real clients suffered real economic and emotional distress as a result of these attorney’s disregard. The de facto client was Mavexar and the actual client, Mellaconic, was simply “inventory,” left without some of the most basic tenants of legal representation. 
 
*This assignment either does not disclose or actively hides the real party in interest because it falsely states who is entitled to the income from the patents. This false statement forms the basis for the criminal referral under 18 U.S.C. 1001. There is also some uncertainty around whether federal law was broken concerning failing to disclose a French sovereign investment fund that was the original assignor of at least one of the patents.
**While Mavexar  vigorously denies being a law firm, the work they were doing in the litigation is legal in nature and forms the basis of the unauthorized practice of law referral.