Judge’s Litigation Funding Probe Reveals IP Edge’s Human Toll

Sally Pugal didn’t want to travel from her home in Houston to tell a federal judge in Delaware how she’d gotten involved as a patent owner in a litigation campaign.

The surgeon’s assistant texted the office manager of IP Edge LLC, a prolific patent monetization company tied to hundreds of infringement suits, repeatedly over the course of several days that she was uncomfortable appearing in court.

“I have nightmares almost every night thinking about it and so stressed,” Pugal texted in October 2022 to Linh Deitz, IP Edge’s office manager, according to communications made public by a federal judge who investigated the company’s business model.

Ultimately, Pugal never did appear in the U.S. District Court for the District of Delaware. At a Nov. 4 hearing, Chief Judge Colm F. Connolly grilled the lawyers for and owners of limited liability companies created by IP Edge. On paper, the LLCs were owned by Pugal, food truck operator Hau Bui and software salesman Mark Hall.

But Pugal’s texts, other private communications, and internal documents made it to Connolly. The judge sought testimony and evidence that might show whether three IP Edge-affiliated LLCs had violated his standing orders mandating litigants in civil cases disclose certain corporate relationships and outside funding.

What the judge found led Connolly to call these “shell companies.” He was especially concerned with the “obvious disparity in the sophistication of the LLC plaintiffs as opposed to Mavexar and IP Edge,” which he said was “evident from the lopsided terms of the consulting services agreements.”

On Nov. 27, Connolly referred lawyers for three plaintiff LLCs and IP Edge for discipline, finding that they worked together to subvert the interests of the on-paper patent owners to the advantage of IP Edge and Mavexar LLC, its consultancy business.

Connolly’s 105-page ruling represents an extensive public detailing of the operations of IP Edge, one of the highest volume filers of patent lawsuits in the US. It raised questions about the ethical standards of the litigation finance industry that supports non-practicing entities—so called because they don’t make or sell products themselves.

“Unfortunately there are bad actors in every industry, and the IP monetization industry is no exception,” said Sarah Tsou, global head of intellectual property at litigation funder Omni Bridgeway. She said she’s pleased Connolly is working proactively to deter funders that are engaging in potential shell games but said the revelation is hard on the industry.

“We think that the claimants and their agents that are involved in this dispute are making everyone look bad,” Tsou said.

Connolly’s investigation—a rare undertaking that’s uncovered some of the previously undisclosed sources that stand to gain from dozens of patents suits filed in Delaware—and ruling revealed IP Edge’s “unbelievable disregard” for people recruited as owners of the LLCs that filed suits in the judge’s court, said Rachael Lamkin, a partner at Baker Botts who specializes in patent litigation defense. She said the communications between IP Edge and Pugal were particularly galling.

“When the jig is up, IP Edge continues to make Pugal think she’s the one who needs to pay sanctions,” Lamkin said. “She’s saying ‘I can’t sleep’ and they’re trying to make sure she shows up in Delaware to take responsibility for their mistakes.”

IP Edge Model

Connolly on Friday referred IP Edge attorneys Papool Chaudhari, Gau Bodepudi, and Duy Tran, who used to work at the company, to the Supreme Court of Texas Unauthorized Practice of Law Committee for engaging in “unauthorized practices of law in Texas.” Last week he posted on his docket letters flagging the IP Edge cases for the US Department of Justice’s Criminal Division and to the US Patent and Trademark Office.

Bodepudi declined Friday to comment personally or on IP Edge’s behalf.

One of the funders of the company’s litigation efforts, however, did weigh in. Chad Meyer, a principal at Tecumseh Alternatives LLC, said his company provides a “very small part” of IP Edge’s funding. In an interview, he defended the IP Edge business model, which relies on finding “friends and family basically” to “get 5% or 10% for essentially doing nothing.”

While he expressed sympathy for Pugal, he said IP Edge didn’t anticipate she and others would become a target of the probe. He said other cases have been settled, and defendants didn’t raise objections.

“Everyone walked away from these cases happy,” he said.

The communications and documents that Connolly reviewed are not clear about how each individual LLC owner connected with IP Edge.

Bui, the food truck owner, called Deitz “a friend” and his entry point. In the text message exchange highlighted in Connolly’s opinion, Deitz called Pugal “sweetie,” even as their exchange grew tense. In a separate IP Edge case before Connolly, the plaintiff LLC’s owner is the widow of an IP Edge patent attorney.

As Deitz tried to convince Pugal to make the trip to Delaware, it became clear she had gotten cold feet, according to their messages.

Deitz forwarded to Pugal a note from Chaudhari, an IP Edge lawyer: “This judge isn’t going to rest until Sally appears in his courtroom in Delaware and if she doesn’t appear on 11/4, a date she requested there’s probably going to be sanctions.”

That means “you will be charged,” and “Unfortunately the judge is a prick and there is not telling how much fees could be,” Deitz told Pugal.

Pugal, who said she was suffering from serious health issues, ultimately didn’t make the Nov. 4, 2022, hearing date. She did not respond to a Bloomberg Law email seeking comment about the opinion.

George Pazuniak, who represents Nimitz Technologies—one of the three LLCs along with Mellaconic IP and Lamplight Licensing— called the probe a “judicial inquisition.” He said in an email to Bloomberg Law on Nov. 27 that counsel for the IP Edge LLCs “followed the law,” and didn’t do “anything wrong or unethical or unprofessional.”

For months Pazuniak, tried to stop Connolly’s probe in its tracks. In February 2023, he pushed to challenge it at the US Supreme Court and he filed multiple appeals aiming to halt the probe.

Rather than be concerned by the disciplinary referrals, Pazuniak said the attorneys were “thankful, that the issues are being transferred to neutral bodies for consideration.”

Bloomberg LP is among the companies sued by Nimitz. Bloomberg Law is operated by entities controlled by Michael Bloomberg, the founder and majority owner of Bloomberg LP.

Sophistication Mismatch

As the investigation progressed, Connolly dug into the mismatch in “sophistication” between the lawyers at IP Edge, and the people they recruited for the litigation campaign. He ordered the LLCs and their lawyers to turn over certain documents related to their structures and solicited courtroom testimony from Hall and Bui in 2022 to figure out what they stood to gain from attaching their names to the LLCs and the asserted patents.

Bui, who runs a Waco food truck called Vietnomz, testified that the LLCs formed in his name had to pay Mavexar, the IP Edge affiliate, 95% of its profits, Connolly wrote.

Mark Hall, the Houston-area software salesman, reported getting 10% of any proceeds from the Nimitz cases, Connolly said.

Connolly said Pugal’s profit split was unknown because she didn’t appear for questioning. Pugal said in one text with Deitz that she doesn’t “even make money on any of the company,” according to court filings.

Connolly ultimately concluded that the arrangements were unfair to the LLC owners and that Pugal, Bui, and Hall should’ve had independent counsel advising them. He wrote that IP Edge structured the LLCs so that it received the lion’s share of the litigation benefits while the the on-paper owners “assume all the risk” from the lawsuits, including attorneys’ fees awards or court-imposed sanctions.

Meyer, whose firm partners with IP Edge, downplayed that risk.

Connolly makes “a big deal about liability, but part of what IP Edge does is they take these patents, do their research, talk to contingency fee attorneys, see what they think and if they think there’s legitimate claims there,” Meyer said. “The possibility of there being liability from attorney’s fees if a case is a loss is so remote and it’s never happened with IP Edge.”

“They’re running a business,” Meyer added. “If the case turns out to be much weaker than they thought initially, they just dismiss it because they’re not into throwing good money after bad.”

Litigation Finance

Connolly’s disclosure requirement for third-party funding and his opinion this week have made waves in the behind-the-scenes litigation finance industry. His April 2022 standing order, which requires parties to disclose whether they are receiving funding for their cases, led to the revelations of IP Edge’s role in the Nimitz, Mellaconic, and Lamplight patent suits and also brought to light when established funders and foreign money have backed cases in his courtroom.

There are various forms of litigation finance, and when legislators and other entities pushing for regulation lump different types of funders together, it’s “detrimental” to the industry, said Andrew Cohen, a director at commercial litigation funder Burford Capital.

“The opponents of legal finance grouped together consumer and commercial legal finance,” he said. “They group together the worst, least professional practitioners of legal finance with the most well-behaved within the legal finance industry, and they do that strategically to tarnish the entire industry.”

Attorneys in the patent law and litigation finance industries differed over what lessons to draw from Connolly’s investigation and opinion.

“A disclosure rule in a handful of cases has already illuminated how many interests might be behind the company that’s in court,” Joshua Landau, senior counsel at the Computer & Communications Industry Association, said in an email.

What Connolly found “might be the most egregious example” but it’s difficult to know because of “lack of disclosure” in other courts, he said.

Cohen of Burford said it was correct for Connolly to use his authority as a judge to investigate what he saw as suspicious behavior. He said he is unsure whether Connolly will continue to require disclosure in his courtroom going forward.

“It remains to be seen whether the standing order remains necessary or relevant given the fact that he’s concluded this investigation now,” he said.

Meyer, whose company launched a fund working with IP Edge two years ago, said he plans to work with IP Edge more, regardless of the investigation’s findings and fallout.

“They want us to become a bigger part of it, and we do, too,” he said. “They’re just doing great work for us.”

The case is Nimitz Techs. LLC v. CNET Media, Inc., D. Del., 1:21-cv-1247, opinion 11/27/23.