TransPerfect case reveals Chancery Court’s flaws

Regarding “This is what Delawareans need to know about the TransPerfect case,” DelawareOnline, Jan. 26:

Delaware’s Chancery Court is without a doubt the most influential judiciary that most Americans have never heard of. But while many elite legal insiders defend this archaic institution, behind the Chancery’s anonymity lurks a long, sordid history rife with conflicts of interest, and blatant self-dealing.

To that end, it’s no surprise The Delaware Bar Association would take the unprecedented step of publishing an Opinion piece in the News Journal defending the Chancery Court titled “This is what Delawareans need to know about the TransPerfect case.” But readers should be warned that the fiction presented in the piece surrounding the TransPerfect matter is almost entirely untethered from reality.

Here’s the plain truth: seven years ago, TransPerfect’s employees fell victim to the mass panic that the Chancery Court sowed when it baselessly granted Phil Shawe an exit strategy by public auction. It was the first time in U.S. history a court forced the sale of a profitable company against the wishes of the business’ founding owner – a gratuitous slap in the face of America’s cherished free enterprise system.

Ultimately, Shawe was able to re-acquire the business he founded by winning the auction and putting the ownership dispute to rest in 2018. But the cost was enormous, and not just because of the over $250 million in fees the case generated for Delaware law firms – a human toll was racked up as well, as TransPerfect employees’ lives were traumatized and upended for years with uncertain futures. Adding insult to injury, Shawe had to pay a commission fee to buy his own shares back from Credit Suisse, a financial institution working as an arm of the court.

This egregious assault stemmed from the Chancery Court’s fundamental failure to judge cases on the merits over personal relationships with lawyers among Delaware’s white shoe elite. Even the current Chief Chancellor, Kathleen McCormick has stated that the members of the Delaware Bar have “always had each other’s backs, we’ve always gone out for drinks after arguments.” This raises the question, in a court where judges are routinely chosen from the same small pool of law firms that are arguing the cases, where millions of dollars in exorbitant and excessive legal fees are there for the taking – how can any level of true impartiality be accomplished?

It can’t. The stakes are too grand and the take is too tantalizing for the local legal establishment to resist, and the recent Opinion piece by members of the Delaware Bar Association makes that painfully clear.

In a system where hometown relationships are everything, the Chancery Court is a shining example of revolving door machinery at work. Chancellors are picked by the governor in a secret process based on recommendations from the Bar Association.

Unlike every other major court in the nation, case assignments are chosen by a fiat from the chief chancellor, not randomly assigned by wheelspin – as federal case assignments are to eliminate any favoritism or appearance of impropriety. And because the chief chancellor and vice chancellors each rule differently yet consistently among themselves, but consistently as a group, the chief can effectively determine the winner of a case before oral arguments even begin.

In a state where 80% of Delaware voters agree that judges should have to recuse themselves on cases involving former clients – and should be barred from retiring to work at companies for whom they ruled favorably – it’s long past time for reforms to be made.

The federal courts have accepted wheel spin as the best practice for ensuring that assignments aren’t rigged. Lastly, Chancery Court has resisted common sense calls for cameras or even audio recording equipment in the courts. The fact is they would rather make up rehashed nonsense about TransPerfect than address any of the reforms that would ensure the court moved into the 21st century.

The Delaware Bar made a great show of attempting to spin the truth around the TransPerfect case, but the facts of this case are far from precedent. In fact, District Court Judge Greg William, who has ac

Another case uncovered a non-practicing entity – commonly known as a “patent troll” – receiving funding from PurpleVine IP, a little-known Chinese investment group. Foreign-based entities should not be able to clog and manipulate the U.S. legal system undetected by investing in shell company lawsuits that drive funds out of the U.S. economy while affecting American companies ability to compete globally.

Connolly aimed to enhance transparency for everyone involved in a case, ensuring not only that parties accused of patent infringement ... are aware of their accusers, but also who stands to benefit.

Unsurprising opposition

Unsurprisingly, there has been opposition to Connolly’s orders. A handful of companies have asked the U.S. Court of Appeals for the Federal Circuit to freeze the order. The appeals court rightly refused to intervene. Notable non-practicing entities and litigation investment entities, like VLSI Technology LLC and IP Edge have now pulled back from litigation in Delaware to keep their investors hidden. Companies’ resistance to transparency raises a key question: If they have a legitimate legal complaint, why are they choosing not to proceed with cases and fighting so hard to keep their funding sources a secret?

These examples underscore the many reasons why disclosure requirements are imperative. Judges should know who is appearing before them so they can make fair and impartial decisions. Defendants should know who their accusers are. Plaintiffs should be protected from unjust manipulation by their financial backers. Productive American businesses should not have the fruits of their labor sucked up by passive investors, foreign or otherwise.

Transparency rule is crucial

A nationwide transparency rule is crucial, especially considering that the U.S. litigation investment industry reached at least $13.5 billion in 2022.

Congressional interest is evident, with House Speaker Mike Johnson, R-La., Sen. John Kennedy, R-La. and Sen. Joe Manchin, D-WV, introducing litigation funding transparency bills. Sen. Marco Rubio, R-Fla., and Sen. Rick Scott, RFla., have also asked their Florida judges to adopt the Connolly rules, and a coalition of state attorneys general have requested that the Department of Justice look into threats posed by TPLF.

The Judicial Conference, the policymaking body for federal courts, should revise the Federal Rules of Civil Procedure to require the disclosure of litigation investment entities, just like they do for insurance, in order to prevent further abuse. But the wheels of government creak slowly, and until broader action is taken, judges nationwide should follow Delaware’s, and Connolly’s, lead.

Jonathan Stroud is general counsel for Unified Patents.