Of Quashing And Quibi

In the majority of cases the more salient focus should be on the consequences of the investment by a litigation funder, rather than the motivation behind the grant of that funding.

Back in June of last year, I highlighted the then-nascent patent and trade secret dispute involving streaming video technology purveyors Eko and Quibi. While Quibi’s attempt to become the Netflix of streamed “short-bite” mobile entertainment proved unsuccessful, its IP dispute with Eko is still kicking in earnest. While I could fill a column just going through the various and sundry filings (including the predicted Quibi IPRs) and counterfilings between the parties, at this point in the process the more interesting battle regards Quibi’s subpoena directed to Eko’s high-profile investor cum litigation financier, billion-dollar plus hedge fund Elliott Management. To date, Quibi’s attempts to get discovery from Elliott have been frustrated at every turn, with Elliott moving to quash the SDNY-issued subpoena seeking information into its knowledge as a publicly-disclosed investor in the lawsuit against Quibi.

Elliott’s motion to quash Quibi’s subpoena had a brief sojourn in the SDNY, before being transferred in late January to the Central District of California (where the underlying litigations between Eko and Quibi are pending) for adjudication. In early February, the CDCA’s Magistrate Judge Kim ordered Quibi to respond to the motion to quash within 10 business days, with Elliott getting five days to file an optional reply to Quibi’s opposition, before the motion would be deemed submitted for decision. As ordered, Quibi filed its opposition on February 18. And a doozy it is, going right to the heart of the significant questions raised when an outside investor takes a position in an IP dispute between two litigants. Because the disposition of this motion could have ramifications for discovery into litigation funding arrangements in patent cases, it is definitely a situation that litigation funders, IP lawyers, and their clients should be monitoring.

While the popular media, such as Variety, have focused on the more salacious question of whether Elliott’s investment in Eko was motivated in part or whole by romantic concerns involving Elliott’s founder, that aspect is less deserving of focus for our purposes. In my view, the motivation of a litigation funder is less important than the impact their investment has on the conduct of the case. As I pointed out in my June column on these pages — and as quoted by Quibi’s counsel in their opposition brief — the main impact of Elliott’s funding is that it has allowed Eko to litigate as if cost were no object.

But even accepting that as true, even that fact is probably less important to Quibi and the public interest as the question of whether the presence of Elliott’s funding means that settlement runs through Elliott’s boardroom table, or whether Eko’s $100 million-plus reasonable royalty demand was in part influenced by the need to generate a big return for the litigation funders. In my view, therefore, in the majority of cases the more salient focus should be on the consequences of the investment by a litigation funder, rather than the motivation behind the grant of that funding.

In its opposition, Quibi weaves in the merits of the litigation itself as a reason to grant discovery into the funding arrangement. In numerous places it highlights the incremental successes on the merits it has achieved thus far, while pointing out that the core aspects of Eko’s trade secret case remain unproven — all in the service of an effort to establish that the substance of communications between Eko and Elliott on the merits of the IP claims are relevant. Likewise, Quibi reinforces the unusually aggressive nature of Eko’s damages claim as a basis for establishing relevance concerning any valuation efforts undertaken by Elliott as part of its investment process. Quibi notes that it could use information generated by Elliott as to case valuation as impeachment fodder for Eko’s damages expert, on top of the need to refute any attempt by Eko to establish a David v. Goliath narrative at trial. (Though the likelihood of Eko taking that approach probably dropped precipitously once Quibi’s core business effort folded.)

Another interesting line of attack used by Quibi — one that I would expect to see other patent defendants pursue over time, especially if Quibi’s argument resonates with the magistrate judge — revolves around Elliott’s potential exposure as a litigation funder to an attorney’s fees award to Quibi. (In the past, I have mentioned that one of the compelling reasons for a patent owner to submit their claims to the rigorous diligence employed by litigation funders is as a form (albeit untested) of attorney’s fees insurance.) Since attorney’s fees can often be grounded in litigation misconduct, Quibi’s brief notes that to the extent Elliott is “driving” the litigation tactics espoused by Eko, it could be liable for attorney’s fees on that basis. Furthermore, Quibi argues that the speculation that Elliott may be exercising settlement control also warrants discovery, while also pointing out that Elliott’s belated identification of its pecuniary interest in the cases justifies further exploration. Finally, Quibi notes the potential standing impacts of Elliott’s investment, a fontanelle overlaying litigation funding arrangements that I expect sophisticated defendants to press on with vigor going forward.

While full of interesting arguments, it is hard to consider Quibi’s opposition a slam dunk to succeed. Yes, certain courts have been loath to grant discovery into litigation funding arrangements — even when those arrangements were deemed relevant without reservation — due to work product concerns. At the same time, all Quibi needs is a sympathetic ear from the magistrate judge to get a crack at Elliott. To that end, Quibi does its utmost to declare that “Elliott’s relationship with Eko is a business relationship, not a legal one.” Whether the magistrate judge agrees will go a long way to either reinforcing the current understanding that litigation funding arrangements are very hard to get discovery on, or in giving proponents of such discovery a high-profile example to seize on. Quibi’s business ambitions may have been quashed, but it is doing its best to make sure its discovery requests don’t suffer the same fate.

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N.B. While I am flattered that Quibi’s legal team saw fit to include excerpts of my frank and objective commentary on this case in their brief, they did so solely on their own volition and without my knowledge or endorsement. To be clear, I have no problem with them doing so, as there is a limited universe of legal commentary on ongoing IP cases to draw from when trying to illustrate a media perspective on a dispute. But I also recognize the power of this platform to call attention to aspects of ongoing cases that would perhaps normally evade scrutiny or commentary, which is why I do my utmost to present these columns in as neutral and forward-looking manner as possible. At bottom, I like to think this column offers a unique perspective on the IP happenings of the day and to the extent it serves to advance the dialogue on issues important to the IP community, all the better. Thanks as always for reading along.

Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.


Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

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