Background
In 2020, Elite Semiconductor sued Anchor Semiconductor and its founder Chenmin Hu, alleging that Anchor had stolen Elite’s semiconductor technology a decade earlier. The case was funded by Legalist, Inc., a litigation finance company. Elite’s claims were brought under both the federal Defend Trade Secrets Act (DTSA) and California’s Uniform Trade Secrets Act (CUTSA).
The case collapsed during discovery. It emerged that the U.S. Patent and Trademark Office had rejected Elite’s own patent application in 2013 by citing Anchor’s earlier patent application — putting Elite on inquiry notice of its trade secret claims at least six years before it claimed to have discovered them. The court granted summary judgment to the defendants, finding the claims time-barred under both statutes’ three-year limitations periods.
In August 2025, the court found that Elite had pursued the case in bad faith and ruled that defendants were entitled to attorney’s fees under the DTSA, California UTSA, and the court’s inherent authority. The question in this order was: who should pay?
The Court’s Holding
The defendants sought fees from four categories of respondents: Elite itself, three law firms (Fish IP Law, Thoits Law, and Jeffer Mangels), individual attorney Jerome van Loben Sels, and litigation funder Legalist, Inc. The court held that only Elite Semiconductor is liable for fees.
The law firms were shielded because Ninth Circuit law holds that 28 U.S.C. § 1927 — the statute allowing sanctions for vexatious multiplication of proceedings — does not reach law firms as entities, only individual attorneys. And no individual attorney was shown to have acted with the subjective bad faith required for sanctions under § 1927 or the court’s inherent authority.
The most significant portion of the ruling addressed Legalist, Inc. The defendants argued that a litigation funder exercising real control over vexatious litigation can be held jointly and severally liable as a de facto party. The court accepted this legal proposition in principle, citing Stan Lee Media, Inc. v. Walt Disney Co. (D. Colo. 2015), but found the facts did not support it. Legalist’s funding agreement expressly stated that Elite — not Legalist — retained control over the litigation and settlement decisions. Legalist’s only act of control was reviewing and approving the initial complaint and requiring detailed memoranda about the statute of limitations issue before agreeing to fund the case. The court held this does not rise to the level of control necessary to hold a funder liable.
The court also rejected an inherent-authority theory against Legalist, finding that Legalist’s pre-funding diligence — including demanding analysis of the limitations issue that ultimately doomed the case — demonstrated appropriate caution, not the bad faith required for sanctions.
Key Takeaways
- Control is the threshold for funder liability. Courts may hold litigation funders liable as de facto parties when they exercise real control over vexatious litigation, but reviewing a single filing (even the complaint) is insufficient.
- Pre-funding diligence is protective, not incriminating. Legalist’s demand for memoranda on the limitations issue was characterized as appropriate caution — not evidence of control or bad faith.
- Contractual language matters. The funding agreement’s express provision that Elite retained control over settlement was cited as evidence against Legalist’s control. Funders should ensure their agreements clearly reserve litigation control to the plaintiff.
- Discovery into funder involvement requires a threshold showing. The court declined to allow discovery into Legalist’s role, requiring defendants to first make a colorable argument of control before any fishing expedition.
Why It Matters
Litigation finance has exploded in recent years, and courts are increasingly grappling with when funders should share in the consequences of unsuccessful cases. This ruling provides a practical framework: funders who structure their agreements to preserve plaintiff control and conduct diligent pre-funding underwriting are unlikely to face fee liability, even when the funded case is found to have been brought in bad faith. For defendants facing funded litigation, the ruling signals that attacking the funder is an uphill battle absent evidence of ongoing control over litigation strategy — not just initial case selection.