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May 21, 2011

Spoliation

Rancid Rambus set itself on a warpath footing, preparing for an enforcement campaign against SDRAM makers for infringing its patent portfolio. Part of the preparation was destroying tons of relevant documents in a series of festive "shredding parties", the first in July 1998; only preserving potentially helpful documents, such as those establishing priority date. The noise woke the neighbors. In separate cases, Micron and Hynix beat Rambus to the courthouse, filing declaratory judgment motions. What ensued over the spoliation issue came to a head as a CAFC clusterus-coitus (a missing entry in Black's Law Dictionary), with the will to justice displayed by a single CAFC judge, Gajarsa. To those in the know, no surprises here, only disappointment at further disarray, at a CAFC that appears randomly dysfunctional in applying the law.

Micron v. Rambus (CAFC 2009-1263) precedential; Judges Newman, Lourie, Bryson, Gajarsa (dissent-in-part), Linn (author)

Hynix v. Rambus (CAFC 2009-1299, 1347) precedential; Judges Newman (dissent-in-part), Lourie, Bryson, Gajarsa (dissent-in-part), Linn (author)

It is undisputed that Rambus destroyed between 9,000 and 18,000 pounds of documents in 300 boxes. There is ample evidence that Rambus destroyed documents in its possession knowing that they would likely be forced to be produced in litigation and intending to prevent that production. There is also ample evidence that Rambus devised this strategy partly on the basis of the advice it received from its outside counsel.

The two cases cover the same subject matter. Delaware district court Judge Sue L. Robinson got it right: Rambus' shredding party was spoliation. Judge Robinson rightly held Rambus accountable, finding the patents unenforceable. Her hapless colleague in the Northern District of California, Judge Ronald M. Whyte, missed by a country mile.

On the California case -

The district court here determined that litigation did not become reasonably foreseeable until late 1999, before which "the path to litigation was neither clear nor immediate" and was subject to "several contingencies [that] had to occur before Rambus would engage in litigation." Spoliation, 591 F. Supp. 2d at 1062.

Meanwhile, in Delaware -

In November 2007, the District of Delaware held a bench trial on the unclean-hands issue asserted by Micron. Stopping short of reaching the unclean-hands claim, the district court found that Rambus had engaged in spoliation; the court accordingly entered judgment in Micron's favor as a spoliation sanction. The court found that litigation was reasonably foreseeable to Rambus "no later than December 1998, when [Rambus IP in-house counsel] Karp had articulated a time frame and a motive for implementation of the Rambus litigation strategy." The district court thus ruled that documents destroyed after December 1998 were intentionally destroyed in bad faith. The district court concluded that the only reasonable sanction for the intentional destruction of documents was to hold Rambus's patents in suit unenforceable against Micron.

Case law -

As the Supreme Court has noted, "[d]ocument retention policies, which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances." Arthur Andersen LLP v. United States, 544 U.S. 696, 704 (2005) (internal citation and quotation marks omitted). Thus, "a party can only be sanctioned for destroying evidence if it had a duty to preserve it." Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003). The duty to preserve evidence begins when litigation is "pending or reasonably foreseeable." Silvestri v. General Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001). See also West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999) (applying the same standard). Thus, "[s]poliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Silvestri, 271 F.3d at 590. This is an objective standard, asking not whether the party in fact reasonably foresaw litigation, but whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation.

When litigation is "reasonably foreseeable" is a flexible fact-specific standard that allows a district court to exercise the discretion necessary to confront the myriad factual situations inherent in the spoliation inquiry. Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir. 2001). This standard does not trigger the duty to preserve documents from the mere existence of a potential claim or the distant possibility of litigation. See, e.g., Trask-Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681-82 (7th Cir. 2008). However, it is not so inflexible as to require that litigation be "imminent, or probable without significant contingencies," as Rambus suggests. Reply Br. of Rambus at 4. Rambus's proposed gloss on the "reasonably foreseeable" standard comes from an overly generous reading of several cases. See Burlington N. & Santa Fe Ry. Co. v. Grant, 505 F.3d 1013, 1032 (10th Cir. 2007) (noting that "[a] spoliation sanction is proper where (1) a party has a duty to preserve evidence because it knew, or should have known, that litigation was imminent, and (2) the adverse party was prejudiced by the destruction of the evidence" (emphasis added); TraskMorton, 534 F.3d at 681 (citing Burlington for the proposition that "courts have found a spoliation sanction to be proper only where a party has a duty to preserve evidence because it knew, or should known, that litigation was imminent," but holding that "Motel 6 had no reason to suspect litigation until--at the earliest--Morton's attorney sent Motel 6 a demand letter" after the alleged spoliation (emphases added)). Burlington merely noted that imminent litigation was sufficient, not that it was necessary for spoliation, and on the easy facts of Trask-Morton, it was decided that the alleged spoliator did not even "suspect" litigation. This court declines to sully the flexible reasonably foreseeable standard with the restrictive gloss proposed by Rambus in light of the weight of contrary authority and the unnecessary generosity that such a gloss would extend to alleged spoliators. See Silvestri, 271 F.3d at 591; West, 167 F.3d at 779 ("Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation."); Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998) ("This obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation . . . as for example when a party should have known that the evidence may be relevant to future litigation."); MOSAID Techs. Inc. v. Samsung Elecs. Co., 348 F. Supp. 2d 332, 336 (D.N.J. 2004) (noting that a litigant "is under a duty to preserve what it knows, or reasonably should know, will likely be requested in reasonably foreseeable litigation"); Scott v. IBM Corp., 196 F.R.D. 233, 249 (D.N.J. 2000) (same). See also United States v. Rockwell Int'l, 897 F.2d 1255, 1266 (3rd Cir. 1990) (holding that for attorney work product to be shielded by the work product privilege, "[l]itigation need not be imminent . . . as long as the primary motivating purpose behind the creation of the document was to aid in possible future litigation." (internal citations omitted)). Moreover, it would make little sense to enjoin document destruction only when the party clears all the hurdles on the litigation track, but endorse it when the party begins the race under the reasonable expectation of clearing those same hurdles. Thus, the proper standard for determining when the duty to preserve documents attaches is the flexible one of reasonably foreseeable litigation, without any additional gloss. (from the Micron opinion)

"[S]poliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Id. at *12 (citing Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir. 2001)). Most relevant in this case is the point when the duty to preserve evidence begins. This determination is informed by a number of policy considerations, including "the need to preserve the integrity of the judicial process in order to retain confidence that the process works to uncover the truth," Silvestri, 271 F.3d at 590, and must balance the reality that "litigation is an ever-present possibility in American life," Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992), with the legitimate business interest of eliminating unnecessary documents and data. (Hynix)

To the matter in the shredder (from the Micron matter)-

The [Delaware] district court found that Rambus destroyed relevant, discoverable documents beginning in July 1998, with the first major shred day occurring in September 1998. The court found that the destruction continued at least through November 1999, with another major shred day occurring in August 1999. In addition, the district court found that Rambus ordered its outside patent prosecution counsel to purge his files relating to the prosecution of the prospective patents in suit in April 1999. There is ample evidence to support all these findings, and they are not seriously disputed even by Rambus. The exact date at which litigation was reasonably foreseeable is not critical to this decision; the real question is binary: was litigation reasonably foreseeable before the second shred day or after? Therefore, the question this court must answer is whether the district court clearly erred when it determined that, at some time before the second shred day in August of 1999, litigation was reasonably foreseeable. This court cannot conclude that the district court clearly erred for at least the following five reasons. [Micron]

[First,] it was not clear error for the district court to conclude that the raison d'ĂȘtre for Rambus's document retention policy was to further Rambus's litigation strategy by frustrating the fact-finding efforts of parties adverse to Rambus. This is a natural reading of getting "[b]attle ready."

Second, Rambus was on notice of potentially infringing activities by particular manufacturers. Once the patent issued, the gun was loaded; when the targets were acquired, it was cocked; all that was left was to pull the trigger by filing a complaint.

Third, Rambus took several steps in furtherance of litigation prior to its second shredding party on August 26, 1999. Karp had already concluded that Rambus would "need to litigate against someone to establish [a] royalty rate and have [the] court declare [the Rambus] patent[s] valid," had prioritized defendants and forums, had created claim charts and determined an expected timeline for litigation that it would "launch in October [1999]," and had as its goal to "be ready for litigation with 30 days notice" "against 1 of the 3 manufacturers" by the third quarter of 1999.

Fourth, Rambus is the plaintiff-patentee, and its decision whether to litigate or not was the determining factor in whether or not litigation would in fact ensue. In other words, whether litigation was reasonably foreseeable was largely dependent on whether Rambus chose to litigate. It is thus more reasonable for a party in Rambus's position as a patentee to foresee litigation that does in fact commence, than it is for a party in the manufacturers' position as the accused.1

1 A similar reasoning may apply to accused infringers where there is declaratory judgment jurisdiction under MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007), because the accused infringer is then in the same position to control litigation as the patentee.

Fifth, as discussed above, the relationship between Rambus and the manufacturers involving RDRAM did not make litigation significantly less likely, it only delayed the initiation of litigation until the manufacturers were either too invested in RDRAM for the SDRAM litigation to negatively impact Rambus's sales, or until Rambus had no choice but to sue because RDRAM was rejected. In general, when parties have a business relationship that is mutually beneficial and that ultimately turns sour, sparking litigation, the litigation will generally be less foreseeable than would litigation resulting from a relationship that is not mutually beneficial or is naturally adversarial.

This court thus affirms the district court's determination that Rambus destroyed documents during its second shred day in contravention of a duty to preserve them and, thus, engaged in spoliation.

By contrast, the CAFC take on the California wake -

The narrow standard applied by the district court in this case vitiates the reasonable foreseeability test, and gives free reign to destroy documents to the party with the most control over, and potentially the most to gain from, their destruction. This fails to protect opposing parties' and the courts' interests in uncovering potentially damaging documents, and undermines the level evidentiary playing field created by discovery that lies at the heart of our adversarial system. See Vodusek v. Bayliner Marine Corp., 71 F.3d 148, 156 (4th Cir. 1995).

Then the majority got weak in the knees about sanctions. In dissent in Micron, Judge Gajarsa was the only judge to correctly connect the dots as Judge Robinson did in Delaware -

I dissent from that part of the majority's opinion that remands for a reexamination of the evidence for bad faith and vacates the district court's sanction award. Even though the majority applauds with one hand the district court's "inherent power to control litigation," West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999), with the other hand it strangles this power by vacating the district court's sanction award. Indeed, the majority does not review the district court's sanction award for an abuse of discretion, instead it reviews the facts and weighs the evidence before it substitutes its judgment for that of the district court, deciding that based on the district court's thorough factual analysis, it would not have granted the dispositive sanctions. Because we should not "disarm the [district] court of its important power to police its proceedings to ensure transparency and predictability and to discourage mischievous conduct by litigants," I dissent.1 Transclean Corp. v. Bridgewood Servs., Inc., 290 F.3d 1364. 1374 (Fed. Cir. 2002).

1 Separately, the majority's discussion of what constitutes reasonably foreseeable litigation in its spoliation analysis is troubling. See Majority Op. at 12-14. Because the Third Circuit has not spoken on the outer bounds of reasonably foreseeable litigation, this court may look to the law of other circuits to help inform the issue. Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 875 (Fed. Cir. 1985), overruled on other grounds by Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998). While I believe the majority is correct that circuits generally do not require "imminent litigation" for it to be reasonably foreseeable, the majority uses its "flexible" standard to overturn the district court's finding of no spoliation in Hynix Semiconductor, Inc. v. Rambus, Inc., No. 2009-1299, -1347, slip op. at 12-13 (Fed. Cir. May 13, 2011), the companion to this case. I disapprove of this backdoor imposition of Federal Circuit law in place of that of the regional circuit and additionally dissent from the portion of the majority's Hynix opinion that overturns the district court's spoliation determination.

The district court found that Rambus' conduct "impugned" the very integrity of the judicial system. Micron Tech., Inc. v. Rambus Inc., 255 F.R.D. 135, 151 (D. Del. 2009) ("District Court Op."). In so doing, Rambus also abused the privilege of owning a patent monopoly. "As recognized by the Constitution, [a patent] is a special privilege designed to serve the public purpose of promoting the 'Progress of Science and useful Arts'" and "is an exception to the general rule against monopolies and to the right to access to a free and open market." Precision Instrument Mfg. Co. v. Automotive Maint. Mach. Co., 324 U.S. 806, 816 (1945). Thus, the public has a "paramount interest in seeing that patent monopolies spring from backgrounds free from fraud or other types of inequitable conduct . . . ." Id. Here, Rambus abused its privilege by intentionally--as found by the district court--destroying evidence in bad faith to protect its exclusive monopoly.

Instead of recognizing this abuse by Rambus, the majority searches to find a needle in the haystack because, in its collective superior judgment, Rambus' conduct does not require taking away that privilege. In fact, the majority fails to consider the "high hurdle" that Rambus must overcome in showing that the district court abused its discretion. Tex. Digital Sys., Inc. v. Telegenix, Inc., 308 F.3d 1193, 1218 (Fed. Cir. 2002). In so doing, the majority reweighs the evidence and decides that "several key items" on which the district court relied "may lead to a determination of bad faith," but the basis on which the district court "reached that conclusion" was not "clear." Majority Op. at 26-27.

As an appellate court, we should not decide whether the facts before us "may" lead to a conclusion that we agree with, but whether by so concluding the district court abused its discretion. Indeed, "[t]he question, of course, is not whether . . . the Court of Appeals, would as an original matter have [resolved the case in the same way as the District Court]; it is whether the District Court abused its discretion in so doing." Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 642 (1977) (citations omitted) (rejecting appellate court's reweighing of evidence and upholding district court's imposition of terminating sanctions for discovery violations as this did not amount to an abuse of discretion).

Here, the district court followed the appropriate Third Circuit standard and provided ample basis in fact for its decision to award dispositive sanctions. District Court Op. at 148-51. In the Third Circuit, a spoliating party acts in bad faith when it "intended to impair the ability of the potential defendant to defend itself." Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 80 (3d Cir. 1994). Under this standard, the district court did not abuse its discretion in finding that Rambus did, in fact, act in bad faith.

In criticizing the district court's sanctions award, the majority claims that the district court must explain the propriety of the sanction "based on the degree of bad faith and prejudice and the efficacy of other sanctions." Majority Op. at 30. This misstates the analysis a district court must undertake to award sanctions for spoliation in the Third Circuit.

In vacating the sanctions award, the majority has called the firing squad to the ready, the squad cocking their guns and taking aim, but instead of shooting the appropriate and culpable party, the squad aimed at the district court's proper determinations of fact. The majority selectively chooses those facts that support its desired outcome, while ignoring those that do not. Weighing evidence as a fact finder is not our function as an appellate court.

In substituting its own views for those of the district court, the majority directly interferes with the sound discretion of the trial courts in managing their cases and prevents them from protecting the litigation process, which they are inherently bound to do. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 404 (1990) ("Deference to the determination of courts on the front lines of litigation will enhance these court's ability to control litigants before them."). Because the majority ignores this essential and inherent power of the district court, I dissent from its vacateur of the sanction imposed by the district court.

Posted by Patent Hawk at May 21, 2011 9:45 PM | Case Law