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IP Case Tests Boundaries of Privilege
The Recorder
October 20, 2008
If a company's sole business is licensing and litigating patents, plus it's run by lawyers, what isn't protected by privilege?
That's the question being asked in a discovery fight between Diagnostic Systems Corp., which is a subsidiary of patent-holding company Acacia Research Corp., and a multitude of software companies it sued for patent infringement in the Central District of California.
The answer could affect future discovery battles involving patent-holding companies, and the U.S. Court of Appeals for the Federal Circuit has taken note. The appeals court agreed to take briefing on DSC's petition for a writ of mandamus, which seeks to put the brakes on the trial judge's order to turn over documents the company considers to be privileged. Last month, the appeals court granted a stay pending appeal.
At issue is whether documents and communications at DSC relating to the patent in question should be considered preparation for litigation, and so protected by privilege, or just normal business, since the only thing the company does is license and sue over patents.
"Other companies who model themselves after Acacia will look very carefully at this decision to figure out how to protect themselves," observed Theodore "Ted" Herhold, an IP lawyer who heads Townsend and Townsend and Crew's litigation department.
Lawyers for the Acacia subsidiary, from Texas law firm Shore Chan Bragalone, are complaining that Judge James Carter is discriminating against their client because it is a patent-holding company.
"The court committed a clear abuse of discretion by basing its decisions on the erroneous notion that patent licensing companies such as DSC are entitled to less protection for their attorney-client communications than a company engaged in any other type of business," the lawyers wrote in a motion to stay the case.
Judge Carter has been circumspect about the Acacia subsidiary's broad privilege claims throughout. Because DSC's sole business is acquiring, licensing and enforcing patents, Carter wrote that he was "concerned that DSC's broad claims of the attorney-client privilege and the work-product doctrine would improperly protect virtually all information possessed by DSC if successful."
The Acacia subsidiary sued a number of software companies in 2006 and 2007, including Oracle and Symantec, for allegedly infringing on database patents.
The discovery fight got started when one of the defendants, NetScout, represented by Cooley Godward Kronish, pushed DSC to turn over information, including license agreements with defendants that settled out of the case. After DSC argued it was privileged information, Carter appointed a special master to comb through 1,300 documents to decide what should be produced.
Carter adopted most of the recommendations in an August order. Aside from questioning the DSC's broad arguments for work-product privilege, Carter also questioned the company's arguments for attorney-client privilege, since many executives there are also lawyers.
"DSC is not entitled to protection by privilege simply because in-house counsel were involved in the transactions," he wrote. "The management team of DSC and related entities consisted of five attorneys."
Michael Markman, a patent lawyer with Covington & Burling in San Francisco who's not involved with the case, said the trial judge did a thorough job in sifting through the privilege issues. Markman said DSC's petition to the appeals court is a little overboard.
"I think this is a fairly aggressive step on DSC's part, pushing the envelope," he said.
William Bohler, a WilmerHale partner representing defendant Microstrategy in the case, said the case asks an interesting question and could have big implications.
"The interesting issue is: In a business whose business is licensing and litigation, when is the company in anticipation of litigation and when is it normal business?" said Bohler. "One thing that could be riding on this is the extent that the preliminary work that these companies do to analyze the patents and possible infringers could be discoverable."
Lawyers for DSC as well as NetScout declined to comment.
