Case law has not been particularly precise as to when inside counsel should advise clients to begin the tedious—and costly—task of preserving documents for patent litigation. However, the twin 2011 rulings by the Federal Circuit (Micron II and Hynix II) followed by their respective 2013 remand decisions provide a solid primer. Together, these four decisions highlight a proper path for document preservation and the fatal consequences of failing to comply. Inside counsel should take note because document retention (and its converse cousin, spoliation) can negatively impact the enforceability of a company’s intellectual property while establishing a core defense for the accused infringers. This article examines the recent Rambus rulings, particularly the sanctions meted out for document retention violations and spoliation.
Document retention for litigation can be a vexing issue for inside counsel. As the Rambus decisions show, outside counsel also similarly struggle to avoid the plethora of hazards. Given that spoliation is a fact-intensive inquiry, some background about Rambus and its operations is helpful in understanding the Federal Circuit’s conclusions.
Rambus’ primary business is licensing its intellectual property to specialty manufacturers of certain kinds of computer memory known as Dynamic Random Access Memory (DRAM) and Direct DRAM (RDRAM). Rambus had some success in having its memory products adopted as the industry standard among leading manufacturers such as Micron and Hynix.
Faced with Rambus’ overt threats to enforce its patents, Micron and Hynix filed their own declaratory judgments complaints against Rambus. As the litigation matured, the seminal issue that emerged was whether Rambus’ pre-litigation destruction of documents, including several so-called document “shred days,” during which thousands of documents were intentionally destroyed, should be treated as spoliation. The courts in each of the Micron and Hynix actions decided the issue differently. In Micron’s case, the District of Delaware held that spoliation had indeed occurred, thereby rendering Rambus’ patents unenforceable; in the Hynix case, the Northern District of California did not. With this split based on virtually the same facts, the Federal Circuit sought to harmonize these incongruous decisions.
In the Micron appeal, the Federal Circuit noted that document retention policies are a common business practice, specifically designed to prevent access of others, including the government. When valid, a document retention (or destruction) policy is perfectly permissible. Thus, a company need not adopt a draconian doctrine to “keep everything.” Instead, a duty to preserve documents is triggered when, objectively, litigation is pending or reasonably foreseeable. In this case, Rambus’ document destruction policy was to further its litigation goals, not its business goals, as its employees were instructed to destroy all documents unfavorable to its litigation position, even against the advice of its outside counsel. Not only was litigation foreseeable, but also the destruction was effectuated with litigation in mind. As such, the Federal Circuit affirmed the trial court’s spoliation holding but remanded for a more full explanation of the factual underpinnings supporting decision to dismiss the case for bad faith and prejudice instead of imposing a lessor sanction.
In the Hynix appeal, the Federal Circuit did not endorse the district court’s application of a strict standard of foreseeability. In reversing the district court, the Federal Circuit held that the spoliation does not require that litigation must be “imminent, or probable without significant contingencies.” Consideration of contingencies would cause a misapplication of spoliation standard, as the court explained that “it would be inequitable to allow a party to destroy documents it expects will be relevant in an expected future litigation, solely because contingencies exist, where the party destroying the documents fully expects those contingencies to resolved.”
The remand decisions
In the Micron case, the district court again held Rambus’ spoliation mandated its patents being held unenforceable because Rambus had acted in bad faith. The court found that Rambus’ document retention policy was adopted as part of its litigation plan (thus making litigation foreseeable), was selectively executed and was designed to destroy unfavorable documents. The court highlighted the alleged instruction from Rambus’ head of intellectual property to its outside counsel that the company needed to be “battle ready.”
In the Hynix case, the district court reversed its initial ruling in view of the Micron appellate decision. However, the court did not find the patents unenforceable, imposing instead a lesser sanction and limiting any damage award to a reasonable royalty.
Although the procedural posture in these cases is complex, the practice tips are strikingly clear and include:
1. Knowing your client’s business so as to assess the foreseeability of the litigation, and thus the timing of a document retention policy
2. Creating a content-neutral document retention policy. One need not “keep everything,” but on the other hand, one cannot destroy documents when a duty of preservation has been triggered
3. Taking a conservative approach as to when litigation is foreseeable. This includes knowing when a patentee learns of a possible infringer
4. Training your executives and personnel on your document retention policy
5. Discussing with your client all objective factors as to when litigation might be foreseeable, including its relationships with direct competitors