Streamlining Discovery in Federal Court Patent Royalty Disputes
December 31, 2001
By: Howard J. Schwartz and Elisabeth W. Gehringer
New Jersey Law Journal
Promote a fast and just result while curtailing costs for your clients
Inventors often license their patented technology to companies in exchange for a royalty. When an inventor later grows suspicious that the licensed technology has made its way into the company's products for which he is not being paid a royalty, the inventor generally files suit in the federal court. Finding and employing efficient discovery practices can advance the dispute to an early, fair and relatively inexpensive resolution.
The first step is to understand and overcome the tensions driving the litigation. It is critical that you work with the magistrate judge, who can dramatically enhance the usefulness of discovery. You can then use certain tools to ease the discovery process including protective orders, initial disclosures, discovery requests, tiered discovery and discovery conferences.
Underlying Tensions
Science is aimed at idea-sharing among scientists. Our patent system is designed to encourage idea-sharing among inventors. Yet, these goals are stretched thin in the .competitive business world and often come apart in litigation.
A company's research and development team works secretly on trade secrets, patents and inventions. The company scientists are paid to operate without much information-sharing so that the company's products can stay one step ahead of its competitor's.
On the other hand, inventors work in secret on products that they can sell to a company before either another inventor or the company itself can invent the product first. When litigation arises, the discovery process encourages and requires the free exchange of information among adversaries, while a company's research and development and an inventor's creations are traditionally kept secret. This struggle between openness and secrecy exemplifies the tensions in patent royalty disputes.
In a patent royalty dispute, the inventor sues the company for royalties and demands access to the research and development behind the company's products. The licensee inventor sits outside the company and is suspicious of the licensor company. The inventor may have invented one piece of technology, and the company might be paying a royalty on 10 products the company admits to using the technology to produce. Nonetheless, as the inventor sees similar new products released, suspicions arise that his or her technology is being used in many more than the 10 products.
During the litigation, the inventor may demand to see the technology underlying many or perhaps all of the company's similar products, while the company generally does not want to reveal any of the technology to the inventor that has either been licensed from other inventors or that has been developed by its own creativity. The company perceives the inventor as trying to learn from its work. This lends to inflexibility - one wanting to see it all and the other wanting to reveal nothing.
The inventor often knows the company research and development team members because the inventor has taught his or her invention and its implementation to those scientists. That normally leads the inventor to contact team members to inquire about the products that have caused him or her to question the use of technology by the company, but those people are trained to protect company research and development. Their unwillingness to give answers understandably sustains the inventor's preconceived suspicions.
An outside inventor is always in competition with the research and development team in that each tries to beat the other to discover new technology, with the company rewarding whoever can do so first. This familiar format compounds the tensions in these disputes.
Neither the inventor nor the research and development team is fond of or understands the discovery and litigation process, but both are necessarily involved. On the other hand, many litigators lack training in science and technology but are necessarily entrenched in it. This difference of perspectives contributes to the tensions underlying these disputes.
Learn the Technology
There are certain ways to ease the tensions that drive patent royalty disputes, which consist of two major issues: (1) does the company use the inventor's technology in more products than it has a license for and, if so, (2) has the inventor been paid or how much should the inventor be paid?
It is critical that you immediately confer with your client to gain an understanding of the technology that is at the heart of the dispute. Although obviously the inventor fills this need on one side of the litigation, it is a bit more complicated when you represent the company. Your first instinct might be to get as much information from a company's inside counsel, if one exists. However, because many high-technology companies, .coms, e-tailers and so on are either brand new or rapidly growing, they often do not have a legal department. In those companies, chief financial officers are the font of necessary information. Chief financial officers are familiar with the royalty payment issue and often know the technology because the company is small enough to share that type of information internally.
Beyond a main contact, access is needed to the research and development team of a company. You must discuss the dispute in normal terms with the research and development team and leave legalese behind. Your ultimate goal is to leam the technology so you can describe it simply. Recognize that the company's ongoing research and development should not be impeded by discovery or litigation. Also recognize that a research and development team's time is valuable. Try not to be redundant in your questions, but make sure you get a clear understanding of the issues.
Get the technology down on paper and in normal terms that lawyers, judges and juries can understand. Have the inventor or someone from the research and development team write a summary in common terms that you can further translate if necessary. Inquire into the meaning of relevant terms and keep a running list of the words and definitions. You should also understand the manufacturing process for the product, which often involves other parties.
This is not to say that you can ignore the traditional legal issues. You have to keep a focus on the legal issues while you gain knowledge of the technological issues. A patent royalty dispute is, after all, essentially a contract dispute. There is often a series of key documents that define the royalty agreement. Those documents must be obtained and ordered. The contract issues must be grasped early. However, such issues, because they come more naturally to lawyers, should not be concentrated on at the expense of understanding the technology.
Armed with the comprehensive knowledge of the process involved, you can crack the commonplace polarization of an adversary. This knowledge enables you to speak in technological terms, not just of pleadings, motions and disputes. If you work at the litigation by focusing on the technology, you can achieve a better and more rapid result for your client.
Working With the Magistrate Judge
Magistrate judges often have a background that provides them with an understanding of the technology involved. However, due to the intricacies of your particular patent royalty dispute, you should be prepared to discuss the technology with specific knowledge so the magistrate judge can quickly grasp the issues.
Get the technology in front of the magistrate judge early and often. Technology is the heart of the dispute, and the royalties to be paid on the technology are secondary. Both sides early on should write informal position papers to the magistrate judge to inform him or her of the underlying technology as it relates to the key factual and legal Issues.
By presenting this to the magistrate judge, you can enable him or her to develop the appropriate case management techniques early on, without the need for motions. The judge can streamline discovery to benefit both parties. There should be discussions with the magistrate judge of what each side will claim so that the judge can help flesh out the issues and allow the needed discovery. At the same time, this enables the magistrate judge to offer predictions on the admissibility of evidence.
Using Protective Orders
The atmosphere for protective orders is not favorable, and any request for one is given significant scrutiny. In the event a protective order is needed, you should be careful not to over-designate information as confidential, because that only sets you up for a losing discovery battle.
Be sure to review and incorporate your compliance with Rule 26(c) of the Federal Rules of Civil Procedure and the relevant case law into any proposed protective order regarding information exchanged during discovery. For example, you need good cause, not just an agreement among parties, to designate something as confidential. See, e.g., Pansy v. Borough of Stroudsburg, 23 F.3d 772 (3d Cir. 1994), and Glenmede Trust Co. v. Thompson, 56 F.3d 476 (3d Cir. 1995).
The tensions between the interests of the parties in a patent royalty dispute create an environment that makes protective orders a contentious and timeconsuming subject. Generally, you would not expect the inventor to insist on marking anything he produces as confidential, because the inventor has already provided his technology to the company when he licensed it. On the other hand, a defendant company may vehemently oppose a demand to produce data that the company does not believe includes the inventor's licensed technology.
The way to avoid motion practice over a protective order, and consequently a way to avoid testing the patience of the magistrate judge, is to try to create a joint protective order.
To formulate a joint protective order, divide it into levels of confidentiality to accommodate, for example, information that the company will produce only for an expert's review and not for the eyes of the inventor. The information exchanged under the protective order can be reviewed least expensively by the inventor and the research and development team, but sometimes an objection to that process cannot be overcome and an expert must be used. With a protective order in place, some of the tensions between the parties may dissipate.
Specific Discovery Requests
Discovery requests in federal cases are often dramatically different from those in state cases in that they are much more specifically drawn. Limit your discovery requests and carefully craft your interrogatories and document demands. Keep in mind the limits provided by the Federal Rules of Civil Procedure regarding the quantity of discovery, such as the limit on the number of interrogatories under Rule 33.
Do not use form discovery requests from your firm's word processing system. Boilerplate discovery will not get you quickly to the precise information you need to prove or disprove your case. Courts generally have no tolerance for a generalist approach to discovery, which boilerplate discovery encourages. You can also eliminate unnecessary depositions by tailoring your interrogatories to disclose the persons who have the precise information you need.
Tiering Discovery
One method that can be very effective in simplifying discovery in patent royalty disputes is to use a two-tiered approach. Ask the magistrate judge to set stages for discovery that first focus on the patent and then focus on the royalties.
For example, in the first stage, the company could provide block diagrams and algorithms for the inventor or an expert to review, which is often sufficient to determine ifthe inventor's technology is being used (but which does not uncover highly secret implementation of that technology). When that is done, the parties and the magistrate judge can determine if implementation of the technology need be shared.
In the second stage, the company could provide sales, royalties and information about the marketing effort, which the royalty agreement no doubt requires. This information need not be exchanged at all unless the first tier, the technology review, uncovers products on which a royalty should have been paid. While this format will not work in all cases, it is suggestive of the creative and practical ways to streamline discovery.
Take every opportunity for conferences with the court, both formal and informal. Many times conferences are called for a specific issue of discovery, yet evolve into much more expansive topics, including settlement. The practical thing to do is to contact the magistrate judge to determine the subject matter. The nature of the conference dictates whether or not your client should be present. If the conference relates to technological aspects, bring a technologically qualified individual. If the conference relates to settlement, bring someone with settlement authority. Speak with the magistrate judge to determine whom you need with you, if anyone.
Always attempt to confer with your adversary before the conference so you can present what you disagree on to the magistrate judge, after letting him or her know of your agreement on other issues. The better practice is to send a letter to the court outlining the specifics of the disagreement on which assistance is requested.
Considering Costs
The dynamic of patent royalty disputes is such that an extraordinary amount of time is spent on discovery issues. And this expenditure of time generates expenses for your client. You should openly discuss cost considerations with your client and the court.
There are many ways to simplify costs in patent royalty disputes. Discovery can be molded in each case by the individual circumstances. Each round of discovery requires thought and creativity. How you manage the case will depend on the facts, the law, the amount and type of evidence and the resources available from both the firm and the client.
Consider different methods to access data, such as reviewing computer files versus paper files, which can be much more tedious and costly to copy. Cut down on the time you disrupt a company by having informative meetings with the research and development team upfront. Get in front of the magistrate judge for a conference instead of filing a motion, because motion practice is often wasteful.
Even if your adversary files a motion, object or respond by letter, before the deadline, with a well-drafted objection. Look for alternative procedural methods at each step. Avoid spending time and money gathering nonconfidential information such as sales, royalties and marketing information, when you have not yet resolved the basic technology issue.
Another cost-cutting method is to shift the costs of discovery to the discovering party. For example, if you get beyond the basic dispute about the technology to a determination of the products on which the inventor should be paid a royalty, you will need an audit of the sales and the royalties paid on those products. Review the royalty agreement between the inventor and the company.
Conventionally, royalty agreements provide for an audit of royalties paid for by the auditing party (licensor). By following the royalty agreement, the discovering party does not get a free ride on the other side's case preparation and a discovery order regarding an audit is not necessary.
Explain to your client that it is always costly to comply with discovery, but the goal is to avoid the even more costly continued litigation. When you represent the company, remember that it is often your contact's job, be it in house counselor the chief financial officer, to keep costs down. That person will often have many ideas of how you can do so.
Cooperative Discovery
Cooperative and organized discovery can be facilitated by civil interaction with your adversary. This suggestion does not impede your ability to advocate vigorously and zealously for your client's position. Working with your adversary through an orderly discovery process simply saves you time and makes you better informed. The result is that you are better able to represent your client.
Though you can adopt certain measures to guard against discovery abuses, there are times when abuse during the discovery process occurs. When this happens, there may be a need for the filing of a protective order under Rule 26( c) of the Federal Rules of Civil Procedure that proscribes certain discovery or limits it to certain terms and conditions.
Although patience is advocated, to protect your client's interest you may have to file a motion for sanctions under Rule 37 of the Federal Rules of Civil Procedure for failure to make disclosure or cooperate in discovery. Before you do, however, it is important to remember that sanctions are imposed only when there is severe conduct that shocks the conscience, and that may be very difficult to establish. It is best to inform the magistrate judge early on of any dispute, giving an opportunity for quick judicial resolution.
This article is reprinted with permission from the December 31, 2001 issue of the New Jersey Law Journal. ©2001 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.
Howard J. Schwartz hschwartz@wolffsamson.com is a member and co-chair of the Intellectual Property Group at Wolff & Samson PC. and practices in all aspects of intellectual property law, including patents, trademarks, copyrights and trade secrets. Elisabeth W. Gehringer is Realogy Corporation Senior Vice President, Corporate Compliance and Ethics Officer, and General Counsel of the Realogy Franchise Group.
