FRCP Amendments: Implications for IP and Patent Troll Litigation

While it is relevant to all litigation, this proportionality principle and potential cost-shifting might have the greatest impact on low-stakes patent troll litigation. First, to determine whether or not the parties' discovery requests are “proportional” in light of “the amount in controversy,” many courts will likely permit early damages discovery. As seen in cases before the recent amendments, early damages discovery could allow defendants to save money by forcing the patent troll(s) to identify the allegedly infringing product(s) and their damages theories early on, narrowing the scope of the case. See, e.g., Eon Corp IP Holding LLC v. Sensus USA Inc., 2013 WL 3982994, at 1 (N.D. Cal. Mar. 8, 2013) (“[T]he Court cautioned that broad discovery requests propounded indiscriminately to all Defendants, without careful crafting of requests ' could result in cost shifting.”). That said, defendants must still be ready to produce some information relevant to damages. Id. (“In order for Plaintiff to make reliable early [damages] disclosures, the Court required Defendants to disclose generally their revenue as well as relevant license information.”), and will still likely bear greater discovery costs than patent assertion entities with far fewer documents to produce (if any).

Overall, while factors such as “the parties' relative access to relevant information” and “the parties' resources” may work against large, sophisticated defendants, with courts expecting clients with more “resources” than patent troll plaintiffs to spend more on discovery, the new rule's express focus on proportionality should result in stricter limits on discovery for low-stakes patent troll litigation in which the “amount in controversy” is relatively small. In addition, the proportionality principle in Rule 26 will ultimately protect parties from overbroad and abusive discovery. For example, in ChriMar Sys. Inc. v. Cisco Sys. Inc., No. 13CV01300JSWMEJ, 2016 WL 126556, at 3 (N.D. Cal. Jan. 12, 2016), the court found that defendant Cisco's argument regarding the burden of responding to patent troll ChriMar's discovery was “well-taken,” especially “in light of the recently revised [Rule] 26(b)(1), which balances the proportional needs of the case, 'considering the importance of the issues at stake in the action ' the importance of the discovery in resolving the issues, and why the burden or the expense of the proposed discovery outweighs its likely benefit.'” Id. The court thus permitted Cisco to respond to ChriMar's discovery request in writing without needing to submit to a second deposition and further held that Cisco's response need only describe representative examples of the accused use. Id. Hence, the changes to Rule 26 should provide some relief in terms of narrowing the scope, and lowering the costs, of discovery. This can, in turn, remove a frequent argument patent trolls use to exact settlement payments ' the high costs of discovery make settlement, even in marginal cases, economically rational.

Changes to Rule 37: Reasonable Preservation and Remedies “Necessary to Cure” Prejudice

A similar proportionality notion underlies the new Rule 37(e), which makes it more difficult to obtain penalties for failure to preserve ESI. The Rule 37 amendments require a party moving for sanctions for failure to produce ESI to show: 1) relevant ESI “should have been preserved” in anticipation of litigation; 2) the party that lost the relevant ESI “failed to take reasonable steps to preserve it”; and 3) the lost ESI “cannot be restored or replaced through additional discovery.” Only if a party demonstrates all three elements may a court order sanctions on a finding of prejudice, and even then, the court is to order measures “no greater than necessary to cure” the prejudice found. Indeed, the most severe sanctions in the rule are reserved for when the court finds “that the party acted with the intent to deprive another party of the information's use in litigation.” The Committee notes do not define “reasonable steps to preserve,” but state that proportionality is a factor and recognize that reasonable steps are required, not “perfection.” These changes should protect large defendants with reasonable document retention policies and practices in place by raising the standard for sanctions in many jurisdictions.

Two recent trademark cases show the new Rule 37(e) in operation, protecting a party with reasonable preservation efforts while allowing sanctions against intentional destruction. First, in Marten Transp., Ltd. v. Plattform Adver., Inc., No. 14-CV-02464-JWL-TJJ, 2016 WL 492743 (D. Kan. Feb. 8, 2016), the court denied defendant's motion for sanctions against a plaintiff for failing to preserve the computer Internet history of an employee who allegedly posted infringing material, citing to the Committee Notes of new Rule 37(e). Specifically, the court noted that sanctions under Rule 37(e) apply only on a showing of the three elements noted above, id. at 4, and found that plaintiff did not breach any duty to preserve because that duty did not arise until nearly one year after the evidence was destroyed. Moreover, the court also found that plaintiff took reasonable steps to preserve ESI because the loss of the employee's computer history was consistent with plaintiff's corporate policy to retain computers for five years, after which their hard drives were wiped. In Internmatch, Inc. v. Nxtbigthing, LLC, No. 14-CV-05438-JST, 2016 WL 491483 (N.D. Cal. Feb. 8, 2016), on the other hand, defendant contended that it used the disputed mark continuously and extensively, but the ESI showing such use was irretrievably lost. The court found that defendant was obligated to preserve the evidence, and that defendant's claims as to why the information was lost were improbable and riddled with inconsistencies. The court further noted that it is unclear whether a court must make the findings set forth in Rule 37 before exercising its “inherent power” to impose sanctions, but then concluded that defendants acted with intent to deprive another party of ESI, satisfying the requirements of amended Rule 37(e)(2). Id. at 4, 14, n.6. The court thus awarded sanctions to plaintiff in the form of a preclusion order, adverse instruction, and attorney's fees.

As these cases illustrate, the new Rule 37(e) makes it more difficult, but by no means impossible, to obtain sanctions for loss of ESI, and attorneys need to be aware of the relevant standards to resist or bring these sanctions motions. Under these new standards, courts overall are likely to require a more specific showing of prejudice, since ' as the Committee notes put it ' the rules require “'reasonable steps' to preserve,” not “perfection.” This means that sophisticated defendants in patent troll litigation suits can take some comfort in the fact that patent troll plaintiffs will have a harder time procuring sanctions when there's simply no more information to produce. Further, defendants can save resources in low-stakes cases by taking reasonable steps, and not “perfect” steps, to preserve ESI.

Abrogation of Rule 84 and Form 18: Plaintiffs Must Allege “Plausible” Infringement Facts

The abrogation of Rule 84 and Form 18 ' a sample complaint that set a lower bar than the “plausible” facts pleading requirement under Twombly and Iqbal ' means that courts will now more uniformly hold plaintiffs to the higher pleading standard. As a result, patent troll plaintiffs will have higher investigation costs in formulating what could otherwise be more vague, unsubstantiated complaints. Indeed, according to Lex Machina's statistics on PACER records, the number of new patent lawsuits filed in a single month hit an all-time high of 790 in November 2015, most likely reflecting patent troll plaintiffs' attempts to avoid the new, more stringent pleading rules. See, Brian Howard, “Spike in Patent Case Filings Corresponding to End of Form 18,” Lex Machina (Jan. 6, 2016). Unfortunately for those last-minute filers, but fortunately for defendants, courts are not likely to use the old pleading standard for complaints filed in the month before Dec. 1, 2015 or even earlier. Instead, in a recent decision in a patent action filed on Nov. 30, 2015, a court noted the amendments are to govern not only civil cases commenced after December 1, but also “insofar as just and practicable, all proceedings then pending.” Atlas IP LLC v. Pacific Gas & Electric Co., No. 15-CV-05469-EDL, at 3 (N.D. Cal. Mar. 9, 2016) (citing Supreme Court of the United States, Order regarding amendments to the Federal Rules of Civil Procedure (Apr. 29, 2015)).

In light of the new rules applying, the plaintiff in Atlas did not (and arguably could not) argue that its complaint was sufficient as complying with Form 18, instead arguing for its sufficiency under Iqbal and Twombly. Under the new standard, the court held that plaintiff “need not provide all of the details that [defendant] contends are required,” but concluded that the complaint's “threadbare description of the alleged abilities of the accused device” failed to state a plausible claim for direct infringement. Id. at 5. The court thus granted plaintiff leave to amend its complaint within two weeks to address the pleading deficiencies identified. Id. at 8. Also noteworthy is the fact that the court ' in the absence of allegations specifying whether the purported infringement was direct or indirect, and literal or under the doctrine of equivalents ' held that Atlas's unequivocal statement that its sole claim was for direct infringement “is sufficient to bind Atlas going forward.” Id. at 9-10. In this way, while defendants may not be able to procure dismissal under the new pleading standard as applied to patent cases, they should be able to force patent troll plaintiffs to provide more detailed and limited allegations early on, than under the prior system.

Conclusion

On the whole, the changes to the FRCP ' and Rules 26, 37, and 84 in particular ' reinforce notions of proportional discovery, reasonable preservation efforts, and precise pleading. These changes should allow defendants in patent troll litigation to better control their discovery and potential settlement costs, as well as force patent troll plaintiffs to investigate and compose narrower and more explicit infringement allegations.

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Mark A. Finkelstein is a partner in the Irvine, CA. office of Jones Day, where he is a member of the firm's Intellectual Property Practice Group. Meredith L. Williams is an associate in Jones Day's Irvine office, where she advises clients in the fields of health care and intellectual property. For more information, please e-mail [email protected]. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.