Opinion
Civil No. 3:04-CV-01897 (CFD)(TPS).
August 11, 2006
RULING ON PLAINTIFF'S MOTIONS TO COMPEL
Plaintiff, WhitServe LLC ("WhitServe"), brings this suit against Computer Patent Annuities, Inc. and Computer Patent Annuities LP (collectively "CPA") for patent infringement under 35 U.S.C. § 271. Plaintiff contends that it is the sole owner of United States Patent numbers 5,895,468 and 6,182,078. WhitServe further claims that CPA is using these patents without payment or license by utilizing a computer program called CPA Direct. "CPA Direct is an on-line patent and trademark portfolio management tool that allows CPA customers varying abilities to view CPA records, issue instructions to CPA, and generate reports." (Def.'s Mem. Opp'n at 3.)
The complaint alleges that U.S. Patent 6,049,801 was also infringed, but the parties have since stipulated to its removal from the scope of this suit (Dkt. #143).
CPA originally brought a counterclaim against third parties St. Onge, Steward Johnston Reens LLC, and Wesley W. Whitmyer. The counterclaim sought a declaratory judgment that, along with WhitServe, both St. Onge and Whitmyer maintained ownership rights in the patents-in-suit. The counterclaim and claims against the third party defendants have been voluntarily withdrawn. (See Dkts. #204, 205.)
Presently pending before the court are two motions to compel. The first (Dkt. #187) seeks an order compelling CPA to produce financial statements for the years 2002 through 2005. The second (Dkt. #190) seeks an order compelling CPA to assert whether it will raise the defense of reliance on attorney's advice in response to WhitServe's claim of willful infringement. For the reasons stated herein plaintiff's first motion to compel (Dkt. #187) is DENIED. Plaintiff's second motion to compel (Dkt. #190) is also DENIED.
I. Motion to Compel Financial Statements
Because this is a patent infringement case WhitServe has sought discovery of CPA's financial data regarding CPA Direct in order to calculate what they will argue to a jury is a reasonable royalty. To that end WhitServe served on CPA Production Request 44 which sought
All documents referring or relating to CPA's annual, quarterly and/or monthly financial statements, including but not limited to, income statements, profit and loss statements, balance sheets, partner equity statements, member equity statements[,] budgets, projections, cash flow statements, and statements of sources or uses of cash for each and every year for the past seven years.
WhitServe subsequently narrowed the temporal scope of their document request to the years 2002-2005. (Pl.'s Mem. Supp. at. 3.)
CPA's initial position with regard to Production Request 44, along with other discovery requests, was to allow WhitServe access to its financial records located at its headquarters on the Isle of Jersey, Channel Islands, United Kingdom. CPA represented that tens of millions of documents were responsive to WhitServe's requests and thus the only reasonable way to provide this information was to allow WhitServe access to the documents rather than copying and shipping them to the United States. CPA was, at that time, unwilling to create new documents summarizing the financial data requested in light of Fed.R.Civ.P. 34(b) which requires a party to disclose documents only "as they are kept in the usual course of business."
On February 15, 2006 the undersigned presided over a lengthy and detailed discovery conference wherein both parties discussed, inter alia, the difficulties involved in forcing WhitServe to travel to the United Kingdom and inspect tens of millions of documents. At the Court's urging, it was agreed that WhitServe would narrow the scope of its discovery requests and CPA would inspect its own financial data and compile a spreadsheet ("the spreadsheet") summarizing the revenue brought in through CPA Direct. CPA has subsequently compiled this spreadsheet and provided it to WhitServe.
This report is reproduced as Exhibit B to defendant's Opposition to Plaintiff's Motion to Compel (Dkt. #198). The exhibit is separately docketed as Docket #207 which was ordered sealed pursuant to the joint proposed protective order that was approved by the undersigned.
Having received the spreadsheet, WhitServe has continued its effort to obtain CPA's financial statements because "The CPA Direct Revenue Spreadsheet indicates 'renewal count' and 'net service charge' for the transactions listed in the various column headings, but does not address profits." (Pl.'s Reply Mem. at 3.) In sum, WhitServe contends that it cannot calculate a reasonable royalty without more of CPA's profit data. The court disagrees. The court finds that the data that has been provided by CPA is sufficient to calculate a reasonable royalty and that the burden of producing more financial data outweighs WhitServe's need to obtain the information.
In coming to the above conclusions the court credits and thus adopts as findings of fact the following representations made by CPA:
The spreadsheet compiled by CPA required approximately 400 hours to produce (Def.'s Mem. Opp'n at 2.)
CPA's agreement to search its own files and compile the spreadsheet saved WhitServe the time and expense of sending agents to the Isle of Jersey to inspect CPA's financial files. (Id.)
The spreadsheet provides "an accurate and complete picture of all service charges for renewals that could arguably be related to any aspect of CPA Direct." (Id.)
The spreadsheet contains patent renewal net service charges for CPA clients who have CPA Direct access and are based in the U.S. or are non-U.S. clients renewing U.S. patents. (Id. at Ex. B.)
A net service charge consists of the fee CPA charges the client subtracted by official and agent charges. (Id.) A net service charge can be characterized as "gross profits." (Id. at 7.)
CPA derives no direct revenue from CPA Direct. Rather, CPA Direct is a tool used by some clients to review patents and, in some cases, execute transactions. All revenues that can be indirectly linked to CPA Direct stem from CPA's primary business of performing patent and trademark registration renewals. (Id.)
The financial statements requested by WhitServe "reflect the financial performance and position of CPA as a whole, and do not in any manner identify or segregate revenues or profits based upon product, service tool or geographic region, or upon any relation or connection to the United States." (Id. at 9.)
Exactly what "gross profits" or, as CPA terms it, "net service charge" means is a source of some confusion. It appears to the court that CPA is using "gross profits" as an accounting term of art. "Gross profits" is defined as "sales minus cost of sales." Joel G. Siegel, Ph.D., CPA et al., Dictionary of Accounting Terms 217 (4th ed. 2005). This is literally what the spreadsheet shows (i.e., the net service charge is the amount charged to the client for patent renewal services minus the costs incurred by CPA as a result of renewing the patents). The term "gross profits" does not account for is CPA's general costs of doing business (e.g., overhead). Subtracting the general business costs from gross profits yields net profit. See id. at 306-07. In its present motion WhitServe essentially seeks information documenting the net profits CPA earns from CPA Direct.
"The frequency or extent of use of the discovery methods [prescribed by the Federal Rules of Civil Procedure] shall be limited by the court if it determines that: (i) the discovery sought is unreasonably cumulative or duplicative . . . or (iii) the burden or expense of the proposed discovery outweighs its likely benefit." Fed.R.Civ.P. 26(b)(2). In the court's view, Rule 26(b)(2) counsels that WhitServe's motion be denied.
CPA has already gone above and beyond its duties prescribed by the Federal Rules when it agreed to search its own files and compile the spreadsheet WhitServe now challenges as insufficient. Further, the information sought by WhitServe would do little towards accomplishing their apparent goal of deriving CPA's net profits from the use of CPA Direct. This is not to say that CPA's net profit derived from CPA Direct is irrelevant to a reasonable royalty calculation. In fact, the court agrees with WhitServe that this data would be extremely relevant towards calculating a reasonable royalty. For instance, if WhitServe knew exactly how much additional profit CPA earned through its use of CPA Direct WhitServe could simply determine the percentage of that profit it believes it is due in light of the infringement and the royalty calculation would be complete. Unfortunately, CPA Direct net profit data does not exist and cannot be synthesized using the financial records WhitServe's present motion seeks.
CPA has represented to the court that the financial data WhitServe seeks in the present motion in no way segregates the profits gained from it's clients use of CPA Direct as opposed to revenue derived from other portions of its business. Further, CPA does not derive any revenue directly from CPA Direct. It does not appear that CPA directly charges its customers for utilizing CPA direct nor do they charge clients requesting access to CPA Direct a higher patent renewal fee. Rather, CPA Direct is simply a tool used by some of CPA's patent renewal customers while others stay updated on the status of their patents through other means. In sum, CPA's profits are derived from the fees charged to customers for CPA's overall patent renewal services, not from the customers' use of CPA Direct. CPA does not keep profitability data on CPA Direct and the financial records CPA does have would not aid WhitServe in attempting to create such data.
Based on the above discussion, the court finds that compelling CPA to produce more financial information would be excessively burdensome in light of the financial data CPA has already produced. The court further finds that WhitServe can adequately calculate a reasonable royalty rate using the gross profit data already provided by CPA. Finally, the court concludes that the financial data requested by WhitServe would be of negligible help in calculating a reasonable royalty. Therefore, WhitServe's motion is denied.
II. Motion to Compel Attorney Opinions
The second motion presently before the court is plaintiff's Motion to Compel the Attorney Opinions, or in the Alternative, to Preclude CPA Defendants' Assertion, in Defense to Whitserve's Charge of Willful Infringement, that they Reasonably Relied Upon the Advice of Counsel in Engaging in the Infringing Acts ("Motion to Compel Attorney Opinions"). WhitServe has served on CPA, inter alia, production requests 42 and 72 and interrogatory 8 which seek "all documents which refer or relate to any opinion of counsel relating to the validity and/or enforceability and/or infringement of the WhitServe patents." (Pl.'s Mem. in Supp. at 6-7.) CPA has objected to these requests based attorney-client privilege. (Id. at 7.)
CPA concedes that, "at the proper stage of litigation [it must] decide whether to rely on the advice-of-counsel defense to WhitServe's willfulness claim and that, if it decides to assert the defense, WhitServe must have an opportunity for discovery as to CPA's reliance on its attorney's opinions." (Def.'s Mem. in Opp'n at 3.) CPA seeks a stay of discovery solely on the issue of its reliance on attorney opinions in defense of WhitServe's willful infringement claim ("advice-of-counsel defense"). The issue then is at what point CPA should be compelled to make the decision whether to raise an advice-of-counsel defense and thus waive its attorney-client privilege objections, or whether to maintain its privilege claims and abandon any advice-of-counsel defense. See Flex Products Inc. v. BASF Corp., 47 U.S.P.Q.2d 1380, 1381-82 (E.D. Mich. 1998). After considering all of the relevant factors the court concludes that discovery on the issue of the advice-of-counsel defense should be stayed and, as a result, WhitServe's Motion to Compel Attorney Opinions (Dkt. #190) is DENIED.
Judge Nevas has succinctly articulated the logic behind CPA's concession:
Generally, when a party learns of the existence of a patent, that party must obtain the advice of competent legal counsel before undertaking any actions that may constitute infringement. The failure to seek legal advice is a factor that supports a finding of willful infringement. Conversely, a party's reliance on the advice of counsel is a factor that militates against a finding of willfulness . . . Thus, an accused infringer faces a dilemma when there are allegations of willful infringement. If an accused infringer intends to assert a reliance on counsel defense at trial, the patentee is entitled to full disclosure in order to prepare its case. Full disclosure requires disclosure of the opinions upon which the potential infringer has chosen to rely, all other attorney communications on the same subject matter and all documents relied upon or considered by counsel at the time and in conjunction with rendering that opinion. On the other hand, if the accused infringer asserts the attorney-client privilege, then it cannot introduce opinions or testimony of counsel at trial to show that it is not guilty of willful infringement.Valois of America, Inc. v. Risdon Corp., No. 3:95 CV 1850 AHN, 1998 WL 1661397, at *2-3 (D. Conn. Dec. 18, 1998) (Internal citation omitted).
Although discovery in this case has been particularly onerous the present motion is commonly filed in patent litigation. As one court noted:
The current convention in patent litigation strategy is as follows: the patent owner opens with a claim for willful infringement; the alleged infringer answers by denying willful infringement and asserts good faith reliance on advice of counsel as an affirmative defense; then the owner serves contention interrogatories and document requests seeking the factual basis for that good faith reliance defense and the production of documents relating to counsel's opinion; the alleged infringer responds by seeking to defer responses and a decision on disclosure of the opinion; the owner counters by moving to compel; and the alleged infringer moves to stay discovery and for separate trials.The Johns Hopkins Univ. v. Cellpro, 160 F.R.D. 30, 34 (D. Del. 1995). Thus, as is the case here, courts are often asked to stay discovery on the advice-of-counsel defense until late in discovery.
An accused infringer . . . should not, without the trial court's careful consideration, be forced to choose between waiving the privilege in order to protect itself from a willfulness finding, in which case it may risk prejudicing itself on the question of liability, and maintaining the privilege, in which case it may risk being found to be a willful infringer if liability is found.Quantum Corp. v. Tandon Corp., 940 F.2d 642, 643-44 (Fed. Cir. 1991). In deciding whether to stay discovery on the issue of the advice-of-counsel defense a court must consider whether
a stay of discovery is uneconomical and a waste of judicial resources, whether a needless delay will be created, the complexity of the case, potential juror confusion, the stage of the litigation at which the request is made, whether any delay in filing such motion was a tactical strategy, the overlap of evidence and witnesses between liability and willfulness, the prejudice to patent owner by delaying the ultimate conclusion of the case, the risk of prejudice as to the liability issues which may result from disclosure, and the prejudice of having counsel who wrote the opinions disqualified as trial counsel.Valois of America, Inc., 1998 WL 1661397, at *3.
After balancing the competing interests, the court concludes that discovery on the issue of the advice-of-counsel defense should be stayed until the parties receive a ruling on CPA's pending Motion for Summary Judgment. First, there appears to be essential discovery which remains to be produced or is subject to continued dispute. Despite WhitServe's contention to the contrary, it is clear that an alleged infringer is entitled to discovery on other aspects of the case before it is compelled to decide whether to assert an advice-of-counsel defense. See e.g., Pittway Corp. v. Maple Chase Co., No. 91 C 3582, 1992 WL 392584, at *6 (N.D. Ill. Dec. 16, 1992).
CPA has served on WhitServe a contention interrogatory involving WhitServe's claim interpretation of the patents-in-suit. Because WhitServe objected to the interrogatory, CPA eventually filed a motion to compel. (See Dkt. #177.) On May 9, 2006 the undersigned ordered WhitServe to answer CPA's claim interpretation interrogatory within thirty days. (See Dkt. #198.) The memoranda submitted by the parties with regard to the present motion indicate that WhitServe had not yet complied with the court's order, although WhitServe represented that it intended to comply by the deadline set by the court. (Pl.'s Reply Mem. in Supp. at 5.) Thus, at this point it is unclear whether CPA has received an answer to its claim interpretation interrogatory let alone whether that answer is sufficient.
CPA's Memorandum in Opposition also cites numerous other areas where it argues WhitServe's discovery responses have been insufficient. (See Def.'s Mem in Opp'n at 5-9.) The fact that these disputes are not subject to a motion to compel militates against a finding that the responses have been as insufficient as CPA claims. However, the history of discovery in this case leads the court to believe that the disputes cited by CPA are more likely real than imagined for the purposes of opposing the present motion. The court further presumes that the absence of a motion to compel on these disputed areas is due to CPA's responsibility under Local Rule 37(a)(2) to attempt to resolve the disputes with the opposition before involving the court. Therefore, based on the above the court concludes that CPA is entitled to further discovery before it will be compelled to decide whether to assert its advice-of-counsel defense.
Finally, the current posture of this case lends itself to a stay. Presently pending before District Judge Droney is CPA's Motion for Summary Judgment of Noninfringement. (Dkt. #79.) This motion, if granted, would potentially dispose of the case without the need to address WhitServe's "willful infringement" claim. Conversely, if CPA's motion is denied then a material fact exits as to whether CPA has infringed WhitServe's patents. At that point WhitServe's need for discovery regarding its willful infringement claim would override CPA's interests in protecting its privileged information. In other words, WhitServe is not prejudiced by a stay, and may still receive full discovery on the advice-of-counsel defense to its willful infringement claim.
Neither CPA's memorandum in support of its Motion for Summary Judgment nor WhitServe's reply addresses the willful infringement claim. This makes sense since, if the court finds that no material fact exits that CPA infringed WhitServe's patents, then CPA could not have willfully infringed the same patents-in-suit.
Based on CPA's representations that no scheduling order has been issued in this case and the above discussion, the court hereby sets forth the following interim scheduling order:
• The parties will complete any remaining Rule 56(f) discovery relating to CPA's pending Motion for Summary Judgment by August 31, 2006.
• In the event that CPA's pending Motion for Summary Judgment is denied, CPA will serve on WhitServe and the court a notice indicating whether it intends to assert an advice-of-counsel defense to WhitServe's willful infringement claim within fifteen days of the court's ruling denying the Motion for Summary Judgment.
• If CPA indicates it intends to raise an advice-of-counsel defense it will serve on WhitServe complete and responsive answers to document requests 42 and 76 and interrogatory 8 within thirty days of the court's ruling denying the Motion for Summary Judgment. Any motion challenging the sufficiency of CPA's response will be filed within fifteen days of receiving said response.
• Both parties will, after conferring with one another, file a proposed scheduling order addressing any further necessary discovery within fifteen days following any ruling on CPA's pending Motion for Summary Judgment.
• All other discovery, including motions addressed at the sufficiency of discovery (e.g., motions to compel, to quash or for a protective order), not related to the pending Motion for Summary Judgment or the advice-of-counsel defense will continue to be taken while the Motion for Summary Judgment is pending and will be concluded within ninety days of this ruling.
If there are any further outstanding production requests or interrogatories not listed in WhitServe's Memorandum in Support of its present motion requesting discovery on its claim of willful infringement, CPA is further ORDERED to provide complete and responsive answers to them along with its responses to the production requests and interrogatory cited herein.
III. Conclusion
For the reasons set forth herein, WhitServe's Motion to Compel Financial Statements [Dkt. #187] is DENIED. WhitServe's Motion to Compel Attorney Opinions [Dkt. #190] is also DENIED. Discovery is hereby STAYED on the issue of the advice-of-counsel defense only, consistent with the above discussion, until thirty days following a ruling on the pending Motion for Summary Judgment. At the conclusion of all proceedings, on application, the court will consider the amount of attorney's fees, if any, that should be awarded in connection with these motions. See Fed.R.Civ.P. 37(a).This is not a recommended ruling. This is a discovery ruling and order reviewable pursuant to the "clearly erroneous" standard of review. 28 U.S.C. § 636(b)(1)(A); Fed.R.Civ.P. 6(a), (e) and 72(a); and Rule 2 of the Local Rules for U.S. Magistrate Judges. As such, it is an order of the court. See 28 U.S.C. § 636(b) (written objections to ruling must be filed within ten days after service of same).
IT IS SO ORDERED.