The “shred days” saga continues to dog Rambus’s implementation of its patent litigation strategy, most recently with U.S. District Judge Ronald M. Whyte’s Sept. 21, 2012 ruling that Rambus’s destruction of documents between 1998 and 2000 occurred after its duty to preserve had been triggered and thus constituted spoliation. Hynix Semiconductor Inc. v. Rambus Inc., Case No. C-00-20905 RMW (N.D. Cal. Sept. 21, 2012) (Findings of Fact and Conclusions of Law on Spoliation and The Unclean Hands Defense). Judge Whyte acknowledged that twin decisions from the Federal Circuit in May 2011 left him with little choice but to find that Rambus spoliated evidence.
The decision effectively reverses Judge Whyte’s 2006 holding (“Hynix I,” which was vacated by the Federal Circuit) that Rambus’s duty to preserve did not arise until late 1999, and that no spoliation occurred after that point. Nonetheless, Rambus may be relatively pleased with the outcome, which does not affect the validity of Rambus’s patents or the determination that Hynix infringed. Rejecting retrial or dismissal as a sanction, the court concluded that Rambus’s spoliation “should preclude it from entitlement to a royalty that places Hynix at a competitive disadvantage,” and thus the “generous royalty rate” awarded in the March 10, 2009 judgment in Rambus’ favor will be limited to a reasonable, non-discriminatory royalty. Briefs on the revised royalty rate are due later this month.
The protection of its intellectual property has been critically important to Rambus, which does not manufacture its own products and relies on license royalties from DRAM (dynamic random-access memory) manufacturers. The infamous “shred days” (in September 1998, August 1999 and December 2000) were part of a broader document retention policy and related licensing and litigation strategy that Rambus began to develop in early 1998. Rambus launched its first patent infringement action in January 2000 against Hitachi; and the Rambus litigation grew to include a series of patent-infringement and antitrust proceedings involving Rambus, Rambus’s DRAM patents, the JEDEC (Joint Electron Device Engineering Council) standards-setting process, a number of chip manufacturers, and government regulators in the U.S. and elsewhere.
Rambus’s Duty to Preserve: A Difference of Opinions
Judge Whyte’s September 21 ruling is the latest piece in a mosaic of spoliation decisions centered on Rambus’s document retention policy, culminating in twin decisions by the Federal Circuit on May 13, 2011.[1] The two Federal Circuit opinions resolved a conflict between Judge Whyte’s 2006 ruling in Hynix I and a 2009 decision in Rambus’s patent litigation with Micron Technology in the District of Delaware (“Micron I“) holding that Rambus engaged in spoliation when it implemented its new document retention policy between 1998 and 2000. At the core of the conflict: divergent views of the point at which litigation becomes “reasonably foreseeable” and thus triggers a potential litigant’s duty to preserve evidence.
Interpreting the “reasonable foreseeability” standard in 2006, Judge Whyte required a relatively heavy pull on the preservation trigger — something “more than a possibility” of litigation — to invoke the duty. In his view, litigation was not reasonably foreseeable when more than 1,200 backup tapes were degaussed in the summer of 1998, and had not become reasonably foreseeable by the time of the September 1998 or August 1999 “shred days.” Without identifying a precise triggering event or date or defining an explicit rule, Judge Whyte appeared to apply a standard of reasonable probability, emphasizing that Rambus’s litigation strategy included a range of contingencies and repeatedly referring to the triggering event as the point (which he concluded occurred in “late 1999″) at which litigation became “probable.”[2] After further litigation, including a 2006 jury finding that Hynix infringed on Rambus’s patents, Judge Whyte entered judgment in Rambus’s favor on March 10, 2009 for a total of approximately $397 million.
Though presented with essentially the same evidence before the Hynix I court, U.S. District Judge Susan L. Robinson held in her January 9, 2009 Micron I decision[3] that Rambus’s duty to preserve arose no later than December 1998, roughly a year earlier than Judge Whyte had determined. Construing the “reasonable foreseeability” standard more broadly than Judge Whyte had, Judge Robinson stated that the duty to preserve “arises when there is knowledge of a potential claim,” and
[a] potential claim is generally deemed cognizable in this regard when litigation is pending or imminent, or when there is a reasonable belief that litigation is foreseeable. For instance, a duty to preserve evidence can arise many years before litigation commences; imminency is sufficient to create the duty, but it is not a requirement.
By December 1998, she held, Rambus “had identified potential litigation targets, causes of action, and fora if negotiations with Intel failed;” and its document destruction after that point constituted spoliation. As a sanction, Judge Robinson ordered that Rambus’s patents were unenforceable against Micron. Judgment was entered on Feb. 10, 2009 against Rambus and in favor of Micron.
Rambus’s implementation of its document retention policy between 1998 and 2000 has been a prominent issue in other proceedings as well, including two Rambus patent infringement actions before U.S. District Judge Robert E. Payne in the Eastern District of Virginia, one against Infineon Technologies AG, the other against Samsung Electronics Co. Viewing Rambus’s actions and preservation obligations much as Judge Robinson later did in Micron I, Judge Payne determined in both the Infineon[4] and Samsung[5] actions that Rambus had destroyed evidence after its duty to preserve arose. Though both cases settled (Infineon in 2005 and Samsung in 2010), the Hynix/Micron conflict remained alive and unresolved.
The Federal Circuit’s Micron II and Hynix II Opinions
Appeals were taken to the Federal Circuit in the Micron and Hynix actions.[6] Both Federal Circuit opinions addressed the standard for determining when the duty to preserve is triggered in advance of patent litigation. Taken as a whole, the opinions adopted a flexible reasonable foreseeability standard, without any additional “gloss” requiring that litigation be “imminent, or probable without significant contingencies.”
Micron II
In its May 13, 2011 Micron decision (“Micron II“), the Federal Circuit held that the reasonably foreseeable standard is an objective standard: the focus is not “whether the party in fact reasonably foresaw litigation” but rather “whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation.” The fact-specific standard is “flexible,” the appellate court emphasized, allowing a court to exercise its discretion in a wide range of factual situations – not so flexible that the duty to preserve is triggered by the “mere existence of a potential claim or the distant possibility of litigation”, but not so “inflexible” as to require Rambus’s proposed “gloss” that litigation be “‘imminent, or probable without significant contingencies.’”
Declining to identify the “exact date at which litigation was reasonably foreseeable,” the Federal Circuit affirmed the lower court’s determination that Rambus spoliated evidence, holding that Judge Robinson did not clearly err in finding that “at some time before the second shred day in August of 1999, litigation was reasonably foreseeable.” The court concluded, however, that given the lower court’s “sparse” analysis, it could not determine whether Judge Robinson applied the proper standard in finding that Rambus had acted in bad faith. This shortcoming also affected the validity of the lower court’s determination of prejudice and its imposition of such a “harsh sanction,” and as a result the Federal Circuit vacated the dismissal sanction and remanded for further consideration.
Hynix II
In its companion May 13, 2011 Hynix decision (“Hynix II“), the Federal Circuit concluded that “the district court applied too narrow a standard of foreseeability in determining that litigation was not reasonably foreseeable until late 1999.” In its Micron II decision, the court stressed, it held that the reasonable foreseeability standard “does not carry a gloss requiring that litigation be ‘imminent, or probable without significant contingencies,’” and Judge Whyte had “applied just such a standard” in Hynix I.
Among the key deficiencies in the lower court’s analysis: Judge Whyte “determined that litigation was not reasonably foreseeable merely because some contingencies were present, which made litigation ‘neither clear nor immediate.’” In the Federal Circuit’s view, however, “the record shows that the district court implicitly recognized that the resolution of each contingency was reasonably foreseeable [italics in original].” Contingencies “whose resolutions are reasonably foreseeable,” the appellate court emphasized, “do not foreclose a conclusion that litigation is reasonably foreseeable.” In sum, the Federal Circuit concluded, the
narrow standard applied by the court in this case vitiates the reasonable foreseeability test, and gives free reign to destroy documents to the party with the most control over, and potentially the most to gain from, their destruction. . . .
Applying the correct standard of reasonable foreseeability, without the immediacy gloss, these considerations compel a finding that litigation was reasonably foreseeable prior to Rambus’s Second Shred Day. . . .
The Federal Circuit vacated Judge Whyte’s Hynix I findings of fact and conclusions of law regarding spoliation as well as the 2009 final judgment and remanded the case for reconsideration of the spoliation issue under the framework set forth in Micron II.
Judge Whyte’s Decision On Remand
In light of the Federal Circuit’s Micron II and Hynix II opinions, Judge Whyte’s spoliation finding on remand was not surprising. As he acknowledged in his Sept. 21 decision, the Federal Circuit left him with little choice but to conclude that Rambus had spoliated evidence:
This court’s finding that Rambus did not spoliate evidence has been vacated, while the Delaware court’s Micron I decision to the contrary has been affirmed. As a result, this court no longer is confronted with two inconsistent decisions. Rather, the slate has been wiped clean in the present action while the spoliation issue has been finally adjudicated in Micron I. This court no longer has grounds for questioning whether the Micron I determination of spoliation is correct. Most importantly, that spoliation finding has been expressly affirmed by the Federal Circuit. . . . Additionally, in its opinion remanding Hynix I, the Federal Circuit unequivocally stated that “[a]pplying the correct standard of reasonable foreseeability . . . litigation was reasonably foreseeable prior to Rambus’s Second Shred Day.” . . . Given this statement by the Federal Circuit, it is difficult to see how this court could do other than find that Rambus spoliated evidence . . . .
Judge Whyte concluded that the Federal Circuit’s Micron II decision should be given preclusive effect regarding the issues of “when Rambus’s duty to preserve began and whether Rambus spoliated documents.” He ruled, however, that Micron II should not be given preclusive effect regarding the issues of bad faith, prejudice or appropriate sanction.
Addressing the spoliation issue, Judge Whyte determined that litigation was reasonably foreseeable prior to the September 1998 “shred day” (but not at the time of the erasing of backup tapes in July 1998) and “thus that destruction of documents during Shred Days 1998, 1999 and 2000 constituted spoliation.” He acknowledged that in Hynix II, the Federal Circuit determined that in his Hynix I decision he had “used an overly narrow standard in determining whether Rambus reasonably foresaw litigation when it destroyed documents” and “placed an inappropriate gloss on the standard, requiring that litigation be ‘imminent, or probable without significant contingencies.’”
Judge Whyte then turned to the issues of bad faith and prejudice. Although in his view the evidence “did not support a conclusion that Rambus deliberately shredded documents it knew to be damaging” — and in fact, he suggested the possibility “that Rambus did not destroy any evidence that would have been beneficial to Hynix’s litigation position” — he found nonetheless that Rambus spoliated evidence “in bad faith or at least willfully.” Judge Whyte also concluded that Hynix had established prejudice regarding Rambus’s destruction of JEDEC-related documents, which “might have shed additional light on the scope of Rambus’s disclosure obligation” during JEDEC’s standards-setting process as well as “Rambus’s plans to gain market power by using information learned at JEDEC meetings.”
Finally, the court considered a range of potential sanctions, including dismissal — the sanction sought by Hynix and imposed in Micron I (and, as noted above, vacated in Micron II because of an overly “sparse” analysis). Judge Whyte rejected a retrial with either an adverse jury instruction or an evidentiary exclusion order, given the delay and expense involved, and also rejected Hynix’s argument that dismissal was the only appropriate alternative remedy. Declining to apply the unclean hands doctrine as a complete defense to Rambus’s infringement claims, Judge Whyte considered Rambus’s hypothetical licensing obligations under JEDEC’s standards-setting process[7] and decided to limit the royalty rate imposed on Hynix by the 2009 judgment to “a reasonable, non-discriminatory royalty”:
[T]he court concludes that the sanction most commensurate with Rambus’s conduct and which addresses the above concerns is to strike from the record evidence supporting a royalty in excess of a reasonable, non-discriminatory royalty. Such a remedy recognizes that Rambus’s patents have been determined to be valid while at the same time recognizing that Rambus’s spoliation of evidence should preclude it from entitlement to a royalty that places Hynix at a competitive disadvantage.
Judge Whyte instructed the parties to submit supplemental briefs on what a reasonable, non-discriminatory royalty would be for the Rambus patents at issue in the litigation: Hynix by Oct. 12 and Rambus by Oct.26.
* * *
While the saga of the Rambus “shred days” is a cautionary tale, a well-planned, carefully-implemented document retention policy plays an important role both in a company’s operations and in its litigation-readiness planning, including in particular its plans for the preservation and discovery of electronically stored information. Among the many useful components (whether in the document retention policy itself or in a related piece of the litigation-readiness plan): a process for determining whether (and if so, when) a duty to preserve records has been triggered; identification of those individuals inside the company with the authority — and responsibility — to suspend normal document destruction procedures; and a process for preparing, communicating, monitoring and eventually terminating a litigation/legal hold. See generally, e.g., The Sedona Guidelines: Best Practice Guidelines & Commentary for Managing Information & Records in the Electronic Age (Second Edition, November 2007).
As Judge Whyte observed in his decision on remand, even the U.S. Supreme Court has acknowledged the propriety “under ordinary circumstances” of document retention policies:
“Document retention policies,” which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. . . . It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.
Arthur Andersen LLP v. United States, 544 U.S. 696, 704 (2005). At the same time, as Arthur Andersen, Hynix and Micron, and countless other decisions remind (and even Dilbert acknowledges…), the design and implementation of a document retention policy is no mean feat.
[2] See Hynix Semiconductor Inc. v. Rambus Inc., 591 F. Supp. 2d 1038, 1062-65 (N.D. Cal. 2006) (“Hynix I“) (court rejected Hynix’s unclean hands defense to Rambus’s patent infringement claims; document destruction during September 3-4, 1998 and August 26, 1999 “shred days” did not constitute spoliation because litigation was not reasonably “probable” at that time; prior to late 1999, “the path to litigation was neither clear nor immediate” and was subject to “several contingencies [that] had to occur before Rambus would engage in litigation;” and Hynix did not demonstrate that documents destroyed during December 2000 “shredding event” were “material to Rambus’s patent claims”).
Judge Whyte addressed the spoliation issue again in 2009, shortly after Judge Robinson’s ruling in the Micron litigation. See Hynix Semiconductor Inc. v. Rambus Inc., 2009 WL 292205 (N.D. Cal. Feb. 3, 2009) (denying Hynix’s motion for summary judgment of unenforceability and, in the alternative, for reconsideration of the court’s unclean hands decision based on Judge Robinson’s Jan. 9, 2009 holding in the Micron litigation that Rambus had spoliated evidence and that its patents were unenforceable against Micron).
[3] See Micron Tech., Inc. v. Rambus Inc., 255 F.R.D. 135, 150–51 (D. Del. Jan. 9, 2009) (“Micron I“) (without reaching Micron’s unclean hands defense, court found that Rambus destroyed documents in bad faith and, as a sanction, ordered Rambus patents unenforceable against Micron; “litigation was reasonably foreseeable no later than December 1998″ and thus “a duty to preserve potentially relevant evidence arose in December 1998 and any documents purged from that time forward are deemed to have been intentionally destroyed, i.e., destroyed in bad faith”).
[4] See Rambus Inc. v. Infineon Tech. AG, 155 F.Supp.2d 668, 682-83 (E.D. Va. 2001) (on Infineon’s petition for fees and costs, court held that Rambus’ litigation misconduct included document destruction “in anticipation of litigation”), vacated-in-part, reversed-in-part, affirmed-in-part, and remanded by 318 F.3d 1081 (Fed. Cir. 2003); see also Rambus Inc. v. Infineon Tech. AG, 222 F.R.D. 280 (E.D. Va. 2004) (granting Infineon’s motion to compel production of documents re Rambus’s document retention, collection and production, court stated that it was “settled that some destruction occurred at a point in time when Rambus anticipated litigation and therefore had a duty to preserve the evidence,” concluding that “[b]y any measure, on this record, Infineon has made a prima facie showing that Rambus intentionally has engaged in the spoliation of evidence”). Following a 2005 bench ruling that Rambus had unclean hands due to spoliation of evidence, and before the court issued its findings of fact and rulings of law, Rambus and Infineon settled.
[5] See Samsung Elecs. Co. v. Rambus Inc., 439 F.Supp.2d 524 (E.D. Va. 2006) (though denying Samsung’s motion for attorney’s fees, court concluded that “the record, taken as a whole, rather clearly shows that litigation ‘became more than a possibility’ in 1998″ and “shows clearly and convincingly that in 1998, 1999 and 2000 Rambus engaged in the spoliation of evidence”), vacated as moot and remanded by 523 F.3d 1374 (Fed. Cir. 2008). The parties settled in early 2010.
[6] In the Micron litigation, Rambus filed its notice of appeal to the Court of Appeals for the Federal Circuit on March 11, 2009. In the Hynix action, Hynix filed its notice of appeal on April 6, 2009; and Rambus filed its notice of cross-appeal on April 17, 2009.
[7] Discussing the JEDEC licensing policies, Judge Whyte explained:
If Rambus had disclosed its intent to obtain patent coverage of the standards being considered by JEDEC, Rambus would have been required, at a minimum, to make its patents available to Hynix and others on a reasonable, non-discriminatory basis. If this case had not yet been fully litigated, the court could have sanctioned Rambus by excluding any evidence of a royalty rate greater than one set on a reasonable and non-discriminatory basis. Such a sanction would have addressed the prejudice Hynix is presumed to have suffered from Rambus’s spoliation by insuring that Hynix was not put at a competitive disadvantage in the marketplace. However, trial has been completed and a generous royalty rate has been awarded. [Footnote omitted.]
