Charles E. Hill & Associates, Inc. v. Abt Electronics, Inc. et al

Filing 232

MEMORANDUM OPINION AND ORDER - GRANTS the Motion to Compel and ORDERS Plaintiff to produce draft license agreements and communications, if any, between Hill and third parties relating to the negotiation of license agr eements entered into to resolve past claims under the patents-in-suitwithin twenty-one (21) days of this Order. Pursuant to the existing Protective Order, such documents shall be designated "Outside Counsel Eyes Only Confidential Information.". Signed by Judge Rodney Gilstrap on 4/3/2012. (ch, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TEXAS
MARSHALL DIVISION
CHARLES E. HILL & ASSOCIATES,
INC.,
Plaintiff,
vs.
ABT ELECTRONICS, INC. ET AL.
Defendants.

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CASE NO. 2:09-CV-313-JRG

MEMORANDUM OPINION AND ORDER
Before the Court is Defendants’ Motion to Compel (Dkt. No. 170), filed May 23, 2011,
urging this Court to compel the production of draft license agreements and communications
regarding license negotiations between Plaintiff Charles E. Hill & Associates, Inc. (“Hill”) and
any third party entered into to resolve past claims under the patents-in-suit.
I.

BACKGROUND

Plaintiff Hill sued Defendants claiming patent infringement of the patents-in-suit. On
November 19, 2010, this Court ordered Plaintiff to produce all final, executed licenses and
settlement agreements existing between Hill and any third party related to the patents-in-suit
(“licenses”). This Court ordered production of the existing licenses as a means to facilitate
calculations of a reasonable royalty as a measure of damages. Such licenses have been produced
or will be produced upon execution. Now, Defendants urge this Court to go behind the licenses
themselves and compel Plaintiff to produce both unsigned drafts of the licensing agreements and
other documents related to negotiations and communications between Hill and such third parties,
entered into to resolve claims under the patents-in-suit. Principally, the Defendants argue that
such production is permitted under the Federal Circuit’s decision in ResQNet1 and is necessary to

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ResQNet.com, Inc. v. Lansa, Inc., 594 F. 3d 860 (Fed. Cir. 2010).

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develop a reasonable royalty calculation in this case. Plaintiff contends that such negotiations
and settlement discussions are privileged, even under ResQNet, and further that they are suspect,
at best, as a means to value the patents-in-suit.
II.

LEGAL STANDARD

The rules of discovery are accorded a broad and liberal treatment to affect their purpose of
adequately informing litigants in civil trials. Herbert v. Lando, 441 U.S. 153, 176, 99 S.Ct.
1635, 60 L.Ed.2d 115 (1979).

Nevertheless, discovery does have “ultimate and necessary

boundaries,” Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351, 98 S.Ct. 2380, 57 L.Ed.2d
253 (1978) (quoting Hickman v. Taylor, 329 U.S. 495, 507, 67 S.Ct. 385, 91 L.Ed. 451 (1947)).
As the Fifth Circuit has repeatedly instructed, “‘[a] district court has broad discretion in all
discovery matters, and such discretion will not be disturbed ordinarily unless there are unusual
circumstances showing a clear abuse.’” Beattie v. Madison County Sch. Dist., 254 F.3d 595, 606
(5th Cir. 2001) (quoting Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 855 (5th Cir.
2000)). See also Alpine View Co. v. Atlas Copco AB, 205 F.3d 208, 220 (5th Cir. 2000). The
party requesting discovery may move to compel the disclosure of any materials requested so long
as such discovery is relevant and otherwise discoverable. See FED. R. CIV. P. 37; Export
Worldwide, Ltd. v. Knight, 241 F.R.D. 259, 263 (W.D. Tex. 2006) (“[Rule] 37(a)[(3)(B)(iii) and
(iv)] empowers the court to compel the production of documents . . . upon motion by the party
seeking discovery.”). Non-privileged materials and information are discoverable if they are
“relevant to any party’s claim or defense” or if they “appear[] reasonably calculated to lead to the
discovery of admissible evidence.” FED. R. CIV. P. 26(b)(1).
Before the Federal Circuit’s ResQNet decision in 2010, courts within this District generally

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applied the rule set forth in Goodyear,2 providing that settlement negotiations are privileged
while the resulting license agreement itself is discoverable. The ResQNet decision has caused
some shift away from Goodyear’s bright-line rule and toward the discoverability of settlement
negotiations. See Tyco Healthcare Group LP v. E-Z-EM, Inc., 2:07-cv-262, (E.D. Tex. Mar. 2,
2010) (Ward, J.); Datatreasury Corp. v. Wells Fargo & Co., 2:06-cv-72, 2010 WL 903259 (E.D.
Tex. Mar. 4 2010) (Folsom, D.); Clear with Computers LLC v. Bergdorf Goodman, Inc., 753 F.
Supp. 2d 662 (E.D. Tex. 2010) (Davis, L.). This court now considers these decisions and seeks
to clarify its approach to reconciling ResQNet with Goodyear in relation to the discovery of preexecution license negotiations and settlement discussions.
III.

ANALYSIS

While some have opined that settlement negotiations relating to licenses are proper for
production in all cases, citing ResQNet as an apparent replacement to Goodyear, this Court takes
a case-by-case approach to the issue and holds that while ResQNet may create an exception to
the Goodyear rule in certain circumstances, it has not wholly replaced Goodyear. Whether the
license negotiations and settlement discussions are properly discoverable will likely depend on
whether, within the context of each case, they are an accurate reflection of the patents’
underlying value and whether their probative value exceeds their prejudicial effect.
The Tyco decision seems to view ResQNet as a complete substitute for Goodyear. See
Tyco, 2010 WL 774878. While the Datatreasury3 decision seems to accept Tyco’s blanket
holding of discoverability, this Court does not reach that same conclusion. This Court finds
itself much closer to the rationale developed in the Clear with Computers4 decision. While
signed licenses relating to the same patents-in-suit are accepted as a valuable source for

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Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F. 3d 976 (6th Cir. 2003).

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2010 WL 903259.
753 F. Supp. 2d 662.

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calculating a reasonable royalty, the negotiations behind those licenses must be viewed, as a
general rule, as less probative and more prejudicial than the licenses themselves. The negotiation
process is, by its nature, a place in which strategy predominates and often obscurity is generated
at the cost of clarity. Parties are inclined to say or act in whatever way moves the process in
their direction, regardless of the merit or truth of what is said or done at the negotiating table.
Parties often employ an “end justifies the means” approach to negotiations. They do so for two
primary reasons: (1) the end result, not the process of getting there, is the sole objective; and (2)
the parties feel free to employ a wide variety of negotiating tactics because they consider that
such negotiations are privileged and protected from future discovery. Citing its earlier decision
in Fromson v. Western Litho Plate & Supply Co., 853 F. 2d 1568, 1574 (Fed. Cir. 1988), the
Federal Circuit said in ResQNet that “[d]etermining a fair and reasonably royalty is often … a
difficult judicial chore, seeming to involve more the talents of conjurer than those of a judge.”
ResQNet, 594 F. 2d at 869. The blanket admissibility of all manner of negotiations permitting
parties to go behind the executed licenses appears to this Court to primarily add heat and not
light to an already difficult judicial chore. This being said, however, the Court finds itself
supportive of the approach to this quandary laid out in Clear with Computers. 753 F. Supp. 2d
662.
In Clear with Computers, Defendants’ filed a Motion to Compel, urging production of
communications related to the negotiations of already-produced license agreements, where the
licenses had been reached within the context of pending or threatened litigation. Id. at 663. The
Court there adopted a case-by-case approach, and determined that “draft license agreements and
settlement communications are likely to be key in determining whether the settlement
agreements accurately reflect the inventions’ value or were strongly influenced by a desire to

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avoid or end full litigation.” Id. at 664. Further, the Court found that Defendants demonstrated
that different companies settled for vastly different amounts as shown by the resulting licenses
and that settlement communications would likely explain such inconsistencies. Id. Finally, the
Court concluded that because the Plaintiff’s business was to “litigate and license” patents and not
to “compete with Defendants in the marketplace,” their litigation-based licenses would likely be
the only licenses of the patents-in-suit, making an accurate understanding of the negotiations
behind them more important than otherwise. Id. The Court in Clear with Computers noted that
the Plaintiff could not produce non-litigation licenses to alternatively establish the value of the
license. Id.
The Court finds the facts of this case analogous to those in Clear with Computers. Here,
as in Clear with Computers, Plaintiff’s business is to litigate and license. Hill does not openly
compete with Defendants in the marketplace. Accordingly, the settlement communications will
be a valid consideration in determining whether the settlement agreements themselves accurately
reflect the patents’ value. Here, Defendants indicate that payment amounts, provided for within
the licenses produced, vary from as high as $3.5 million to as little as $100,000. The draft
versions of these license agreements as well as the underlying negotiations will help to clarify
these discrepancies and, in truth, are probably the only source from which such clarity might
come. Accordingly, applying the case-by-case analysis adopted in Clear with Computers, this
Court finds that here, the Goodyear rule must yield to the exception attributed to ResQNet. The
Court therefore will require production of the draft license agreements and underlying settlement
negotiations in this case. However, the Court cautions future litigants that such production will
be viewed as the exception and not the rule. Settlement negotiations are always suspect to some
degree and are often littered with unreal assertions and unfounded expectations. The Court is

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aware that assertions made during settlement negotiations are generally made to “close the deal”
and are not always grounded in facts or reason. Accordingly, while the Court allows discovery
of the negotiations and settlement discussions at issue, the Court intends, as provided in
Datatreasury, to thereafter direct its attention and scrutiny to the weight and degree that should
properly be afforded to such negotiation materials.

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IV.

CONCLUSION

The Court hereby GRANTS the Motion to Compel and ORDERS Plaintiff to produce
draft license agreements and communications, if any, between Hill and third parties relating to
the negotiation of license agreements entered into to resolve past claims under the patents-in-suit
within twenty-one (21) days of this Order. Pursuant to the existing Protective Order, such
documents shall be designated “Outside Counsel Eyes Only Confidential Information.”

SIGNED this 19th day of December, 2011.
So ORDERED and SIGNED this 3rd day of April, 2012.

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RODNEY GILSTRAP
UNITED STATES DISTRICT JUDGE

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