Daedalus Blue, LLC v. Microsoft Corporation

Filing 74

ORDER Defendant Microsoft Corporations Objections to andAppeal from May 12, 2022 Non-Dispositive Order of Magistrate Judge 64 areOVERRULED and DENIED. Signed by Judge Alan D Albright. (lad)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
WACO DIVISION

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DAEDALUS BLUE, LLC,
Plaintiff
-vsMICROSOFT CORPORATION,
Defendant

W-20-CV-01152-ADA

ORDER DENYING MICROSOFT CORPORATION’S OBJECTIONS TO AND APPEAL
FROM MAY 12, 2022 NON-DISPOSITIVE ORDER OF MAGISTRATE JUDGE
Before the Court is Defendant Microsoft Corporation’s (“Microsoft”) Objections to and
Appeal from the May 12, 2022 Non-dispositive Order of Magistrate Judge. ECF No. 64. Plaintiff
Daedalus Blue, LLC’s (“Daedalus”) Opposition to Defendant’s Motion was timely filed in
response. ECF No. 66. Microsoft filed a Notice of Supplemental Authority. ECF No. 67. Having
considered all the relevant briefing, the Court DENIES Microsoft’s Objection.
I.

BACKGROUND

On April 18, 2022, the court held a sealed discovery hearing on requests to compel
discovery raised by both Daedalus and Microsoft. ECF No. 61 at 1. A follow-up hearing was
held on April 26, 2022, concerning Microsoft’s first request. Id. Subsequently, the Court held
another sealed discovery hearing on May 11, 2022, on related issues. Id.
Of the numerous discovery issues, Microsoft objects to and appeals Magistrate Judge
Gilliland’s Discovery Order holding that “communications reflecting negotiations or drafts of
unconsummated agreements are not discoverable absent a further showing of good cause.” ECF
No. 64 at 1–2 (quoting ECF No. 61 at 4). Microsoft sought production of documents and email
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communications exchanged with third parties regarding Daedalus’s attempts to commercialize
enforce, sell, monetize, or license the Asserted Patents. ECF No. 61 at 2. On May 12, 2022, the
Court issued an order consolidating the Court’s ruling from all of the hearings. ECF No. 61 at 1
(the “Order”). In this Order, with regard to the communications about prospective monetization
or licensing of the patents, the Court held that the identity of the parties contacted about a license
to the Asserted Patent are discoverable, as are any final consummated agreements that include
the Asserted Patents. ECF No. 61 at 4. Additionally, the Court held that communications
reflecting negotiations or drafts of unconsummated agreements are not discoverable absent a
further showing of good cause. ECF No. 61 at 4.
On May 26, 2022, Microsoft filed an objection to and appeal from the Court’s May 12,
2022 Order. ECF No. 64. Microsoft argued that Magistrate Judge Gilliland’s Discovery Order,
regarding the communications about prospective monetization of licensing of the patents, was
clearly erroneous or contrary to law. ECF No. 64 at 1. In addition, Microsoft argued the
Discovery Order incorrectly applies a heightened standard of “good cause” for documents and
communications reflecting Daedalus’s efforts to monetize the Asserted Patents. ECF No. 64 at 2.
II.

STANDARD OF REVIEW

“A magistrate judge’s determination regarding a nondispositive matter is reviewed under
the ‘clearly erroneous or contrary to law’ standard.” Baylor Health Care Sys. v. Equitable Plan
Serves., 955 F. Supp. 2d 678, 689 (N.D. Tex. 2013); see also 28 U.S.C. § 636(b)(1)(A); Fed. R.
Civ. P. 72(a).
The “clearly erroneous” standard applies to the magistrate judge’s findings of fact. See
Baylor Health Care Sys., 955 F. Supp. 2d at 689. That standard is a “highly deferential” one; the
Court must affirm the Magistrate’s decision unless “on the entire evidence [the Court] is left with

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a definite and firm conviction that a mistake has been committed.” Gomez v. Ford Motor Co.,
2017 WL 5201797, at *2 (W.D. Tex. April 2017) (quoting United States v. United States
Gypsum Co., 333 U.S. 364, 395 (1948)) (internal quotations omitted). In other words, even were
the Court disposed to differ with the Magistrate, such a difference of opinion would not alone
entitle it to reverse or reconsider the Order. Id. (citing Guzman v. Hacienda Records &
Recording Studio, Inc., 808 F.3d 1031, 1036 (5th Cir. 2015)).
On the other hand, a magistrate judge’s legal conclusions are reviewed de novo under the
less stringent “contrary to law” standard. See id.; Gandee v. Glasser, 785 F. Supp. 684, 686 (S.D.
Ohio 1992), aff’d, 19 F.3d 1432 (6th Cir. 1994) (citing 28 U.S.C § 636(b)(1)(A); Fed. R. Civ. P.
72(a)); Fogel v. Chestnutt, 668 F.2d 100, 116 (2d Cir. 1981), cert. denied sub nom. Currier v.
Fogel, 459 U.S. 828 (1982).
III.
A.

LEGAL STANDARD

Relevance of Discovery

Parties are permitted discovery of any non-privileged material relevant to a party’s claim
of defense that is proportional to the needs of the case. See, e.g., Fed. R. Civ. P. 26(b)(1);
Hawkins v. AT&T, 812 F. App’x 215, 218 (5th Cir. 2020) (“the scope of discovery is broad and
permits the discovery of ‘any nonprivileged matter that is relevant to any party’s claim or
defense.’”) (quoting Crosby v. La. Health Serv. & Indem. Co., 647 F.3d 258, 262 (5th Cir.
2011)).
The Federal Rules of Civil Procedure grant the courts broad discretionary powers.
According to Rule 26(b)(2)(C), the court must limit the extent of discovery otherwise allowed by
the rules, or by local rule, if it determines that the proposed discovery is outside the scope
permitted by Rule 26(b)(1). Furthermore, even when a party shows information is not readily

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accessible because of undue burden or cost, the court may nonetheless order discovery from it if
the requesting party shows good cause. Fed. R. Civ. P. 26(b)(2)(B).
With respect to whether records of unconsummated negotiations should be discoverable,
the courts are currently split. Courts have both required and not required parties to produce
documents regarding unconsummated negotiations. In Phoenix Sols. Inc. v. Wells Fargo Bank,
N.A., the plaintiff was ordered to produce documents regarding settlement negotiations as
relevant to show plaintiff’s view of infringement, reasonable royalty, invalidity, and licensing
over time. 254 F.R.D. 568, 582–85 (N.D. Cal. 2008). Courts have ordered the production of
“ongoing and unconsummated patent licensing communications with third parties in the absence
of a consummated agreement” because they are “relevant to whether prior licenses are
comparable and to the calculation of a reasonable royalty.” High Point Sarl v. Sprint Nextel
Corp., No. 09-2269-CM-DJW, 2012 U.S. Dist. LEXIS 59529, at *28–29 (D. Kan. Apr. 30,
2012).
On the other hand, the court in Mondis Tech., Ltd. V. LG Elecs., Inc., found
unconsummated settlement negotiation communications not to be discoverable for multiple
reasons. No. 2:07-CV-565-TJW-CE, 2011 WL 1714304, at *5 (E.D. Tex. May 4, 2011). That
court and others have subsequently held that “plaintiff’s ‘ongoing or unconsummated settlement
and licensing negotiations with the patent-in-suit are not discoverable’ because they are
unreliable absent a final decision and may have a chilling effect on ongoing settlement
negotiation.” See, e.g., Sol IP, LLC v. AT&T Mobility, LLC, No. 2:18-cv-00526-RWS-RSP, 2020
WL 60140, at *3 (E.D. Tex. Jan. 6, 2020) (citing Mondis); Bergstrom, Inc. v. Glacier Bay, Inc.,
No. 08-50078, 2010 WL 257253, at *2–3 (N.D. Ill. Jan. 22, 2010). In Hemphill v. San Diego

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Ass’n of Realtors, Inc., the court stated, “discovery of evidence pertaining to settlement
negotiations is appropriate only in rare circumstances.” 225 F.R.D. 616, 620 (S.D. Cal. 2005).
IV.

ANALYSIS

As previously mentioned, to be reversed, rulings on issues of fact must be found “clearly
erroneous,” whereas rulings regarding issues of law must be found “contrary to law.” Before the
Judge were issues of both fact and law. The issues of fact were whether the unconsummated
negotiations were relevant or “unreliable” sources due to their lack of finality, and if they were,
whether they were “too burdensome” by way creating a “chilling effect on current negotiations.”
There are two issues of law. First, the courts are currently split with respect to whether records of
unconsummated negotiations should be discoverable. Second, whether a magistrate judge has the
discretion to implement a good cause standard in discovery.
Because the magistrate judge operated within the court’s discretion with respect to the
relevance and burden of discovery, and because the courts are currently split with respect to
whether records of unconsummated negotiations should be discoverable, this Court cannot find
that the magistrate judge’s holding regarding relevance is either “clearly erroneous” or “contrary
to law.” In addition, because the magistrate judge has the discretion to implement a good cause
standard in discovery, the Court does not find that the magistrate judge’s holding was “contrary
to law.”
Microsoft argues the Court should compel Daedalus’s production of the discovery at
issue because it is relevant to the value of the patents and damages. ECF No. 64 at 5. Microsoft
cites “in [the] absence of [a] consummated agreement,” courts have ordered production of
ongoing and unconsummated patent licensing communications with third parties. ECF No. 64 at
6. In the present case, Daedalus has provided one license that arose out of settlement.

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In response, Daedalus argues unconsummated settlement negotiations are not
discoverable because they are unreliable absent a final decision and may have a chilling effect in
ongoing negotiations. ECF No. 66 at 3.
In reply, Microsoft provided supplemental authority from the Eastern District of Texas
where the court found that offered rates (unconsummated negotiations) may be acceptable if
properly considered. ECF No. 67 at 1.
Given the standard of review, the Court finds the Magistrate Judge operated within the
Court’s discretion in gauging the relevance and burden of discovery as set by the Federal Rules
of Civil Procedure and holdings of its sister courts. Therefore, the Order is not “clearly
erroneous.” Furthermore, since the courts are currently split with respect to whether records of
unconsummated negotiations should be discoverable, and since the Magistrate Judge ruled based
on the Mondis line of cases—one of the two lines of cases available—this Court cannot find that
the Magistrate Judge’s holding regarding relevance is “contrary to law.” Of course, a split in
holdings does not in and of itself justify rulings that are “contrary to law.” However, courts differ
in determining the relevance of unconsummated settlement negotiations due to unreliability and
their impact in ongoing negotiations. For this reason, this Court, and others, tend to decline
entertaining discovery requests for such negotiations absent justifiable facts. Accordingly, any
notion of a heightened “good cause” threshold is not tied to elevating the relevance standard;
instead, the Court seeks “good cause” or reasons to justify how generally unreliable settlement
negotiations raise the discovery request to the threshold relevance standard.
Microsoft also argues Daedalus failed to show the requested documents are not
proportional to the needs of the case, nor that Daedalus explained why a protective order would
be insufficient to avoid any such concerns about the chilling effects of ongoing negotiations.

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ECF No. 64 at 6. But both of these requirements are circumvented by the Court’s denial based on
relevance and reliance on the reasoning in Mondis, which provides that unconsummated
negotiations are not discoverable because they are “unreliable absent a final decision.” See, e.g.,
Sol IP, LLC v. AT&T Mobility, LLC, No. 2:18-cv-00526-RWS-RSP, 2020 WL 60140, at *3
(E.D. Tex. Jan. 6, 2020) (citing Mondis); Bergstrom, Inc. v. Glacier Bay, Inc., No. 08-50078,
2010 WL 257253, at *2–3 (N.D. Ill. Jan. 22, 2010). Quite simply, “the communications have less
context and therefore less probative value. For example, one party in the negotiation may be
puffing by making certain communications.” Mondis, 2011 WL 1714304, at *5. This reasoning,
upon which Judge Gilliland relied, sufficiently supports the Order such that Microsoft’s
objections and appeal are without merit. Moreover, even under a de novo standard of review, this
Court would have reached the same outcome.
V.

CONCLUSION

For the reasons stated above, Defendant Microsoft Corporation’s Objections to and
Appeal from May 12, 2022 Non-Dispositive Order of Magistrate Judge (ECF No. 64) are
OVERRULED and DENIED.
SIGNED this 1st day of August, 2022.

ALAN D ALBRIGHT
UNITED STATES DISTRICT JUDGE

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