Do New Federal Rules Mean Death for Local Patent Rules?

In the spirit of the holiday season, December 1, 2015, will bring a gift to litigators in the form of amendments to the Federal Rules of Civil Procedure. Before snoozing off at the mere mention of rules, if you are someone who has ever been sued for patent infringement, give some thought to the potential effect of a key rule change on discovery in patent litigation.

Under soon–to–be–amended Rule 26, “Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit” (emphasis added).

This shift to a discovery system based on the concept of proportionality could send shockwaves through the world of patent litigation, given that patent litigation is the poster–child for disproportionality in civil litigation in at least two respects.

First, patent litigation is notoriously expensive, with costs ranging from $650,000 to $5 million. It is little wonder that accused infringers will often settle for $25,000 a case that would cost over half–a–million dollars to litigate. It is just that easy for the merits to fall out of consideration in deciding how to respond to a patent complaint.

Second, as the Federal Circuit has noted, accused infringers bear a disproportional amount of the discovery expenses:

This is, at least in part, because accused infringers often possess enormous amounts of potentially relevant documents that are ultimately collected and produced. The Federal Rules of Civil Procedure, as well as the local discovery rules and policies of a number of district courts, allow for liberal discovery, and it is not uncommon for an accused infringer to produce millions of pages of documents, collected from central repositories and numerous document custodians. Those discovery costs are generally paid by the producing party, increasing the nuisance value that an accused infringer would be willing to settle for in a patent infringement case.

Eon–Net LP v. Flagstar Bancorp, 653 F.3d 1314, 1327 (Fed. Cir. 2011) (emphasis added). In Eon–Net, it cost Flagstar Bank over $600,000 to obtain a favorable judgment even though the district court stayed all discovery not related to claim construction.

As the Federal Circuit accurately described, the local patent rules of many jurisdictions in which patent cases are frequently filed feed this disproportionality because, under them, so much discovery is required of accused infringers so early in the case that costs become immediately prohibitive, again inducing accused infringers to settle despite the merits of the claim not because of them. It is this precise disproportionately that patent trolls have identified and exploited under their sue–and-settle business model. For example, in the Eastern District of Texas, the local patent rules require the parties to begin exchanging infringement and invalidity contentions and extensive document production starting ten days before the first case management conference. In the Northern District of Illinois, an accused infringer must produce documents relating to the accused instrumentality and a copy of each known piece of prior art within fourteen days after the defendant answers or otherwise responds to the complaint or the plaintiff answers or otherwise responds to a counterclaim.

So where, after December 1, 2015, does the new rule of proportionality in discovery leave local patent rules that front–load expensive discovery obligations without regard to the importance of the issues at stake or the underlying value of the claim? One answer is: Nowhere. When the Federal Rules and local rules conflict, the Federal Rules win, and the local rules must be abandoned. In the words of Federal Rule of Civil Procedure 83, “A local rule must be consistent with—but not duplicate—federal statutes and rules.”

Stay tuned for further developments.