Federal Circuit considers boundaries of spoilation

In Hynix Semiconductor Inc. v. Rambus Inc., Nos. 2009-1299, 1347 (Fed. Cir. May 13, 2011), Hynix Semiconductor Inc. (“Hynix”) appealed the District Court of Northern California’s denial of Hynix’s motion to dismiss arising from Rambus Inc.’s (“Rambus) alleged spoliation of documents.

Hynix Semiconductor is a companion case to Micron Technology, Inc. v. Rambus Inc., No. 2009-1263, slip.op. (Fed. Circ. May 13, 2011) (“Micron II”). In Micron II the District Court of Delaware held that Rambus spoilated documents in dereliction of a duty to preserve and held Rambus’ patents unenforceable as a sanction. Both cases were decided contemporaneously by the Federal Circuit.

Rambus’ primary business was licensing its intellectual property to dynamic random access memory (“DRAM”) manufacturers. Rambus achieved a measure of success licensing DRAM production by Samsung, Hynix (then Hyundai),Hitachi, Micron and several of the largest RAM manufacturers. During the licensing period, several manufacturers produced non-compatible DRAM (“SDRAM”) which formed the alleged infringement by Hynix. In October 1997, Rambus hired Joel Karp to prepare and negotiate licenses for Rambus’ patents to infringing companies. In January 1998 Rambus’ CEO instructed Karp to prepare a licensing and litigation strategy for presentation to the March 1998 Rambus Board Meeting. Karp enlisted outside counsel to draft the litigation strategy and in preparation for the meeting, comments were recorded which stated that that Rambus needed to litigate against someone to establish a royalty rate and have a court declare the DRAM patent valid. There were also comments made to create a document retention policy in order to make Rambus “battle ready” accompanied by a need to clean out all attorney notes to create similarity with United States Patent and Trademark Office (USPTO) files.

At the March 1998 Board meeting, Karp presented a litigation strategy with a timeframe to commence legal action within 4-6 months after obtaining potentially infringing parts and implemented a document retention policy and a discovery database. In July 1998, Karp made presentations on the document retention policy to engineers where who were told to specifically retain documents that would establish DRAM patent priority. In September 1998, Rambus held their first “Shred Day” destroying 400 boxes of documents and in June 1999, duration and timing charts were created for litigation in the Northern District of California and Eastern District of Virginia, with an October 1, 1999 prospective filing date. Karp’s goal for the third quarter of 1999 was to prepare a litigation strategy against 1 of the 3 manufacturers, all the time being ready for litigation with a 30 days notice. Thereafter, on August 26, 1999 Rambus held its second “Shred Day” destroying 300 additional boxes. Through all the Shred Days, Rambus kept no record of what was destroyed and admitted that some destroyed materials related to contract and licensing negotiations, patent prosecutions and finances. On October 22, 1999, Karp sent Hitachi a letter referencing Rambus’ patents and sued Hitachi on January 19, 2000 for infringement of DRAM technology.

On appeal from the district court’s finding of no spoliation on Rambus’ part, the Federal Circuit noted that “spoliation refers to the destruction or material alteration of evidence or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation” Silvesteri v. Gen. Motors Corp., 271 F.3d 583, 590 ( 4th Cir. 2001). The Federal Circuit noted that the most important point in this case was when the duty to preserve evidence began. Both parties and the Federal Circuit agreed that when balancing competing interests relevant to the preservation and destruction of documents and data, the reasonable foreseeability is the proper standard. Silvesteri, 271 F.3d at 591. However, Hynix argues that reasonable foreseeability incorporates no requirement of imminence of litigation while Rambus argued that to be reasonably foreseeable, litigation must be imminent, at least in the sense that it is probable and free of significant contingencies. Here, the district court determined that litigation did not become reasonably foreseeable until late 1999, before which litigation was neither clear, immediate and was subject to several contingencies.

The Federal Circuit established that the standard of reasonable foreseeablilty does not carry a gloss requiring that litigation be “imminent or probable without significant contingencies.” Micron II, No. 2009-1263, slip.op. The district court’s discussion of contingencies did not consider the likelihood that those contingencies would be resolved and they mistakenly determined that because some contingencies were present, litigation was neither clear nor immediate. Contingencies whose resolutions are reasonably foreseeable do not foreclose a conclusion that litigation was foreseeable. Micron II, slip.op. at *20-21.

It was also found that the district court’s application of the standard of foreseeablity was too strict. This was evidenced by the fact that the district court was the only court to determine that the duty to preserve documents did not begin until after Rambus’ second shred day. The Federal Circuit concluded that the district court’s narrow application of the standard 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. The Federal Circuit vacated the district court’s judgment relating to Hynix’s motion to dismiss due to spoliation and remanded the issue for further analysis in light of the opinion and the reasonable foreseebility test.

Finally, the Federal Circuit held that the Rambus’ destruction of documents in preparation of its suit against DRAM manufacturers could reasonably constitute a crime, and the district court’s determination to pierce Rambus’ attorney-client privilege under the crime-fraud exception was valid under California Penal code §135, which prohibits destruction of documents about to be produced in evidence. Drawing a distinction from People v. Prysock, 180 Cal. Rptr 15, 31 (Ct. App. 1982) – in which the defendant controlled the timing of the destruction and law enforcement controlled the initiation of investigation – here, Rambus controlled the timing of both the destruction and the initiation of investigation which created a tangential relationship in which Rambus’ control over what documents were destroyed and when the investigation was filed limited the documents used in the investigation to those chosen by Rambus.

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