Federal Circuit Says Rambus Illegally Destroyed Documents

On Friday, May 13, 2011, the Federal Circuit issued the latest decision in a long line of Rambus decisions stemming out of conduct of Rambus as it participated in the JEDEC standard-setting body, as well as litigation events that followed.  Rambus was investigated for antitrust violations, and has been able to put those issues in the past.  See Rambus Patent Related Antitrust Saga Appears to be Over.  Unfortunately, there remained patent infringement litigation brought by Rambus and Rambus was charged with destroying evidence that should have been kept for trial.  And in this latest case, Micron Technology Inc. v. Rambus, Inc., a five judge panel of the Federal Circuit (per Judge Linn) affirmed the district court’s determination that Rambus destroyed documents during its second shred day in contravention of a duty to preserve them and, thus, engaging in spoliation. This decision seems virtually assured to result in Rambus losing all opportunity to seek redress for patent infringement.

The evidence clearly demonstrates, and Rambus acknowledged, that at least between July 1998 and November 1999 Rambus shredded numerous paper documents and magnetically erased all but 1 of 1,269 backup tapes storing e-mail backups.  The only one not destroyed was recovered because it was needed to establish a priority date during patent prosecution.  Therefore, the issue wasn’t whether there was a destruction of evidence, that was clear.  The question was two-fold: (1) did the destruction of evidence occur after Rambus had a duty to retain the evidence in anticipation of litigation; and (2) what is the appropriate sanction for spoliation.  The Federal Circuit did find spoliation, but remanded to the district court for further determination regarding the appropriate sanction given that the Federal Circuit felt the district court applied the wrong standard for determining bad faith.

According to the Federal Circuit, the real question was whether litigation was reasonably foreseeable before the second shred day or after? The Federal Circuit concluded that the district court did not clearly err in determining that litigation was reasonably foreseeable before the second shred day, thereby resulting in the inappropriate destruction of evidence, for at least these five separate reasons:

1. While it is reasonable for a business to have document retention policies that result in the destruction of documents, even some that might later be useful or relevant during litigation, it is not acceptable to implement such policies for the purpose of destroying evidence.  The Federal Circuit determined that it was not clear error for the district court to conclude that the reason for Rambus’s document retention policy was to further Rambus’s litigation strategy by frustrating the fact-finding efforts of parties adverse to Rambus.
2. Rambus was on notice of potentially infringing activities by particular manufacturers, and numerous internal Rambus documents demonstrated the intent to play the “IP card.” Moreover, by its own admission Rambus actively broadened its claims to cover JEDEC standard-compliant products, and, according to the testimony of CEO Tate, it knew that those products would infringe its claims. With the broadening of claims for the purpose of capturing JEDEC compliant products Rambus was more than on notice about the likelihood of litigation.
3. On June 24, 1999, the Rambus’ CEO instructed Rambus Vice-President Joel Karp to create a strategy to go after the first target, which would commence in October 1999.  The first target was reference to Rambus needing to go after some company in order to set a royalty rate for future negotiations.  Obviously, with plans in the works to litigate as early as June 24, 1999, the second shredding party in August of 1999 happened after litigation was reasonably anticipated.
4. Because Rambus was the party in charge of determining whether they would bring litigation it is reasonable for a party in Rambus’s position as a patentee to foresee litigation that does in fact commence, than it is for a party in the manufacturers’ position as the accused.
5. Rambus argued that they delayed litigation, showing that it was not a foregone conclusion.  But the Federal Circuit pointed out that Rambus did not have any business relationships with the defendants.  Had there been an established working relationship delay may be some evidence of the fact that there was no particular plan to initiate litigation. Because Rambus and the manufacturers did not have a longstanding and mutually beneficial relationship regarding SDRAM, Rambus cannot use its delay tactics regarding RDRAM to undermine the other consideration to the contrary.

The fact that Rambus was found to have engaged in the spoliation of evidence does not end the inquiry, however. The district court had implemented the ultimate sanction — the dismissal of Rambus’ complaint.  The Federal Circuit did not say that dismissal could not be the appropriate sanction, but the the Federal Circuit did determine that district court applied the incorrect standard to determine if Rambus’ actions were done in bad faith. The district court had applied a “knew or should have known” standard in its bad faith determination. On remand, the district court was instructed to determine whether Rambus intended to impair the ability of the potential defendant to defend itself without regard to whether Rambus should have known of the propriety of its document destruction.

The issue of prejudice of the spoliation was also remanded by the Federal Circuit. Whether there was prejudice will turn directly on whether Rambus was found to be acting in bad faith, which I suspect they will be found to have done. In the situation where there is spoliation and bad faith the burden is on the bad actor (i.e., the party engaged in the spoliation) to show lack of prejudice. If Rambus was not acting in bad faith then the burden to show prejudice is on the party seeking the sanction. There is no disputing that on the second shred day in August Rambus destroyed between 9,000 to 18,000 pounds of documents that should have been kept. Without those documents it is impossible to know whether the there was prejudice, so the bad faith determination will answer the question. Will Rambus have the burden to show lack of prejudice or will Micron have the burden to show prejudice. Whoever has the burden relative to prejudice seems all but certain to lose the prejudice argument.

Finally, with respect to making the determination on what sanction to employ, the Federal Circuit did recognize that dismissal is an extremely harsh sanction, but may indeed be the proper sanction. The Federal Circuit explained that in gauging the propriety of the sanction, the district court must take into account (1) the degree of fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by the opposing party; and (3) whether there is a lesser sanction that will avoid substantial unfairness to the opposing party and, where the offending party is seriously at fault, will serve to deter such conduct by others in the future.

This case will no doubt start another firestorm on the Internet and elsewhere as Rambus defenders proclaim the innocence of Rambus and spin the conspiracy theory de jour.  Whether Rambus engaged in any activity that violated the Antitrust laws is no longer the issue though, and it is clear that Rambus destroyed an unprecedented amount of discoverable information after it had devised a litigation strategy to go after alleged infringers.  There is nothing wrong with devising litigation strategy, and there is nothing wrong with legitimate document retention policies, but there is something very wrong with destroying discoverable documents and evidence once a litigation strategy has been set in motion.  At that point litigation is not just foreseeable, it is predictable.  Thus, it is clear that the Federal Circuit and district court are correct; Rambus engaged in spoliation.

On remand it will be up to the district court to determine whether Rambus acted in bad faith.  It does not take a great soothsayer to predict that the district court will find that Rambus did act in bad faith, which means they have the burden to demonstrate there would be no prejudice to Micron.  Without the documents it will be impossible for Rambus to demonstrate Micron was not prejudiced, so sanctions will follow.  Given that the district court has already once issued the ultimate sanction, look for that same sanction to be issued on remand.  After all, the Federal Circuit has already said “the record evidence may indeed justify a dispositive sanction, but the seriousness of such a sanction warrants an analysis of all of the factors…” Seems like tacit approval for a dismissal of the case.

So look for the district court to consider all of the factors as laid out by the Federal Circuit and again dismiss the case because Rambus engaged in spoliation and because their bad faith actions prejudiced Micron.