September 29, 2016

Let the Punishment Fit the Crime

By Bryan K. Wheelock, Principal

In Drone Technologies, Inc. v. Parrot S.A., [2015-1892, 2015-1955] (September 29, 2016), the Federal Circuit vacated the final judgment and the awards of damages ($7.8 million) and attorney fees ($1.7 million), finding that the district court abused its discretion in issuing the two discovery orders and in entering a default judgment against Parrot for its failure to comply with those orders.

Parrot first contested jurisdiction, arguing that Drone did not have standing to bring suit.  Relying on the presumption that the named inventors are the true and only inventors, the Federal Circuit saw no reason why Parrot should be allowed to reassert an invalidity challenge under the guise of a motion to dismiss for lack of standing.

Parrot’s main argument on appeal is that the district court twice abused its discretion: first, when it directed Parrot to turn over its on-board source code; and, second, when it sanctioned Parrot by entering a default judgment against it after it failed to produce the source code.  Parrot contended that it produced documents sufficient to show the operation of the accused products as required by LPR 3.1, while Drone argued, and the Court agreed, that Parrot had to produce its source code.  Parrot failed to produce the Source Code, and the district court rejected Parrot’s attempts to avoid having to disclose its source code.  The district concluded that “lesser sanctions” would have been inadequate, and entered a default judgment against Parrot as to liability and struck its
answer and counterclaims.  The Federal Circuit denied Parrot’s petitions for mandamus, and the case went to trial on the issue of damages.

The Federal Circuit found that the district court twice abused its discretion: first, when it issued the July 1 and July 25 Orders; and second, when it imposed a default sanction on Parrot for not complying with those orders.  Regarding the discovery orders, the Federal Circuit found that the district court failed to follow its local patent rules (as well as the Federal Rules) and also failed to provide any explanation for its deviation from those rules.  The Federal Circuit noted that there was no finding that Parrot did not comply with LPR 3.1.  The  Federal Circuit also found no explanation why the source code had to be produced instead of the inspection and copying mentioned in the rule.  The Federal Circuit also found no explanation why the orders were not limited to the products “identified in the claims pled.”  Finally, the Federal Circuit noted the absence of any showing of relevance or need for the source code.

The Federal Circuit observed district court should have compared the needs of the case with both the burden placed on Parrot to produce “all source code” and the significant consequences that might result from unauthorized or inadvertent disclosure, noting that protective orders are not fool-proof.

Turning to the propriety of the sanctions, the Federal Circuit reviewed the Poulis factors applied by the Third Circuit:

(1) the extent of the party’s personal responsibility; (2) whether the party had a history of dilatoriness; (3) whether the conduct of the party or the attorney was willful or in bad faith; (4) the meritoriousness of claims or defenses; (5) the prejudice to the adversary caused by the party’s conduct; and (6) the effectiveness of sanctions other than dismissal or default.

Because the apparent prejudice to Drone is unsubstantiated, the Federal Circuit said that the fifth factor disfavors a severe sanction.  Turning to the effectiveness of the sanctions, the Federal Circuit said that the district court’s analysis suggests it did not seriously consider alternative sanctions, observing:

Notwithstanding the “strong presumption” against a “drastic” sanction like default, the court rejected all alternatives without explanation.

The Federal Circuit found that Parrot’s offers of alternative production were not indicative of a party trying to hide a smoking gun.  Accordingly, it found that the district court abused its discretion in concluding that default was the only available remedy.

The Federal Circuit did not find Parrot blameless, however, and noted that if Drone should bring a further motion for actions, the Court was free to consider whether lesser sanctions were warranted.