by Dennis Crouch
In the USA, civil litigation typically involves substantial discovery — with each party demanding to see the other side’s secrets. In patent law, these secrets are often at the core of the business process: product development and manufacturing processes, key product details, detailed market and sales data, etc. That information may be needed to resolve the infringement litigation, but you could imagine a competitor also using the information for a competitive advantage in the marketplace.
Protective Order: The common solution is a protective order with varying levels of confidentiality. A number of districts have adopted an automatic protective order that basically fits this scheme. As one example, the District of Utah Federal Courts automaticaly apply a Standard Protective Order in every case that allows parties to designate materials as CONFIDENTIAL INFORMATION – ATTORNEYS’ EYES ONLY. The result of that designation is that the information can only be reviewed by attorneys (and perhaps their staff), and cannot be provided to any “competitive decisionmaker.” In addition to avoiding improper competitive use of litigation, limiting the scope of access also reduces the likelihood that trade secret information will be inadvertently disclosed.
In this situation, parties regularly argue about whether certain in-house counsel can review the material. The recent interlocutory appeal in Modern Font Applications LLC v. Alaska Airlines, Inc., — F.4th — (Fed. Cir. 2022), highlights some of these issues; although the appellate court ultimately determined that it lacked jurisdiction to hear the appeal.
Unlike the competitor-litigation situation I highlighted above, Modern Font and Alaska are not competitors. Rather, Modern Font is a patent assertion entity that makes its money through licensing IP rights. Still, Alaksa balked at allowing Modern Font’s in-house counsel to review the source code it disclosed in discovery. The Utah magistrate judge and district court agreed with Alaska that the Modern Font in-house counsel was a competitive decisionmaker and refused to modify the standard protective order to allow access. On this point, the court concluded that Modern Font’s key business activity is IP licensing, and the in-house counsel is intimately involved with that activity. In my view, the court’s interpretation of “competitive decisionmaker” does not seem to fit the limitation’s purpose because there was no sense that the in-house counsel would have any use for Alaska’s source code beyond the context of the litigation at hand. Certainly, Modern Font is not about to begin competing with Alaska Airlines in any marketplace. It looks to me that the Utah court used the “competitive decisionmaker” designation as a hook to limit code distribution to outside counsel in order to avoid inadvertent disclosure. “The risk of inadvertent disclosure outweighs the risk of prejudice to Plaintiff.”
This is a pretty big deal in this case since the content of the code is going to determine whether or not Alaska infringes. And now in-house counsel will be unable to inspect the accused specimin. In this case, in house counsel is an experienced and skilled patent attorney who (1) was doing lots of the work in order to reduce litigation costs; (2) is intementely involved with parallel litigation and so has a very good understanding of whether a particular process is infringing; (3) is a key settlement negotiator; and (4) is the key monitor of outside counsel and their handling of the lawsuit. Those activties will all be significantly hobbled by the protective order, especially considering that Modern Font’s outside counsel trial & appellate team consists of one person – Perry Clegg.
Modern Font appealed the order, but had a major procedural problem: the Final Judgement Rule generally bars appeals of interlocutory orders, such as a discovery order. There are a number of important exceptions to the Final Judgment Rule:
- Partial Final Judgment: This comes up most often when a court issues a partial summary judgment, and the losing party is able to peal-off that portion for immediate appeal.
- Rulings on Injunctions: Under 28 U.S.C. 1292(a), a district court’s ruling regarding injunctive relief can be automatically appealed, even if the case is not yet final as a whole. In patent cases, these appeals typically involve preliminary injunctions.
- Appeal of Certified Question: Under 28 U.S.C. 1292(b), a district court can certify a question of law for immediate appeal. The appellate then has the discretion to decide whether or not to hear the appeal.
- Mandamus: The appellate court can issue an interlocutory writ of mandamus in situations where a district court has clearly abused its discretion causing a major injustice. For historical reasons, this is not called an appeal but today is effectively treated as an appeal.
- Appeal under the Collateral Order Doctrine: This doctrine permits immediate appeal in a small subset of cases where the district court (1) conclusively decides an issue that (2) “resolve[s] important questions separate from the merits” and (3) the decision would be “effectively unreviewable on appeal from the final judgment in the underlying action.” Quoting Swint v. Chambers Cnty. Comm’n, 514 U.S. 35 (1995).
The collateral order doctrine is the only one of these five that fit the situation, and Modern Font appealed under the doctrine.
The Federal Circuit never reached the merits. In a split decision, the appellate court held that it lacked appellate jurisdiction. In particular, the court concluded that the case failed to meet prong #3 of the Collateral Order Doctrine. I.e., the court concluded that the question (of whether in-house counsel should have access to the code) can wait until after final judgment. On this point, the appellate decision is extremely weak since an abuse of discretion at the discovery stage will likely be seen as a non-appealable harmless error by the time of final judgment because it does not rise to a due process violation. Still, the decision fits within the typical approach that appellate courts almost always refuse to hear collateral order appeals of discovery issues.
The majority opinion here was penned by Judge Cunningham and joined by Judge Reyna. Judge Newman wrote in dissent. Her particular argument focused on the issue of appellate jurisdiction.
Judge Cunningham had concluded that the court lacked jurisdiction since Modern Font’s issue could wait until final judgment. Judge Newman argued that the court generally has discretionary jurisdiction in situations like this, and the proper question is whether the court should exercise its discretion. “[O]ur authority to review this ruling is not a matter of appellate jurisdiction, but of appellate discretion. . . . [T]he question concerning this particular protective order is within our jurisdiction and subject to our discretion to review and resolve.” Newman in Dissent.
Look for the upcoming public comments period for this upcoming significant FTC proposed “noncompete agreements” rule. It would ban nearly all post-employment covenants not to compete made between employers and employees. Both present and future. However, it would not prohibit trade secret law violations enforcement or other restrictive covenants such as nondisclosure agreements, nonsolicitation agreements, and no-poaching agreements. But those latter agreements might be “considered non-compete clauses” under this proposed rule if “they are so unusually broad in scope that they function as such.”
[The FTC has allegedly long held the view that the this is a restraint of trade and competition between businesses, under its statutory jurisdiction, and depresses employee wages by restricting their mobility. In July 2021, President Biden signed an executive order directing the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”] [Some states already have.]
Does this invoke Federal pre-emption of what up to now has been State driven efforts?
> Does this invoke Federal pre-emption of what up to now has been
> State driven efforts?
Yes. The proposed FTC rule contains an express federal preemption provision saying that it “shall supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with [the proposed FTC rule].”
So yes, an employer wouldn’t be able to enforce a contractual non-compete provision against a former employee. Requiring an employee to sign a contract containing such a provision, in the first instance, would also be prohibited under the proposed FTC rule.
That said, as many others have observed (including the one dissenting FTC Commissioner who voted against the rule), it is likely that this rule will be judicially challenged under the “major questions doctrine,” which basically says that a federal agency cannot promulgate a rule having vast and far-reaching consequences unless Congress gave the agency clear and specific authorization to promulgate that rule. The FTC Act gives the Commission authority to promulgate rules to curtail “unfair or deceptive acts or practices in or affecting commerce,” which is arguably even more vague and amorphous than other recent cases where agency rules were set aside by the courts.
Thanks!
There have been both state and federal anti-trust or other competition-restraint laws and/or policies for a very long time.
A common concern with giving source code access to patentee’s in-house counsel involves patent prosecution activities, i.e., that confidential information could be misused by in-house counsel (perhaps unconsciously or inadvertently) in drafting claims in other pending applications. That said, it’s not clear from the record if the in-house counsel here had any responsibilities relating to patent prosecution.
But courts have been understandably protective of source code in discovery given its extraordinarily sensitive nature and the harm from unauthorized use or disclosure, and I can imagine that a commercial airline like Alaska Airlines might have unique considerations for limiting access to their source code.
Dennis seems to suggest that preventing in-house counsel from having access to the defendant’s source code is unusual, but it’s actually been the standard and accepted practice for the better part of a decade. If you look at the default or model protective orders published by the Eastern District of Texas, Western District of Texas, Northern District of California, District of Delaware, and others, they include a separate and elevated confidentiality designation for source code that requires the plaintiff to review the code only on a stand-alone (non-networked) computer at the offices of defendant’s counsel, and the code is available only to outside counsel and a limited number of experts/consultants retained for the case (typically no more than three). There is no provision for in-house counsel to have access to source code, regardless of whether or not they’re a competitive decision-maker.
If the PAE attorney here is so directly involved [even controlling?] in this litigation, why is he or she not a listed attorney on this case?
Because he’s involved in the sense of reviewing the defendants’ code and then determining how to prosecute continuations in order to better snare their products and what patents to buy in order to sue them next time.
Those are additional argument for the exclusion of PAE attorneys from source code access with protective orders in patent suits. But my question was if there is any ethics issue for an attorney not making any appearance of record in a lawsuit, so that the trial judge does not have normal control over that attorneys conduct, when that attorney is the one actually but secretly funding and/or controlling the conduct and settlement of that lawsuit?
P.S. Is not one of the PAE attorney’s access arguments here, namely that he: “has a very good understanding of whether a particular process is infringing,” a bit weak, since he is highly unlikely to be a witness testifying as to infringement in the suit?
Seems like even if in-house counsel can’t “see the code” (which is fair enough) they need to at least be able to ask questions of whoever can see the code so they can ascertain the relationship between the code and the claim terms.
Of course, if the case seems possible to resolve (against the patentee) without the answers to those questions, then in-house counsel should be forced to wait until that rubicon has been crossed to Lear about the code.
For what it’s worth, before I was an attorney I was involved in litigation (on the patentee’s side) where only I was permitted view certain electronic information belonging to the defendant, and only at a third party location under supervision. I could describe what I saw to the attorneys I worked for but nothing at the site could be copied.
>, then in-house counsel should be forced to wait until that rubicon
Sure, if you want to actively discourage settlements.
I am surprised that there is no write-up yet about yesterday’s mandamus denials in In re Creekview IP and In re Waverly Licensing. Those decisions could have a big impact on the PAE business model.
… what happens when the “0h N0es Tr011s” propaganda narrative infects general procedural understanding…
(another Ends Justifies the Means)
Now where is my weeping emoticon?
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