CAFC Reverses Contempt Finding for Disclosures of Confidential Discovery Information to Develop Joint Defense Strategy

On June 28, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a precedential decision in Static Media LLC v. Leader Accessories LLC reversing a contempt finding entered in the Western District of Wisconsin over alleged violations of a protective order from a design patent infringement case between Static and Leader. Judge Jimmie Reyna authored a brief dissent from the majority opinion, arguing that Leader’s disclosure of certain confidential information with another company sued by Static for the development of a joint defense strategy was a violation of the district court’s protective order.

Leader Shares Confidential Info with Second Static Defendant After Written Assurance Signed

Static Media sued Leader Accessories in May 2018 over alleged infringement of U.S. Patent No. D771400, Stadium Seat. In September of that year, both parties entered into a protective order following a summary judgment ruling of noninfringement to designate certain discovery documents as confidential. The protective order required technical experts and other outside persons hired by either party to sign a Written Assurance agreement prior to receiving the information deemed confidential, which bound those persons to only use that information for purposes related to the patent infringement case between Static and Leader.

Static then sent a cease-and-desist letter to another firm, OJ Commerce, on the ‘400 design patent, prompting OJ Commerce’s attorney to reach out to Jen-Feng Lee, Leader’s attorney in the Static media action, to discuss the development of a joint defense group that would be governed by a joint defense agreement (JDA) written to protect the confidentiality of certain information covered by the protective order. Although OJ Commerce’s attorney signed the Written Assurance agreement, and despite emails from Lee requesting OJ Commerce to abide by the terms of the protective order, OJ Commerce’s attorney improperly used royalty agreements declared confidential under the protective order to assess a settlement proposed by Static.

When Static discovered this disclosure of information covered by the protective order, the company filed a motion in Western Wisconsin for discovery sanctions and a civil contempt order against Leader and Lee. The district court granted this motion and ordered Leader to pay Static’s attorney’s fees along with an additional $1,000 penalty. The court’s ruling was based on two theories: that Lee was responsible for the improper use of confidential information by OJ Commerce; and that the development of the joint defense strategy was itself a violation of the protective order.

FRCP 37 Sanctions Are Improper Under Taggart if ‘Fair Ground of Doubt’ as to Wrongfulness Exists

While Federal Rule of Civil Procedure 37(b)(2)(A)(vii) permits a district court to decide that the violation of a court order is contempt of court punishable by sanctions, the Federal Circuit noted that the recent U.S. Supreme Court ruling in Taggart v. Lorenzen (2019) clarified that is improper for a district court to find contempt when there “is [a] fair ground of doubt as to the wrongfulness of the [contemnor’s] conduct.”

With this standard in mind, the Federal Circuit quickly dispelled the first ground upon which the Western Wisconsin district court rested its contempt order. While the district court found that Lee knew or should have known that OJ Commerce would have used the information for improper purposes prior to signing the JDA, the Federal Circuit agreed with Leader that the district court lacked clear and convincing evidence of this knowledge. The appellate court found that nothing confidential was disclosed by Lee until after the signing of the Written Assurance and that Lee’s repeated requests to OJ Commerce to adhere to the protective order provided no basis for a finding that Lee’s disclosure violated the order, thus making the contempt ruling an abuse of the court’s discretion on that particular ground.

The Federal Circuit took a longer time to analyze the second ground upon which the Wisconsin district court entered the contempt ruling: that Leader’s development of the joint defense strategy itself was an impermissible use of the confidential information outside of the Wisconsin action between Static and Leader. On appeal, Leader argued that under paragraph 4(f) of the protective order, which governed the parties’ use of outside persons who signed the Written Assurance in order to receive confidential information, it had permission to disclose information to OJ Commerce’s attorney as a contractual consulting attorney hired to help Leader develop various aspects of its defense against Static. Static countered that the joint defense strategy was impermissible under the protective order as it applied to both of Static’s lawsuits against Leader and OJ Commerce and was not limited to the Wisconsin action.

Alleged Violation of Protective Order Turns on Meaning of ‘Use’ Within Context of Protective Order

“The alleged violation of the protective order turns on the meaning of the term ‘use’ and whether it extends to a disclosure to parties bound by the protective order,” wrote Judge Timothy Dyk, who penned the majority opinion in the ruling. Judge Dyk wrote that precedent from Supreme Court and circuit courts of appeals rulings held that the word “use” was a term that must be defined based on its context. This was further underscored by the Federal Circuit’s own major claim construction decision in Phillips v. AWH Corp. (2005), which held that “the context in which a term is used… can be highly instructive.”

Taken in light of the context of the language in the protective order, the Federal Circuit found a fair ground of doubt as to whether Lee’s disclosure for developing a joint defense strategy was an impermissible use of that information. The CAFC first noted that the protective order was developed to prevent public dissemination that could cause competitive disadvantage. Thus, the “use” of the information for developing a joint defense strategy was not a use that disclosed to the public or those not signatories to the protective order. Judge Dyk found support for this interpretation in the Ninth Circuit’s ruling in In re Dual-Deck Video Cassette Antitrust Litigation (1993), which reversed a district court’s contempt ruling that the plaintiff’s use of confidential information obtained in discovery during a 1987 lawsuit to commence another action against the defendant in 1990 was not a violation of the protective order entered in the earlier case.

Judge Reyna Dissents: Joint Defense Strategy Itself Was an Impermissible Use

Respectfully dissenting from the majority’s opinion was  Judge Jimmie Reyna, who argued that under the correct precedent from the Seventh Circuit, which governs proceedings in Western Wisconsin, the district court is entitled to deference on determinations as to whether a party has complied with its own discovery orders. “Accordingly, we cannot, under Seventh Circuit law, reverse the imposition of sanctions for a violation of a discovery order unless it is clear that no reasonable person could concur in the trial court’s assessment,” Judge Reyna wrote.

Judge Reyna opined that the simple fact that the confidential information was disclosed to develop a joint strategy for multiple cases made it unreasonable for Leader and Lee to believe that the confidential information would not be used for improper purposes outside of the Wisconsin action. “Indeed, in my view, Appellant was in violation of the protective order independently of whether the information was eventually used in the second litigation,” Judge Reyna concluded.