Pennsylvania court holds pre-licensing correspondence is relevant to damages and must be produced

Judge William Caldwell of the Middle District of Pennsylvania was faced with an issue that has arisen with increasing frequency in the past year: whether the pre-licensing correspondence between a patent owner and its licensees is discoverable. Kimberly-Clark Worldwide, Inc. v. First Quality Baby Prods., LLC, Civil No. 1:CV-09-1685 (M.D. Pa. Sept. 15, 2010) (Caldwell, J.). Judge Caldwell's decision follows what appears to be the prevailing view on this topic i.e., such correspondence is discoverable because it is relevant to the damages calculus.

Defendant First Quality sought production of "document concerning the communications between [plaintiff Kimberly-Clark] and any licensee, or potential licensee, of the patents-in-suit, the related patents, or related applications." Kimberly-Clark resisted production of these documents, arguing that pre-licensing correspondence is neither admissible nor reasonably calculated to lead to discovery of admissible evidence. First Quality argued that such documents are relevant to damages and obviousness. The court agreed with First Quality.

Kimberly-Clark's argument rested on Fed. R. Civ. P. 26(c) and Fed. R. Evid. 408, claiming that such documents are irrelevant and are inadmissible because of Rule 408's prohibition against the use of such documents at trial. The court noted, based on the tension between Rule 26(c), which allows broad discovery, and Rule 408, which prohibits the use of settlement discussions to prove liability, that the Third Circuit has adopted a heightened standard that parties seeking production must meet: "A party therefore seeking discovery of settlement negotiations must make a 'particularized showing that the evidence sought is relevant and calculated to lead to the discovery of admissible evidence.'" The court was quoting Ford Motor Co. v. Edgewood Properties, Inc.,257 F.R.D. 418 (D.N.J. 2009).

TheKimberly-Clark courtagreed with First Quality that the pre-license correspondence was relevant to both obviousness and reasonable royalty. The court agreed with First Quality that pre-license communications will reveal evaluations of or differing positions concerning infringement, invalidity, patent scope, and the value of the patents-in-suit. (Citing also Phoenix Solutions, INc. v. Wells Fargo Bank, N.A., 254 F.R.D. 569, 582 (N.D. Cal. 2008.) The court concluded thatFirst Quality had met the heightened standard because it made the particularized showing that the proposed discovery will lead to the discovery of admissible evidence.

It is surprising that the Kimberly-Clark court did not cite the Federal Circuit's decision in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010). There, the Federal Circuit held that prior license agreements resulting from prior litigation may be the "most reliable" evidence to the reasonable royalty calculation. The court also suggested that a district court should consider the panoply of events and facts that occurred after the hypothetical negotiation and that could not have been known to or predicted by hypothesized negotiators.The Kimberly-Clark court may not have cited ResQNet simply because theparties' briefs did not cite it, butResQNet is worthy authorityon which adefendant may rely to compel production of pre-license communications.

Other courts have relied on ResQNet to grant discovery of pre-license communications, holding that they are relevant to computing reasonable royalty damages. See, e.g., Tyco Healthcare Group LP v. E-Z-EM, Inc., Civil Action No. 2:07-cv-262 (E.D. Tex. March 2, 2010) (Ward, J.);DataTreasury Corp. v. Wells Fargo & Co., Civil Action No. 2:06-cv-72 (DF) (E.D. Tex. March 4, 2010) (Folsom, J.).