““You really should settle this case…”You really should settle this case…”

Do the Courts practice what they preach?Do the Courts practice what they preach?

Daniel Lueders

November 2009

You should settle…trust me

Settlement will save fees and

give you certainty.

No one said this was

going to be fair or

reasonable.

OVERVIEW

•DJ Jurisdiction

•Injunction (Preliminary & Permanent)

•Reasonable Royalty

•FRE 408

•Enforced Settlement “Agreements”

•Other problems

Settlement Contract only Settlement Contract only with those who are with those who are

trustworthytrustworthy

TORTTORTCONTRACTCONTRACT

DECLARATORY JUDGMENT JURISDICTION

In MedImmune, the Supreme Court emphasized that DJ jurisdiction only requires that the dispute at issue be:

"definite and concrete, touching the legal relations of parties having adverse legal interests”; and that it be “real and substantial” and “admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.”

Id. at 771 (quoting Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-41, 57 S.Ct. 461, 81 L.Ed. 617 (1937)).

DECLARATORY JUDGMENT JURISDICTION

.In sum, the rule adopted by the court in this case will effect a sweeping change in our law regarding declaratory judgment jurisdiction. Despite the references in the court's opinion to the particular facts of this case, I see no practical stopping point short of allowing declaratory judgment actions in virtually any case in which the recipient of an invitation to take a patent license elects to dispute the need for a license and then to sue the patentee.

SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007).

Settlement vs. Settlement vs. INJUNCTIONSINJUNCTIONS(Permanent)(Permanent)

U.S. Supreme Court:U.S. Supreme Court:

““MercExchange MercExchange sought to licensesought to license its patent to eBay its patent to eBay and Half.com, as it had previously done with other and Half.com, as it had previously done with other companies, companies, but the parties failed to reach an but the parties failed to reach an agreementagreement. MercExchange subsequently filed a . MercExchange subsequently filed a patent infringement suit against eBay and Half.com patent infringement suit against eBay and Half.com in the United States District Court for the Eastern in the United States District Court for the Eastern District of Virginia. A jury found that MercExchange's District of Virginia. A jury found that MercExchange's patent was valid, that eBay and Half.com had patent was valid, that eBay and Half.com had infringed that patent, and that an award of damages infringed that patent, and that an award of damages was appropriate.”was appropriate.”

eBay Inc. v. MercExchange LLC, 78 USPQ2d 1577 (U.S. eBay Inc. v. MercExchange LLC, 78 USPQ2d 1577 (U.S. 2006)2006)

Settlement vs. Settlement vs. INJUNCTIONSINJUNCTIONS(Permanent)(Permanent)

U.S. Supreme Court:U.S. Supreme Court:““For example, For example, some patent holderssome patent holders, such as , such as

university researchersuniversity researchers or or self-made self-made inventorsinventors, might reasonably prefer to license , might reasonably prefer to license their patents, rather than undertake efforts to their patents, rather than undertake efforts to secure the financing necessary to bring their secure the financing necessary to bring their works to market themselves. Such patent works to market themselves. Such patent holders holders maymay be able to satisfy the traditional be able to satisfy the traditional four-factor test, and we see no basis for four-factor test, and we see no basis for categoricallycategorically denying them the opportunity to denying them the opportunity to do so.do so. ””

Settlement vs. Settlement vs. INJUNCTIONSINJUNCTIONS(Preliminary)(Preliminary)

In In High TechHigh Tech the plaintiff’s prior offer to license the plaintiff’s prior offer to license was used as a basis for denial of a preliminary was used as a basis for denial of a preliminary injunction against the defendant’s infringing injunction against the defendant’s infringing actions. The court stated: actions. The court stated:

““To the contrary, the evidence shows that HTMI To the contrary, the evidence shows that HTMI offeredoffered a license to New Image, so it is clear that a license to New Image, so it is clear that HTMI is willing to forgo its patent rights for HTMI is willing to forgo its patent rights for compensation. That evidence suggests that any compensation. That evidence suggests that any injury suffered by HTMI would be compensable in injury suffered by HTMI would be compensable in damages assessed as part of the final judgment in damages assessed as part of the final judgment in the case.”the case.”

High Tech Med. Instrumentation Inc. v. New Image High Tech Med. Instrumentation Inc. v. New Image Indus. Inc.Indus. Inc., 33 U.S.P.Q.2d 2005, 2009 (Fed. Cir. , 33 U.S.P.Q.2d 2005, 2009 (Fed. Cir. 2009).2009).

FRE 408: RULE (2006 FRE 408: RULE (2006 amend.) amend.)

(a) Prohibited uses.—Evidence of the following is not admissible (a) Prohibited uses.—Evidence of the following is not admissible on behalf of any party, when on behalf of any party, when offered to prove liability for, offered to prove liability for, invalidity of, or amount of a claiminvalidity of, or amount of a claim that was disputed as to that was disputed as to validity or amount, or tovalidity or amount, or to impeach through a prior impeach through a prior inconsistent statement or contradictioninconsistent statement or contradiction: :

(1) furnishing or offering or promising to furnish, or (2) accepting (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a the claim which compromising or attempting to compromise a the claim which was disputed as to either validity or amount; and, is not was disputed as to either validity or amount; and, is not admissible to prove liability for or invalidity of the claim or its admissible to prove liability for or invalidity of the claim or its amount. Evidence ofamount. Evidence of

(2) (2) conduct or statementsconduct or statements made in compromise negotiations is made in compromise negotiations is likewise not admissible regarding the claim, likewise not admissible regarding the claim, except when except when offered in a criminal caseoffered in a criminal case and the negotiations related to a and the negotiations related to a claim by a public office or agency in the exercise of regulatory, claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority. This rule does not investigative, or enforcement authority. This rule does not require the exclusion of any evidence otherwise discoverable require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise merely because it is presented in the course of compromise negotiations.negotiations.

FRE 408: RULEFRE 408: RULE

(b) Permitted uses. This rule does not (b) Permitted uses. This rule does not require exclusion if the evidence is require exclusion if the evidence is offered for purposes not prohibited offered for purposes not prohibited by subdivision (a).by subdivision (a). Examples of Examples of permissible purposes include proving permissible purposes include proving a witness's bias or prejudice; negating a witness's bias or prejudice; negating a contention of undue delay; and a contention of undue delay; and proving an effort to obstruct a criminal proving an effort to obstruct a criminal investigation or prosecution.investigation or prosecution.

Affirmative Defense Not Affirmative Defense Not for “invalidity of…a for “invalidity of…a

claim” ?claim” ? Ralph Lauren trademark: polo pony logoRalph Lauren trademark: polo pony logo Def’s marks: 4 versions, A, B, C and D.Def’s marks: 4 versions, A, B, C and D. During a FRE 408 settlement negotiation:During a FRE 408 settlement negotiation:

D’s asserts P said it had no objection to version D’s asserts P said it had no objection to version D;D;

P denies such a statementP denies such a statement At trial, Def seeks to introduce evidence of At trial, Def seeks to introduce evidence of

the ‘statement’ to show:the ‘statement’ to show: Lack of likelihood of confusionLack of likelihood of confusion Estoppel by acquiescence. Estoppel by acquiescence.

PRL USA Holdings Inc. v. United States PRL USA Holdings Inc. v. United States Polo Ass’n IncPolo Ass’n Inc., 86 U.S.P.Q.2d 1022 (2nd ., 86 U.S.P.Q.2d 1022 (2nd Cir. 2008)Cir. 2008)

Affirmative Defense Not Affirmative Defense Not for “invalidity of…a claim” ?for “invalidity of…a claim” ? The settlement statement could not be entered as The settlement statement could not be entered as

evidence that there was no “likelihood of confusion” evidence that there was no “likelihood of confusion” since this went to liability for the claim. since this went to liability for the claim.

the Court reached the opposite conclusion with respect the Court reached the opposite conclusion with respect to admissibility to prove the affirmative defense of to admissibility to prove the affirmative defense of “estoppel by acquiescence”. “estoppel by acquiescence”. IdId. at 1027. . at 1027.

The Court deemed that the The Court deemed that the affirmative defenseaffirmative defense was was notnot to establish the “ to establish the “invalidity” of the claiminvalidity” of the claim. . IdId. . Rather, it was deemed to fall within the rule’s “another Rather, it was deemed to fall within the rule’s “another purpose” exception. purpose” exception.

This was done even thought the Court recognized the This was done even thought the Court recognized the ““overlapoverlap” between the estoppel issue and the likelihood ” between the estoppel issue and the likelihood of confusion issue in that of confusion issue in that the estoppel evidence, the estoppel evidence, “may well suggest to the jury that the owner of “may well suggest to the jury that the owner of the mark did not believe the mark in question was the mark did not believe the mark in question was likely to cause confusionlikely to cause confusion.” .” IdId. at 1026.. at 1026.

A little good “FRE 408” A little good “FRE 408” news:news:

The Eighth Circuit addressed the issue whether The Eighth Circuit addressed the issue whether FRE 408 applied to “documents not FRE 408 applied to “documents not communicated to the opposing side.” The circuit communicated to the opposing side.” The circuit concluded that “[t]he spirit of the Rule, as concluded that “[t]he spirit of the Rule, as recognized by several circuits and as set forth in recognized by several circuits and as set forth in the commentary to the Rule, supports the the commentary to the Rule, supports the exclusion of certain work product, internal exclusion of certain work product, internal memos, and other materials created specifically memos, and other materials created specifically for the purpose of conciliation, even if not for the purpose of conciliation, even if not communicated to the other party.” communicated to the other party.”

EEOC v. UMB BankEEOC v. UMB Bank, _ F.3d at _. (8, _ F.3d at _. (8thth Cir. 2009) (No. Cir. 2009) (No. 07-2901)(citing 307-2901)(citing 3rdrd, 5, 5thth and 11 and 11thth Circuit cases Circuit cases favorably). favorably).

But: apparently such client settlement notes are discoverable.

FRE 408: THIRD-FRE 408: THIRD-PARTIESPARTIES

Recently the Seventh Circuit affirmed an Recently the Seventh Circuit affirmed an order enforcing a subpoena and directing a order enforcing a subpoena and directing a third party to produce documents exchanged third party to produce documents exchanged during arbitration between the third party during arbitration between the third party and a defendant in present suit, despite the and a defendant in present suit, despite the defendant’s contention that the parties to the defendant’s contention that the parties to the arbitration agreement agreed to arbitration agreement agreed to confidentialityconfidentiality. . Gotham Holdings LP v. Health Gotham Holdings LP v. Health Grades Inc.,Grades Inc., No. 09-2377 (7th Cir. September No. 09-2377 (7th Cir. September 3, 2009). The court held that the 3, 2009). The court held that the confidentiality agreement accompanying the confidentiality agreement accompanying the arbitration cannot bar disclosure to a stranger arbitration cannot bar disclosure to a stranger to the agreement (such as the plaintiff) to the agreement (such as the plaintiff) seeking discovery under federal rules. seeking discovery under federal rules. Id.Id.

FRE 408: PRE-FRE 408: PRE-INFRINGEMENT INFRINGEMENT NEGOTIATIONSNEGOTIATIONS

Deere & Co. v. Int’l Harvestor Co., Deere & Co. v. Int’l Harvestor Co., 218 U.S.P.Q. 481 (Fed. Cir. 1983). 218 U.S.P.Q. 481 (Fed. Cir. 1983).

International Harvester (the infringing party) International Harvester (the infringing party) sought to have evidence admitted of offers sought to have evidence admitted of offers from Deere to license Deere’s technology at a from Deere to license Deere’s technology at a 1% royalty to International Harvester. The 1% royalty to International Harvester. The Federal Circuit ruled that the Federal Circuit ruled that the offers were offers were admissibleadmissible because the because the firstfirst of the two of the two offers predated the infringementoffers predated the infringement and was and was therefore not a settlement negotiation under therefore not a settlement negotiation under FRE 408.  Deere unsuccessfully argued that FRE 408.  Deere unsuccessfully argued that the dealings between Deere and International the dealings between Deere and International Harvester were always made with the Harvester were always made with the knowledge that an eventual court battle was knowledge that an eventual court battle was possible or even probable and therefore all possible or even probable and therefore all their negotiations should be protected by FRE their negotiations should be protected by FRE 408. 408.

DISMISSAL v. CONSENT DISMISSAL v. CONSENT DECREEDECREE

DismissalDismissal Consent DecreeConsent Decree

Case ends.Case ends. Case continues.Case continues.

Separate settlement Separate settlement agreement = private agreement = private contract remedies.contract remedies.

Terms of consent Terms of consent decree = contempt of decree = contempt of Court remedies.Court remedies.

Settlement terms Settlement terms may be totally privatemay be totally private

Consent decree Consent decree terms public.terms public.

Contract rules.Contract rules. Rule 65 rules; more Rule 65 rules; more limiting in structure. limiting in structure.

DISMISSALDISMISSAL

Dismissal: case and all orders cease to Dismissal: case and all orders cease to existexist Confidentiality Orders evaporate unless Confidentiality Orders evaporate unless

Judge recites that Court retains jurisdiction.Judge recites that Court retains jurisdiction. No collateral estoppel or res judicata.No collateral estoppel or res judicata.

Dismissal: no injunction.Dismissal: no injunction. Dismissal: can be verbally stipulated.Dismissal: can be verbally stipulated. Dismissal: settlement agreement may Dismissal: settlement agreement may

remain confidential.remain confidential.

CONSENT DECREECONSENT DECREE

Consent Decree = Court Order.Consent Decree = Court Order. Must be public.Must be public. Rule 65 “four corners” rule; no Rule 65 “four corners” rule; no

incorporation by reference.incorporation by reference. Limited to actual case and controversy:Limited to actual case and controversy:

Enforceable: “D is enjoined from making Enforceable: “D is enjoined from making Model No. 352 and colorable imitations Model No. 352 and colorable imitations thereof.thereof.

Not: “D is enjoined from infringing U.S. Not: “D is enjoined from infringing U.S. Patent No. 8,443,912”. Patent No. 8,443,912”.

“It is apparent, nevertheless, from a review of patent cases dealing with contempt proceedings that injunctions are frequently drafted or approved by the courts in general terms, broadly enjoining “further infringement” of the “patent,” despite the language of Rule 65(d), and Supreme Court interpretation.

…contempt proceedings, civil or criminal, are available only with respect to devices previously admitted or adjudged to infringe, and to other devices which are no more than colorably different therefrom and which clearly are infringements of the patent.”

KSM Fastening Systems, Inc. v. H.A. Jones Company, Inc., et al., 227 USPQ 676 (Fed. Cir. 1985)

Easy to find oneself in a Easy to find oneself in a dismissaldismissal

In In Garber v. Chicago Mercantile ExchangeGarber v. Chicago Mercantile Exchange, the Federal Circuit , the Federal Circuit discussed the relative ease with which a party can enter a stipulation discussed the relative ease with which a party can enter a stipulation of dismissal. of dismissal.

““Indeed, the Seventh Circuit has treated filings that were far more Indeed, the Seventh Circuit has treated filings that were far more ambiguous than the stipulation in this case as falling under Rule ambiguous than the stipulation in this case as falling under Rule 41(a)(1)(A). In 41(a)(1)(A). In Boran v. United Migrant Opportunity Services, Inc.Boran v. United Migrant Opportunity Services, Inc., , the court found that the court found that a letter, signed by only the plaintiff, was a letter, signed by only the plaintiff, was properly considered a stipulation for dismissal underproperly considered a stipulation for dismissal under Rule Rule 41(a)(1)(A)(ii). 99 Fed. App'x 64 (7th Cir. 2004). The court stated 41(a)(1)(A)(ii). 99 Fed. App'x 64 (7th Cir. 2004). The court stated that “literal compliance with the stipulation requirement has not that “literal compliance with the stipulation requirement has not been required where the agreement of all parties is apparent.” been required where the agreement of all parties is apparent.” IdId. at . at 66-67. Furthermore, the court noted that 66-67. Furthermore, the court noted that other circuits recognize other circuits recognize that “even oral assent to dismissal can satisfy”that “even oral assent to dismissal can satisfy” Rule 41(a)(1)(A) Rule 41(a)(1)(A)(ii). (ii). IdId. at 67. In light of the Seventh Circuit's permissive entry of . at 67. In light of the Seventh Circuit's permissive entry of dismissal under Rule 41(a)(1), we conclude that the “Stipulation for dismissal under Rule 41(a)(1), we conclude that the “Stipulation for Dismissal Without Prejudice” was what it claimed to be, irrespective Dismissal Without Prejudice” was what it claimed to be, irrespective of the attached proposed order and arguably discretionary language. of the attached proposed order and arguably discretionary language. We therefore find that the stipulation was properly entered under We therefore find that the stipulation was properly entered under Rule 41(a)(1).”Rule 41(a)(1).”

Garber v. Chicago Mercantile ExchangeGarber v. Chicago Mercantile Exchange, 570 F.3d 1361, 1381 (Fed. , 570 F.3d 1361, 1381 (Fed. Cir. 2009).Cir. 2009).

‘‘Forced’ Settlement Forced’ Settlement “agreement”?“agreement”?

All that is required is that the Court, without a All that is required is that the Court, without a jury, “conclude that agreement has been reached jury, “conclude that agreement has been reached on all material terms.” on all material terms.”

Brock v. Scheuner Corp.Brock v. Scheuner Corp., 841 F.2d 151, 154 (6th , 841 F.2d 151, 154 (6th Cir. 1988). Cir. 1988).

Early agreement that payment of $162,714.32 was Early agreement that payment of $162,714.32 was the “final material term necessary to complete the “final material term necessary to complete the agreement”, despite disagreement on other the agreement”, despite disagreement on other [important] terms. [important] terms.

This can be done even if the asserted settlement This can be done even if the asserted settlement agreement is verbal. agreement is verbal. IdId. .

‘‘Forced’ Settlement Forced’ Settlement “agreement”?“agreement”?

PlaintiffPlaintiff DefendantDefendant CourtCourt$167,714$167,714 $167,714$167,714, but , but

later wanted later wanted to recalculate to recalculate the correct the correct amountamount

$167,714$167,714

Certified Certified checkcheck

Reg. check Reg. check (float)(float)

Reg. Check Reg. Check (float)(float)

Attorneys feesAttorneys fees NO attorneys NO attorneys feesfees

Attorneys Attorneys fees, fees, (reversed)(reversed)

‘‘Forced’ Settlement Forced’ Settlement “agreement”?“agreement”?

PlaintiffPlaintiff DefendantDefendant CourtCourtPay Pay government $ government $ who will who will disperse $ to disperse $ to employeesemployees

Pay Pay employees employees directlydirectly

Pay Pay government $ government $ who will who will disperse $ to disperse $ to employeesemployees

(reversed)(reversed)12% interest 12% interest raterate

12% interest 12% interest raterate

12% interest 12% interest raterate

Nunc pro tunc Nunc pro tunc

(6 month (6 month interest)interest)

NotNot Nunc pro tunc Nunc pro tunc (reversed)(reversed)

Federal Circuit: settlement Federal Circuit: settlement ‘gotcha’‘gotcha’

Joy Mfg Co. v. National Mine Serv. Co., Joy Mfg Co. v. National Mine Serv. Co., 1. U.S.P.Q.2d 1627 (Fed. Cir. 1987). 1. U.S.P.Q.2d 1627 (Fed. Cir. 1987).

The settlement language said that The settlement language said that “NATIONAL will not file any suit “NATIONAL will not file any suit in any United States Court or any in any United States Court or any Court in any foreign country Court in any foreign country challenging or contesting the challenging or contesting the validity of the Licensed Patents . . validity of the Licensed Patents . . .”..”. Id. Id. at 1629.at 1629.

OTHER PROBLEMS WITH OTHER PROBLEMS WITH LICENSING SETTLEMENTSLICENSING SETTLEMENTS If royalty based, and if between competitors, If royalty based, and if between competitors,

you are giving your competitor a meter on you are giving your competitor a meter on your business.your business.

The lowest royalty given will be a lighting The lowest royalty given will be a lighting rod for future litigation “reasonable royalty” rod for future litigation “reasonable royalty” analysis and for settlement terms. analysis and for settlement terms.

Power Lift Inc. v. Weatherford Nipple-Up Power Lift Inc. v. Weatherford Nipple-Up Systems, Inc.Systems, Inc., 871 F2d. 1082 (Fed. Cir. , 871 F2d. 1082 (Fed. Cir. 1989)(1989)(denying termination for non-payment denying termination for non-payment breachbreach; applying Oklahoma anti-forfeiture ; applying Oklahoma anti-forfeiture statute)statute)..

No good deed goes No good deed goes unpunishedunpunished

if you try to settle, the courts will (may):if you try to settle, the courts will (may): Find DJ jurisdiction over you.Find DJ jurisdiction over you. No preliminary injunction.No preliminary injunction. No permanent injunction.No permanent injunction. Admit your settlement compromise as evidence Admit your settlement compromise as evidence

of a reasonable royalty.of a reasonable royalty. Admit settlement talks as proof of a dispositive Admit settlement talks as proof of a dispositive

affirmative defenses.affirmative defenses. Force on you an “agreement” that you never Force on you an “agreement” that you never

agreed to.agreed to. Not terminate the settlement even for Not terminate the settlement even for

nonpayment.nonpayment. Strictly construe the agreement to allow validity Strictly construe the agreement to allow validity

challenges despite a clear contrary intent. challenges despite a clear contrary intent.

““You really should settle this case…”You really should settle this case…”

Do the Courts practice what they preach?Do the Courts practice what they preach?

Daniel Lueders

November 2009