Court Denies Discovery of Evidence Regarding IRS' Views on License Agreements Between a Patent Owner and Its Affiliates

Abstract

A California court recently held that evidence regarding the IRS's opinion of whether royalty rates paid by a patent owner's affiliates to the patent owner were truly arms-length terms was not relevant to determining reasonable-royalty damages for the asserted patents because those rates were for technologies other than those found in the asserted patents.

A reasonable-royalty determination in patent-infringement litigation may be impacted by royalty rates found in prior comparable license agreements. Thus, parties often seek discovery not only of such agreements, but of information surrounding those agreements. This issue can often be contentious, particularly if the parties disagree as to the relevance of such information. Recently, in Warsaw Orthopedic, Inc. v. NuVasive, Inc.,¹ the United States District Court for the Southern District of California held that evidence regarding the Internal Revenue Service's (IRS) views about royalty rates paid by the patent owner's affiliates to the patent owner on technologies other than the asserted patents was not relevant to a reasonable-royalty analysis for the patents-in-suit.

Background

Warsaw Orthopedic, Inc. sued NuVasive, Inc. for infringing two of Warsaw's patents. The jury found both patents infringed and awarded Warsaw damages. On appeal, the Federal Circuit affirmed the determinations as to infringement and validity of the asserted patents, but remanded the case to the district court for a new trial on damages. On remand, NuVasive believed that Warsaw would seek to rely on Warsaw's intercompany license agreements with its affiliates to support its reasonable-royalty damages theory. Attempting to gather evidence to undercut Warsaw's use of such agreements, NuVasive asked Warsaw to turn over all documents relating to the determination of the IRS that certain license agreements between Warsaw and its affiliates were not arms-length transactions. Warsaw refused, primarily on the ground that those documents were irrelevant to the case. Unable to resolve the issue, the parties filed a joint motion with the court for determination of the discovery dispute.

The Court's Decision

Warsaw argued that the documents NuVasive sought were irrelevant because the license agreements determined by the IRS to be not arms-length transactions were agreements covering technologies in its affiliate's cardiac and neuro divisions, whereas the patents-in-suit covered spinal technology. Countering, NuVasive contended that even if the agreements subject to the IRS' determination related to another business segment within Warsaw's affiliates, the IRS' determination called into question the similar affiliate agreements Warsaw intended to rely on in the case.

The court agreed with Warsaw. According to the court, "evidence regarding the royalty rates paid by [Warsaw's] affiliates to [Warsaw] on other technologies and evidence regarding the decision by the IRS that the rates paid on those technologies was not the product of arms-length negotiations [were] not relevant in [the] case." Although, hinting that royalty rates between the related entities even covering the same technology involved in the case might not be relevant to a reasonable-royalty determination, the court clarified that it was not presently deciding that issue.

Strategy and Conclusion

This decision shows the discretion that district courts exercise in determining the relevance of documents for discovery purposes. And, while the scope of discovery is generally broad in patent-infringement litigation, the decision shows that courts may be unwilling to allow discovery of documentation for damages purposes that does not relate to the technology at issue in the case. The decision also raises questions as to the use of royalty rates between related companies as evidence of a reasonably-royalty rate in an arms-length negotiation.

Endnotes

¹ The court's decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2015/Warsaw Orthopedic v. Nuvasive - casd-3-08-cv-01512-636.pdf.