Failing to Institute Sufficient Safeguards to Prevent the Disclosure of Confidential Information in License Agreements Results in Sanctions

Authored by D. Brian Kacedon, John C. Paul, and Robert D. Wells

In patent litigation, when parties produce license agreements with third parties, certain sensitive aspects of license agreements—including royalty rates and other sensitive business terms—may, under the protective order in the litigation, need to be redacted before opposing counsel can provide a document or filing to its client. A recent decision from the United States District Court for the Northern District of California in Apple v. Samsung,¹ shows the potential outcome of failing to "institute sufficient safeguards" to properly protect a third party's confidential business information.

In that decision, Magistrate Judge Grewal sanctioned Samsung and its counsel for (1) failing to properly protect confidential licensing information, (2) delaying in notifying the licensing parties about the disclosure, and (3) distributing the report to hundreds of its employees who were not involved in the litigation.

Background

A junior associate at the law firm acting as outside counsel for Samsung was tasked with redacting the report of Samsung's damages expert before providing the redacted version to Samsung. The associate failed to redact certain information, however, thereby revealing confidential terms of Apple's license agreement with Nokia. The associate then posted the incompletely redacted report to an FTP site and emailed more than 90 Samsung employees with instructions on accessing the document. These employees then downloaded and distributed the document to even more Samsung employees. Ultimately, over 200 people received a copy of the document with the confidential licensing terms.

During subsequent licensing negotiations between Nokia and Samsung, Nokia proposed a certain term and Samsung countered by reciting the confidential terms of Nokia's license agreement with Apple, indicating that it had received the information from its lawyers in the Apple v. Samsung litigation. Because Samsung had received access to the confidential information, the court, at Nokia's request issued an Order to Show Cause Why Sanctions Are Not Warranted, based on apparent violations of the court's protective order.

The Decision

Apple and Nokia argued in favor of sanctions on several grounds, including (1) Samsung's wrongful use of the disclosed confidential information, (2) Samsung's counsel's failure to fully redact the information before sending the expert report to Samsung, and (3) counsel's failure to notify Apple and Nokia of the disclosure.

In its order, the court addressed four specific aspects of the accused conduct that potentially warranted sanctions. First, the court was not persuaded that Samsung used information from the insufficiently redacted expert report in its negotiations with Nokia. According to Samsung, either it learned of the license terms from published news sources, or it just guessed, or it learned of the terms through a "license memo" prepared by another law firm. The court found each of Samsung's arguments tenuous at best, but, when considered together, Samsung's explanations left the court unpersuaded that Samsung used the insufficiently redacted expert report in its negotiations with Nokia.

Second, the court found, although the failure of the junior associate to fully redact the expert report indeed violated its protective order, the resulting harm was too small and speculative to punish. The failure was clearly inadvertent and did not warrant sanctions.

Third, the court held, a violation of its protective order occurred each time unredacted confidential information was distributed to someone not authorized to view it. As to Samsung's counsel, the court reasoned, because the confidentiality of the information traded by the parties was important enough to warrant hundreds of pages of sealing motions, thousands of pages of supporting declarations, and an interlocutory appeal to the United States Court of Appeal for the Federal Circuit, it should have also warranted "a second, or even a third, round of review" by counsel. The court also noted that Samsung could have chosen not to expose individuals to litigation documents, but instead chose to distribute the report "to hundreds of people who were in no way involved in the Apple litigation." Because those "willful failures" to "institute sufficient safeguards" resulted in the distribution of confidential information to hundreds of people, the court found that the breadth and volume of the disclosure alone warranted sanctions.

Finally, the court noted, under the protective order, "in the event of [an unauthorized] disclosure . . . the party responsible for having made such disclosure" was required to "immediately notify counsel for the Producing party whose discovery material had been disclosed." The court found that when the junior associate found the confidential information in the allegedly redacted version of the report and raised his concern with a senior associate and partner, counsel for Samsung should have "immediately" notified Apple of the disclosure. Because the firm did nothing, the conduct required sanctions. In light of its findings, the court ruled that counsel for Samsung must reimburse Apple, Nokia, and their client for all costs and fees incurred in litigating the motion.

Strategy and Conclusion

This case illustrates that "instituting sufficient safeguards" may prevent or reduce the impact of sanctions in litigations.

1. Having a review process with "a second, or even a third, round of review" by counsel may be useful not only in preventing inadvertent disclosure, but also may be useful in preventing sanctions when such disclosure occurs.
2. In cases like this, where a violation of the protective order was found to occur each time unredacted confidential information was distributed to someone not authorized to view it, limiting the distribution of litigation information to those involved in the litigation may prevent sanctions or reduce the impact of sanctions in the event that confidential information is disclosed.
3. Under the protective orders, like the one in the present case that provide for immediate notification in the event of an unauthorized disclosure, having an awareness and safeguards such as a system for doing so may avoid sanctions.

Endnotes
¹ The order can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2014/Apple_v_Samsung_sanctions.pdf.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.