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“We saw that if we paid off this patent holder, we’d have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents.”1
Litigation is expensive, plain and simple. In a typical patent-infringement dispute, defending a case from start to finish—that is, from the complaint to the appeal—may cost a company upwards of a million dollars. Accordingly, the defendant-company will often choose to pay the patent holder a licensing fee instead of advancing its case to trial. At times, the alleged infringer may be particularly confident that it is not infringing, or that the patent is not even valid in the first place. Nevertheless, an impartial weighing of potential litigation costs against the price of licensing the patent will oftentimes produce an economically justifiable solution—pay the patent holder and simply walk away. It must just be the cost of doing business, right?
Not for Newegg, and not for its Chief Legal Officer, Lee Cheng.2 In an age when settlement is commonplace, Newegg’s approach to infringement litigation is refreshing, albeit confrontational and seemingly expensive: Newegg refuses to settle with nonpracticing entities (NPEs) that allege infringement.3 NPEs, which are more commonly referred to as “patent trolls,” are companies that accumulate patents with the intent to aggressively pursue licensing fees through litigation, with no plans of ever manufacturing or marketing the patented inventions.4 In the past decade, NPEs have changed the landscape of patent law, generating a constant fear of litigation and discouraging the very innovation that lies at the heart of patent protection. Even President Obama, in a recent “Fireside Hangout” on Google Plus, stated that NPEs were doing nothing more than “extorting” money from others, and that further legislation is necessary to remedy the problem.5 Soverain Software LLC v. Newegg Inc.6 demonstrates how costly and truly difficult it can be for a defendant to stand its ground against an NPE.
In 2007, Soverain filed suit against a group of companies for infringement of its patents disclosing a system for e-commerce sales transactions.7 Each of the other defendant-companies chose to pay Soverain to license the patents in exchange for avoiding litigation; however, Newegg refused. It argued that the Newegg sales system was materially different than the patented system, and that Soverain’s patents were obvious in light of the prior art and thus invalid. In a way, the case was a perfect storm. On one side, the prototypical NPE holding a group of dubious patents, and on the other, an alleged infringer committed to litigating the issue, regardless of cost. The stage was set for the two companies to square off in what was coined “the mother of all patent battles,” and the rest of the online-retail community had a front-row seat.8 The case is particularly interesting for two reasons: It highlights the stark difference between the Federal Circuit and the district court’s position regarding what level of evidence is necessary to establish a prima facie case of nonobviousness, and it also provides an example of when a court will disregard evidence of licensing as secondary indicia of nonobviousness, when such licenses merely reflect a party’s attempt to avoid costly litigation.
The “Shopping Cart” Patents and Soverain’s Goal to Obtain One Percent of All Internet Sales
The Soverain-Newegg dispute involved a number of patents, developed in 1994 by Open Market Inc., covering a system that most would describe as your typical online sales transaction. The patents disclosed a sales system with a buyer computer, a host computer, and a merchant computer, all interconnected by an electronic network. Under the patented system, the buyer accesses the merchant’s website and selects a product, the product is recorded in the buyer’s “shopping cart,” and the information is saved on the server until he or she chooses to checkout and purchase the item. The vast majority of online retailers rely on a similar system to conduct sales transactions on the Internet.
The patented inventions were embodied in a software system called “Transact” that Open Market attempted to license to retailers in the early 1990s. After modest success, Open Market sold the patents and supporting software to Divine Inc. in 2001. Less than two years later, however, Divine filed for bankruptcy, and Soverain purchased the patents. In fact, Soverain was created specifically to acquire these “shopping cart” patents, with the ultimate goal of brandishing the patents to demand licensing fees from all major online retailers.9 Shortly after acquiring the patents, Soverain began actively pursuing licensing fees from online retailers whose sales systems incorporated the patented technology.
Soverain’s goal was to demand a one percent royalty on all Internet sales transactions generated through the use of the patented system.10 From the outset, Soverain was extremely successful, obtaining judgments against Avon and Victoria’s Secret for over $18 million, as well as a running royalty on all online sales.11 In 2005, Amazon settled with Soverain for a reported $40 million, while The Gap also settled for an undisclosed sum.12 And to date, Soverain has filed infringement suits against more than a dozen other companies, such as Office Depot, Kohl’s, and J. Crew.13 In 2007, Soverain shifted its focus to Newegg, an online retailer that sells electronics and information-technology products.14
Nonobvious as a Matter of Law?
Newegg refused to pay Soverain a licensing fee for the use of the patented system, and in 2007 the parties went to trial in the United States District Court for the Eastern District of Texas.15 At issue were the three Open Market patents that Soverain had acquired: U.S. Patent Nos. 5,715,314 (the ‘314 patent); 5,909,492 (the ‘492 patent); and 7,272,639 (the ‘639 patent). The parties each agreed that there were three specific sets of claims at issue: the “shopping cart” claims, which were system claims 34 and 51 of the ‘314 patent; the “hypertext statement” claims, which were system claims 41 and 61 of the ‘492 patent; and the “session identifier” claims, which were method claims 60 and 79 of the ‘639 patent. The “shopping cart” claims involved the system of storing shopping information in individual storage areas, referred to as shopping carts, on the host server. The “hypertext statement” claims covered a system of producing an online-accessible sales summary, or receipt, with each sales transaction. And last, the “session identifier” claims disclosed a method of assigning a number to each shopping session, for purposes of keeping record of the transaction.
At trial, Newegg attempted to differentiate its system from the patented inventions, claiming that its sales system did not store sales information on its server but, instead, utilized “cookie” technology to store the ongoing sales information on the buyer’s computer until checkout, which it argued was a significant distinction. Additionally, and most notably, Newegg also attacked the validity of the patents themselves, claiming that all three patents were obvious in light of the prior art and thus invalid. Specifically, Newegg alleged that an e-commerce system called the “CompuServe Mall” was available prior to the issuance of Open Market’s original patents, rendering the “shopping cart” and “hypertext statement” claims of the ‘314 and ‘492 patents obvious. Additionally, Newegg relied on U.S. Patent Nos. 5,560,008 (the ‘008 patent) and 5,724,424 (the ‘424 patent), both of which disclosed a method of assigning numbers to individual customers, to argue that the “session identifier” claims of the ‘639 patent were also obvious.
Throughout trial, both parties offered evidence on the issue of obviousness. Newegg relied heavily on the CompuServe Mall, a system by which a buyer could access a database of retailers on a buyer computer that operated as an electronic sales catalog: The buyer would type “O” to order or select an item and “checkout” to purchase. Newegg offered testimony from CompuServe’s former Chief Technology Officer, who provided a detailed description of the CompuServe system, as well as two books, published prior to the patented inventions, that explained how to utilize the CompuServe Mall. Additionally, Newegg’s expert witness testified regarding the similarities between the CompuServe Mall and the patented system embodied in the Transact software, detailing the similarities element by element, before concluding that all of the elements and limitations found in Soverain’s patents were “shown or apparent” in the prior art.16
In response, Soverain argued that its patents were nonobvious in light of the CompuServe Mall, offering testimony from its own expert, who explained that the patented system had a number of claims that were not present in the CompuServe Mall. Specifically, Soverain alleged that the patents incorporated Internet technology that was not available at the time of the CompuServe system. Additionally, Soverain was permitted to offer evidence that numerous companies had paid to license its “shopping cart” patents, as a means of demonstrating that the inventions were commercially successful. Relying on these licenses, Soverain’s argument was rather convincing: Why would companies pay to license Soverain’s software if its patents were invalid?
Despite extensive evidence on the issue of obviousness, at the close of trial Judge Davis removed the issue of obviousness from the jury, granting Soverain’s Rule 50(a) motion and concluding that the patents were nonobvious as a matter of law and thus valid. Judge Davis said, “I don’t think there’s sufficient testimony to present an obviousness case to the jury. I think it would be very confusing to them.”17 With the issue of obviousness removed from consideration, the jury found that Newegg had indirectly infringed on the “shopping cart” and “hypertext statement claims” of the ‘314 and ‘492 patents, but that it did not infringe on the “session identifier” claims of the ‘639 patent. The jury awarded Soverain $2.5 million dollars in damages.
After the jury rendered its verdict, both Newegg and Soverain filed a series of post-trial motions. Newegg moved to vacate and remit the damages award, while Soverain moved for a permanent injunction or, in the alternative, an ongoing royalty payment. Both sides also filed renewed motions for judgment as a matter of law under Rule 50(b). Again, Judge Davis sided with Soverain, denying Newegg’s motions and upholding the jury’s verdict of infringement of the ‘314 and ‘492 patents. Additionally, the judge set aside the jury’s finding of noninfringement of the asserted claims of the ‘639 patent, entering a judgment in favor of Soverain and ordering a new trial on the issue of damages. Last, he entered a judgment in favor of Soverain for both post-trial damages and an ongoing royalty of $0.15 per sales transaction for the life of the patents.
The Nonobviousness Requirement
To obtain a patent, an invention must exhibit patentable subject matter and must be new, useful, and nonobvious.18 At issue in Soverain was the obviousness requirement, which states a patent may not be obtained “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.”19 In order to determine nonobviousness, a patent examiner or the court will consider previous patents, patent applications, and other existing public information to determine whether, in light of that information, the claimed invention or improvement would have been obvious to an ordinary person with skill in that particular art. For example, in a patent application for a new system of delivering an existing pharmaceutical, the examiner may review prior patents covering delivery systems of other pharmaceuticals, as well as articles published in medical journals and other available literature, to determine if this new system of delivery is sufficiently nonobvious to warrant patent protection.
In Graham v. John Deere Co.,20 the Supreme Court established four factors that the court should consider in determining if the party has satisfied the nonobviousness requirement: (1) the scope and content of the prior art; (2) the difference between the prior art and the claimed invention; (3) the level of ordinary skill in the field of the invention; and (4) any “objective” or “secondary” considerations.21 With ongoing advances in technology, the courts have frequently been faced with difficult validity determinations with respect to nonobviousness. Particularly relevant in the Soverain case was the Federal Circuit’s recent decision in Muniauction, Inc. v. Thomson Corp.,22 a case involving patents disclosing a system of buying and selling bonds online. With respect to whether it was obvious to combine an existing bonds-sales system and Internet technology, the Federal Circuit concluded that the patents failed the nonobviousness requirement, stating that the application of Internet technology to an existing process was “commonplace.”23
The Federal Circuit—“Questions of Law Must Be Correctly Decided”24
Despite the judgment in the district court, most believed Newegg had actually scored a significant victory at trial—the $2.5 million verdict was only seven percent of what Sovereign sought in damages, and the $0.15 royalty per transaction was significantly less than the one percent of all sales that Soverain had set out to obtain. Nevertheless, Newegg appealed the decision to the United States Court of Appeals for the Federal Circuit. Citing Graham and KSR International Co. v. Teleflex Inc.,25 the Federal Circuit characterized the obviousness determination as a question of law, before gently reminding the district court that “questions of law must be correctly decided.”26
The Federal Circuit reversed the district court’s ruling that the patents were nonobvious as matter of law. In stark contrast to the district court’s finding, the Federal Circuit concluded that sufficient evidence was offered to determine that the patents were, in fact, obvious as a matter of law and thus invalid. Judge Newman wrote, “The district court’s conclusion that a prima facie case of obviousness was not met is not explained by the court or by Soverain, and does not accord with the record.”27 The court went on to hold that the “shopping cart” and “hypertext statement” claims of the ‘614 and ‘492 patents were obvious in light of the CompuServe Mall system, and that applying the use of the Internet to the existing electronic sales process did not render the Soverain patents nonobvious. Additionally, the court vacated the district court’s finding of infringement regarding the “session identifier” claims of the ‘639 patent, stating that the prior ‘008 and ‘424 patents rendered obvious the “session identification” claims, and that any distinction between attaching numbers to individual buyers, as opposed to individual sales transactions, was immaterial.
Last, the court rejected Soverain’s argument that extensive licensing and commercial success of the patented inventions negated any finding of obviousness. In reaching its decision, the court explained that the patented system was relatively unsuccessful in the early 1990s, and that the recent licensing of the product was more likely a reflection of parties attempting to avoid costly infringement litigation, as opposed to a genuine interest in the patented system. The court concluded that licenses purchased “by those who bought litigation peace . . . do not support [a finding of] nonobviousness.”28
Emptying the Cart—Soverain’s Impact Moving Forward
The Federal Circuit’s decision to reverse the district court’s finding of nonobviousness as matter of law would usually be surprising. It is hard to understand how two courts, both reviewing the same evidence, could come to entirely conflicting conclusions. More specifically, the district court found there was insufficient evidence to allow the jury to even consider the issue of obviousness, while the Federal Circuit concluded that very same evidence was sufficient to render the patented system obvious by clear and convincing evidence.
The result, however, is less surprising when you consider that the parties litigated the case in the Eastern District of Texas. The Eastern District has, over time, developed a reputation as being a “patent friendly” court and, as such, is a common forum for NPEs seeking to enforce their patents.29 With this decision, the Federal Circuit has seemingly pushed back against the Eastern District. Nevertheless, it is hard to predict if the Federal Circuit will continue down this path of curbing baseless patent litigation, or if defendants will actually choose to provide it with the opportunity to do so. Here, Newegg likely spent more money defending the suit than it would have paid for a license—to effect change, other defendants would have to make similar financial sacrifices. Another possible solution to limiting the NPE threat could be a fee-shifting provision that would permit the defendant to recoup attorney fees if the patent is determined to be invalid, which would serve to discourage baseless infringement actions, while also incentivizing defendants to challenge what they consider to be questionable patents.30 Under existing patent law, a judge may award attorney fees only in exceptional cases.31
At a minimum, the Soverain case is certainly a victory for online retailers, as well as the consumers who would have been affected by the increased cost of online sales. In contrast, the decision is a significant loss for Soverain, whose attempts to utilize “shopping cart” patents to generate licensing fees have seemingly been halted. From a tactical standpoint, the case provides future defendants with a roadmap for attacking broad, technology-based patents that simply incorporate the Internet into existing methods. Last, the case serves to expose the inherent weaknesses in arguing that licensing fees should be considered secondary indicia of nonobviousness, when such licensing is likely the result of parties avoiding costly litigation, as opposed to a desire to utilize the patented invention. Moving forward, this distinction may prove to be an effective tool for defendants seeking an invalidity determination based on the obviousness of the patented invention, especially when the licensing fees at issue are significantly less than the cost of litigating infringement.
Kevin C. Adam, Commentary, Obviously Obvious: Federal Circuit Reverses District Court’s Decision That Online “Shopping Cart” Patents Are Nonobvious as a Matter of Law—Soverain Software LLC v. Newegg Inc., 1 Suffolk U. L. Rev. Online 9 (Feb. 25, 2013), http://www.suffolklawreview.org/adam-patent.
Kevin C. Adam is a 2012 graduate of Suffolk University Law School and former Editor-in-Chief of the Suffolk University Law Review.
Supreme Court cases reflect changing times. Suffolk University Law Review began in 1967, the year of Loving v. Virginia,1 a civil rights case that struck down state laws barring interracial marriage. In 2013, the Court has before it cases to determine the validity of federal and state laws limiting same-sex marriages.2
This piece looks at a different sector of the Court’s docket. Not coincidentally, Suffolk University Law Review Online begins as courts are paying increased attention to issues of high technology. The Supreme Court presently has four intellectual property cases pending (and two just decided), after decades in which it commonly considered one or two such cases per year.
Ass’n for Molecular Pathology v. U.S. Patent & Trademark Office3 addresses an issue with philosophical implications: Are human genes patentable? The case represents a recent surge of Supreme Court patent cases. In 1980, Diamond v. Chakrabarty held that a living thing, a genetically engineered, “human-made micro-organism” is patentable subject matter.4 In 1981, Diamond v. Diehr established that computer-implemented inventions could be patentable.5 The invention in question was a process for curing rubber, involving measuring certain temperatures and using a computer to calculate the appropriate length of time to run the curing process. Those cases also established three categories of nonpatentable subject matter: abstract ideas, laws of nature, and natural phenomena. The Supreme Court then did not address the issue of patent subject matter for decades, leaving the lower courts struggling to define the boundaries of those three vague exceptions.
In 2010, Bilski v. Kappos held that a general process for using commodity exchange transactions to hedge risks was an unpatentable abstract idea.6 In 2012, Mayo Collaborative Services v. Prometheus Laboratories, Inc. held unpatentable a diagnostic method, which consisted essentially of measuring the level of a metabolite in a patient’s blood and adjusting the dose of a drug accordingly.7 The Court held that this method was unpatentable as encompassing a law of nature combined with “well-understood, routine, conventional activity previously engaged in by scientists who work in the field.”8
The Federal Circuit in Ass’n for Molecular Pathology held that Bilksi and Prometheus did not govern the patentability of genes, on the theory that its analysis did not apply to the third category of unpatentable subject matter: products of nature.9 Rather, the Federal Circuit held that human genes were patentable—not in natural form in the body—but in the isolated form captured in a laboratory. The isolated form, the lower court ruled, was a different molecule than the natural form and so not simply a product of nature.10 If, however, the Supreme Court does extend the general approach of Prometheus, it might well hold that the gene itself is an unpatentable product of nature, and the isolated form is simply the result of “well-understood, routine, conventional activity previously engaged in by scientists who work in the field.”11
Notable also is the fact that Ass’n for Molecular Pathology will not answer the broad question of whether human genes are patentable? The facts of the case raise only the issue of whether human DNA, once isolated, is patentable. But “human genes” could encompass many other issues: Whether synthetic genes put into humans are patentable; whether DNA isolated from fossil ancestors of homo sapiens are patentable; whether genes from another species combined with human genes are patentable; and whether human DNA that did not code for a gene—but was nevertheless useful—was patentable.
Genes are also at the heart of Bowman v. Monsanto Co.,12 in which the question is: “Whether the Federal Circuit erred by (1) refusing to find patent exhaustion in patented seeds even after an authorized sale and by (2) creating an exception to the doctrine of patent exhaustion for self-replicating technologies?”13 In plain English, whether a farmer who purchases patented genetically modified seeds may plant the seeds that grow from the resulting plant. Such self-replicating technologies indeed raise new questions for the law.
Software can also fall into that category, and raises analogous issues. An important issue is whether someone who buys software may resell it without infringing the copyright in the software. Courts so far have enforced limitations on resale incorporated in intellectual property licenses, whether for patented seeds or copyrighted software. By contrast, copyright holders of yore were not able to shut down markets in used books.
John Wiley & Sons, Inc. v. Kirtsaeng14 reflects the increasing internationalization of trade and communications.15 The case addresses the question of whether the importation of books printed abroad under license from a copyright owner infringes the copyright owner’s exclusive right to distribute the work in the United States. A student from Thailand noticed how much more expensive textbooks were in the United States than their foreign counterparts. The enterprising student imported and sold thousands of books until publishers successfully sued him for copyright infringement. If a book is printed and sold in the United States, the purchaser may freely resell it under the “first sale” doctrine. But the Second Circuit held that first sale does not apply to books printed outside the United States, even if authorized by the copyright holder.16 The case turns on laborious issues of statutory interpretation and has good policy arguments on both sides. If first sale does not apply to foreign works, then museums in the United States are infringing by displaying foreign-made artworks they own, such as Picasso’s paintings. If first sale does apply, then perhaps United States publishers will no longer sell less expensive editions abroad, hurting education in developing countries.
Federal Trade Commission v. Watson Pharmaceuticals, Inc. addresses a different aspect of the control over the market for a product covered by intellectual property.17 When patented pharmaceuticals are reaching the end of their patent term, patent holders often sue makers of the generic versions for patent infringement. Sometimes those suits are resolved in a counterintuitive way: The patent holder pays the accused infringer as part of the settlement. Such “reverse settlement payments” look like antitrust violations: A monopolist paying a potential competitor to stay out of the market. But some courts have tended to uphold such settlements, on the theory that they encourage settlement of litigation and offer an incentive to develop generic versions of patented drugs. Watson will address the elementary question of how closely courts will scrutinize such transactions under antitrust laws.
Gunn v. Minton addressed an institutional issue, holding that state courts have jurisdiction to hear legal malpractice claims involving patents.18 Exclusive jurisdiction in patent and copyright cases has made intellectual property primarily a federal area of the law. The mere fact that Gunn reached the Supreme Court demonstrates how that has extended even to state law claims that involve federal intellectual property rights, such as the claim that a patent lawyer negligently drafted the claims in a patent application or gave faulty advice in patent litigation. The Supreme Court unanimously held that exclusive federal jurisdiction over patent law does not deprive state courts from exercising jurisdiction over state law claims in a case involving a patent.19 Gunn echoes the issues of federalism in 1967 and today, whether and how states and the federal government could regulate marriage.
Already, LLC v. Nike, Inc. addressed the question of how easy it should be for someone to sue himself or herself.20 Among legal entitlements, intellectual property rights are notoriously vague, ambiguous, and uncertain. Rights holders often assert infringement without filing suit, such as to gain leverage in licensing negotiations. The accused party may then seek to clarify rights–by suing itself by bringing a declaratory judgment action seeking a court order that it is not infringing. The party asserting rights will then backpedal, arguing there is no controversy and so no justiciable case. Already held that there was no jurisdiction where the trademark holder had filed a covenant not to sue the other party.21
These high-profile cases give a flavor of the role that technology and intellectual property have come to play in today’s society. Suffolk University Law Review Online will reflect and embody these changes.
Stephen McJohn, Commentary, Genetic Engineering, Self-Replicating Technologies–and Used Books: Intellectual Property Law in 2013, 1 Suffolk U. L. Rev. Online 5 (Feb. 25, 2013), http://www.suffolklawreview.org/mcjohn-ip2013.
Stephen McJohn, Professor of Law, Suffolk University Law School.
A quarter century ago, the Lexington, Kentucky Veterans Affairs (VA) Medical Center pioneered a risk management program now known as “disclosure and offer.” Its guiding principal was that patients injured by malpractice should be told about the incident and “made whole” without having to litigate.
After a patient suffered an injury that the VA judged to have been caused by a departure from the standard of care, the VA contacted the patient and, along with an attorney of his choosing, invited him to meet with VA staff. At the meeting, the VA disclosed the error to the patient and discussed a plan about how to meet the patient’s medical needs. With guidance from his own legal counsel, the patient was offered fair, negotiated compensation (defined as what a judgment would be, including pain and suffering, if the case went to trial).
The VA program’s creators believed advising patients to seek counsel was necessary to protect the program’s integrity: Negotiating compensation for malpractice requires experience and expertise in law and medicine alike. Risk managers have this experience, unrepresented patients do not. And, because the goal was to be completely transparent and honest, the fact that a patient had legal representation was not seen as a threat. If the attorney made an unrealistic demand, VA risk managers simply said no to it.
In 1999, the Lexington VA team published a paper describing their experience using this method. 1 They concluded that payouts were similar to hospitals in a comparison group that did not have disclosure-and-offer protocols. It also appeared to save the VA money by reducing legal expenses that would have been incurred had these cases been litigated. This was deemed a success: The program treated patients ethically, helped the VA realize savings, and facilitated patient safety analyses without fear of legal ramifications.
Today, disclosure-and-offer programs are fixtures at facilities nationwide. 2 The current generation of programs, however, appears to have adopted a self-serving approach that eliminates safeguards designed to assure patients get fair advice regarding compensation. The most recent data revealed that only four percent of disclosure programs advise patients to seek independent legal advice.3
This should not be. To disclose an error and not to offer full compensation—or to disclose an error, but then leave a patient to negotiate with a trained risk manager with adverse financial interests—puts physicians on the wrong side of a conflict of interest.4
Recent research shows why programs that avoid attorney involvement may, intentionally or not, take advantage of patients.5 Only sixty percent of the study participants (each of whom was asked to assume they had suffered an injury and then had it disclosed to them as having been caused by a clear act of malpractice) described themselves as being very likely or somewhat likely to seek counsel regarding their legal rights. The potential for abuse becomes clear when coupling this with the finding that 78.8% of those surveyed stated they would be very likely or somewhat likely to accept waiver of medical expenses only (as opposed to full damages) as compensation.
The VA believed that the disclosure-and-offer programs’ collaborative tone made it difficult for unrepresented patients to recognize the need to ask nuanced questions that were likely beyond their legal understanding. Risk managers have a primary financial responsibility to their employers that should be balanced by a skilled representative for the patient. Without this, unrepresented patients would likely never know whether an offer was sufficient to pay future injury-related expenses (for medical costs and lost earnings); whether offered pain and suffering damages (if any) approximated a likely jury value; or if the offer had been discounted for any reason (e.g. unclear liability or to build-in room with the expectation the patient would attempt to negotiate).
To prevent miscommunications or misunderstandings, we recommend that disclosure programs adopt a two-part protocol as part of any discussion of malpractice with a patient:
Nothing in these protocols should be considered revolutionary. In fact, attorneys who suspect they have committed legal malpractice must exercise these same practices with their own clients.6
Advising patients to seek counsel protects their interests and the process’s integrity too. Without it, patients may not recognize that the discussion about compensation is inherently a legal negotiation in which those making the offer have a conflict of interest. It is also important to allow patients to have a cooling-off period if they initially decline to consult an attorney. Ultimately, some patients may decide not to seek counsel, or even not to take compensation. Making this decision, however, presupposes the patient has a fair opportunity to consider the options and the effects of foregoing compensation. For that reason, no decisions should be made with unrepresented patients until they have had a fair opportunity to understand the significance of their decisions.
These best practices are not intended as a windfall for plaintiffs’ attorneys. Instead, plaintiffs’ attorneys are ethically bound to do the right thing by significantly reducing their fees if claims are resolved as a result of the disclosure-and-offer process.7 If patients are able to afford it, plaintiffs’ attorneys should work for a reasonable hourly fee. If not (or if patients would prefer to pay on a contingency fee basis), the plaintiff’s attorney is obligated to offer a contingent fee significantly less than the traditional one-third.
Compensation is a tricky issue and one in which a patient both deserves and requires advice from experienced advisors whose only loyalty is to the patient. By adopting these protocols, medical facilities and patients alike can resolve a bad situation in an ethically sound way. In the event that negotiations fail and result in a trial, hospitals are in a strong position to prove that their postincident activities were fair and patient-centered rather than self-serving.
Gabriel Teninbaum and Steve Kraman, Essay, Disclosure and Offer at Twenty-Five: Time to Adopt Policies to Promote Fairly Negotiated Compensation, 1 Suffolk U. L. Rev. Online 1 (Feb. 25, 2013), http://www.suffolklawreview.org/teninbaum-kraman.
Gabriel Teninbaum, Associate Professor of Legal Writing, Suffolk University Law School. Professor Teninbaum has written extensively in the area of medical apology. His other publications include How Malpractice Apology Programs Harm Patients, 15 Chap. L. Rev. 307 (2011) and Medical Apology Programs and the Unauthorized Practice of Law, 46 New Eng. L. Rev. 505 (2012).
Dr. Steve Kraman, Professor, Division of Pulmonary, Critical Care and Sleep Medicine, Department of Internal Medicine, University of Kentucky. Dr. Kraman is the former chief of staff of the Lexington, Kentucky VA Medical Center. Together with medical center counsel, he started and managed that facility’s disclosure-and-offer program.
A lawyer shall not: (1) make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless the client is independently represented in making the agreement; or (2) settle a claim or potential claim for such liability with an unrepresented client or former client unless that person is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel in connection therewith.
Federal judges have a variety of tools to sanction litigants who fail to comply with discovery orders.1 After years of discovery disputes in Linde v. Arab Bank, PLC,2 the district judge issued “severe” sanctions against Arab Bank, which, according to the bank’s attorneys, turned a multi-billion-dollar case “into a show trial.”3 The plaintiffs are thousands of victims and family members of victims of Palestinian terrorist attacks that occurred in Israel between 1995 and 2004.4 The plaintiffs alleged that the bank violated the Anti-Terrorism Act (ATA) by providing material support and resources to foreign terrorists with the knowledge or intention that they would be used in the preparation or execution of the aforementioned attacks.5 The allegations included claims that the bank assisted in administering a “death and dismemberment benefit plan,” and provided other types of financial services to terrorist organizations.6
During the pretrial discovery phase of the case, Arab Bank refused to produce a sizable portion of the requested materials, claiming that doing so would subject them to liability under foreign law. The district court applied a commonly used balancing test, holding that the plaintiffs’ interests in receiving information vital to the litigation, coupled with the United States’ interest in combating terrorism, outweighed the bank’s privacy interests and potential hardship, as well as the interests of the implicated foreign countries in enforcing their banking-secrecy laws.7 The bank, however, refused to produce the requested discovery despite the district court’s order.8 Years after the bank’s initial refusal, the district court issued sanctions.9
The district court’s sanctions will provide the plaintiffs with two key advantages at trial.10 First, it will allow the jury to essentially infer that the missing discovery would have established the bank’s liability. Second, the bank will be precluded from making any argument or offering any evidence at trial that the plaintiffs could have refuted with the missing discovery.
Arab Bank subsequently filed an interlocutory appeal of this order to the Second Circuit, asking the court to vacate it by, among other things, issuing a writ of mandamus. The bank argued that the Second Circuit had jurisdiction to review the sanctions order because the headlines of a potential multi-billion-dollar jury verdict claiming the bank had “blood on [its] hands” could lead to a run on the bank from both its correspondent banks and customers, effectively crippling it before an appeal could be heard.11 Moreover, the bank also contended that compliance with the order would destroy the privacy rights of thousands of customers, and an appeal could not repair that damage once done. The bank asked the court to issue a writ of mandamus to vacate the sanctions order, claiming that it violates the established limits for civil sanctions on parties acting in good faith during discovery. In addition, the Kingdom of Jordan filed an amicus curiae brief arguing the sanctions violated the principles of international comity.12
The plaintiffs countered that the court did not have jurisdiction to vacate the sanctions order because, among other things, the district court’s order was not an indisputable abuse of its discretion.13 The plaintiffs argued that the bank did not, as it claimed, act in good faith, and countered that the order’s inferences would still require the support of independent evidence. Additionally, they posited that the preclusion order only prevents the bank from unjustly benefiting from the evidence they refuse to produce.14
The ATA provides a civil cause of action for the victims of international terrorism. Before its enactment, it was difficult for victims of terrorism to be made whole from the damages inflicted upon them. The statute allows plaintiffs to collect treble damages and attorneys’ fees from those that injure an American citizen “by reason of an act of international terrorism.”15 Although the phrase “international terrorism” was left ambiguous, courts have looked to congressional intent to determine which activities fall within the definition’s scope. In Boim v. Holy Land Foundation for Relief & Development, the Seventh Circuit held that, under certain circumstances, individuals or entities could be liable under the ATA for donating to the Palestinian terrorist organization Hamas.16 Courts have largely relied on this case’s reasoning to establish “material support,” which includes providing financial services, as within the scope of “international terrorism,” and thus creating liability under the ATA.17 Additionally, courts have also required that a financial institution must “knowingly” provide material support to terrorists in order to be found liable.18 Plaintiffs who file suit against banks under the ATA rely heavily on records that document the bank’s actions. Indeed, such evidence is directly relevant to proving a bank acted with the required scienter to be held liable.
The Federal Rules of Civil Procedure state: “Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense,” and the “[r]elevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”19 The scope of pretrial discovery has been referred to as “sweeping, virtually creating a presumption of discoverability.”20 Courts can order a party under their jurisdiction to produce discovery under that party’s “possession, custody or control,” no matter where it is located.21 Considered by most of the world’s judicial systems to be invasive and overreaching, the Federal Rules’ discovery provisions demanding production often conflict with foreign laws mandating concealment.
In 1987, the Supreme Court held that foreign law does not “deprive an American court of the power to order a party subject to its jurisdiction to produce evidence.”22 The Court endorsed a balancing test that addresses the sensitive and fact-specific inquiries these issues implicate.23 In ATA banking cases, courts have consistently ordered the production of discovery located abroad in violation of the laws of the country where the discovery is located—generally weighing the interests of the plaintiffs in gathering important evidence to make their case, and of the United States in combating terror, more heavily than the defendant and foreign nation’s interest in avoiding liability and enforcing their laws.24 When a district judge balances the interests at stake and decides to order discovery, despite the potential liability for the producing party under foreign law, failure to obey the court’s orders can result in sanctions. Indeed, the consequences can be devastating; the sanctions at a court’s disposal include the adverse-inference instruction and the right to suppress evidence.25 When imposing sanctions, case law dictates that district courts should consider, among many factors, the harshness of the sanctions, the degree to which the sanctions are needed to reestablish the evidentiary balance upset by the nondisclosure, and the nondisclosing party’s degree of fault.26
Once a district judge orders discovery, the orders are usually interlocutory and not subject to immediate appeal because they can be reviewed after final judgment in the case.27 There are numerous exceptions to this rule, however, which include the issuance of a writ of mandamus. The All Writs Act enables appeals courts to issue a writ of mandamus instructing a district court to remedy an erroneous order.28 Nevertheless, mandamus is warranted only under circumstances such as “judicial usurpation of power” or “clear abuse of discretion” by the lower court.29 Moreover, the party seeking issuance of the writ must have no other suitable means of attaining the relief it seeks. Even if a case falls within the scope of the aforementioned requirements, the court still has discretion to consider whether issuance is “appropriate under the circumstances.”30
In Linde, the Second Circuit held that the privacy implications of a potential judgment, as well as the economic and diplomatic ramifications, were not extraordinary enough to warrant review. The court rejected use of this power “even if the District Court incorrectly resolved any singular factual or legal question.”31 The court held that warnings of a run on the bank or “financial and political destabilization” were too speculative, and indirectly linked to the sanctions at issue.32
Typically, terrorist organizations use foreign banks and financial institutions to fund their attacks and activities. Thus, the circumstances surrounding ATA banking cases will almost always implicate records located abroad and generate discovery disputes that place banks in the catch-22 between United States courts demanding production and foreign laws mandating concealment. If district courts continue to weigh the respective interests in favor of the plaintiff and the production of evidence abroad, the consequences for defendants in these cases could be dire. In Linde, the Second Circuit established that sanctions allowing adverse-inference instructions and evidence-preclusion orders are effectively unreviewable until after a final judgment. If similar sanctions are ordered in ongoing and future ATA banking discovery disputes, the plaintiffs in these cases will proceed to trial with significant settlement leverage.
While these discovery and evidentiary disputes raise difficult questions and implicate a variety of important interests, courts should continue to order the production of evidence abroad and sanction litigants that refuse to comply. The alternative would render the ATA moot. If foreign banking-secrecy laws effectively shield evidence located abroad, plaintiffs bringing suit under the ATA would be unable to prove their cases. Indeed, the plaintiffs in these cases must prove that the banks acted with the requisite scienter to be held liable. When foreign banks are the accused parties, almost all evidence required to prove such a claim will inevitably be located abroad. Congress intended for the ATA to “empower victims” of international terrorism “with all the weapons available in civil litigation,” including discovery.33 While concerns of international comity should be considered, it is well established that legislative intent can override those concerns.34 Congress’s intent was to use discovery as one of those weapons; limiting discovery would effectively render the ATA moot, hardly ‘empowering’ the victims of terrorism.
Although harsh, the sanctions at issue are not unjust, nor will their application create a “show trial.” The plaintiffs will still be required to submit independent evidence in support of their claim and then the jury will decide, based on the merits of the evidence presented, whether the documents the bank withheld likely had the content they are allowed (but not required) to infer. Additionally, limiting evidence the bank can offer prevents the bank from benefiting from evidence it withheld from the plaintiffs. Without this order, Arab Bank officials could testify at trial that they closed terrorist accounts but then invoke banking secrecy and refuse to answer questions about when or why they did so. It would be analogous to a criminal defendant taking the stand and answering direct examination, but then refusing cross-examination on the grounds of Fifth Amendment privilege.35 The absence of these orders would actually lead to “show trials,” where banks could escape liability by withholding important documents—effectively enjoying the benefits and avoiding the hindrances of the laws and courts of the United States.
If ATA plaintiffs are unable to access vital discovery to prove their cases, they will not be the only ones harmed; the United States public will suffer as well. The possibility of significant civil damages in United States courts and the subsequent economic ramifications of such awards can deter banks from doing business with terrorists. The ATA’s legislative history suggests that Congress viewed private suits under the Act as “infused with the public interest.”36 Indeed, there is some evidence that ATA suits have already begun to incentivize banks to implement greater efforts to prevent terrorists from utilizing their services.37 In fact, this would not be the first time private civil litigation could play a role in bankrupting terrorism. The Ku Klux Klan was “brought to its knees” by private civil litigation, as opposed to government or military action.38
Today, more than ever before, foreign banks enjoy the benefits of our markets and protections of our laws. It would be unjust if foreign banks could enjoy those advantages while simultaneously avoiding their hindrances. Banks that conduct business in the United States make a choice, and sometimes that choice can present disadvantages as well. If foreign banks decide that it would be more beneficial to turn a blind eye to terrorists that utilize their services than to remain under the personal jurisdiction of United States courts, then that is their prerogative. Until a bank (or any organization or individual) makes that choice, however, it has impliedly accepted the risks of being under control of two legal systems that may, at times, conflict with each other. While under the control of two legal systems, banks should fail in any argument that suggests the United States’ interest in combatting terrorism and providing remedies to victims of terrorism should yield to foreign interests by enforcing banking secrecy. There will always be banks willing to provide material support for terrorist organizations, as long as it makes financial sense for them to do so.39 Ordering discovery, and implementing sanctions that will balance the evidentiary gap stemming from noncompliance, will fulfill congressional intent and allow plaintiffs to present their case. There is no doubt that the victims of international terrorism deserve to hold accountable those providing material support to the terrorists that victimize them. The most important outcome of ATA litigation, however, will be the threat of civil litigation as a significant deterrent against rendering material support to terrorists in the future.40 By cutting off the “oxygen of terrorism,” civil litigation will decrease the operational capacity of terrorists and, in turn, will inevitably shorten the list of victims (and plaintiffs) able to file suit under the ATA.41
Matthew J. Smith, Case Note, Discovering New Ways to Deter Terrorism: The ATA and the Cross-Border Discovery Catch-22, 1 Suffolk U. L. Rev. Online 25 (Feb. 25, 2013), http://www.suffolklawreview.org/smith-discovery.