Commercial Litigation and Arbitration

Severe vs. Lesser Sanctions — Fifth Circuit Standards for Each — Deeming Facts Admitted Is a Lesser Sanction That Need Only Be “Just and Fair”

Alexsam, Inc. v. IDT Corp., 2013 U.S. App. LEXIS 10009 (Fed. Cir. May 20, 2013):

In January 2011, following the close of discovery, Alexsam moved for sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure, alleging that IDT had failed to disclose information suggesting that the miscellaneous systems infringe Alexsam's patents, in violation of IDT's discovery obligations. Alexsam asked the court to deem these card products to be infringing "for purposes of the action." J.A. 7726.

Midway through trial, the court granted Alexsam's motion for sanctions regarding the miscellaneous systems. The court announced, outside the presence of the jury:

I find that [the court] had ordered the Defendant to fully and completely respond to the Plaintiff's interrogatories . . . , [and] that the Defendant failed to do so. The Defendant also stated in its response to the Motion for Sanctions that [some of this information] [*7] had been [previously] disclosed. I find that that statement was false. To cure the prejudice to the Plaintiff and to prevent this conduct from occurring in the future, I am declaring or deeming established that the Blackhawk cards, the InComm cards, the PaySpot cards, and the Sears cards, [that is, the cards activated using the miscellaneous systems,] infringe the patents-in-suit. The jury will be so instructed. They will also be instructed that the only issues they need to decide, with respect to those cards, relate to invalidity and damages.

J.A. 13,820. The court denied IDT's request either to lessen the sanction or to apply the determination of infringement after the jury's verdict in order to avoid prejudicing the jury's consideration of the remaining issues. At the close of trial, the court instructed the jury that "it has previously been determined that IDT's [miscellaneous systems] infringe the asserted claims of the '608 and '787 patents," and directed the jury to "limit [its] consideration to issues of invalidity and damages as to those [systems]." J.A. 14,827-28.

Footnote 2. The effect of the sanction was that the miscellaneous systems were adjudged to have infringed not only claims 57 and 58 of the '608 patent, the only two claims regarding which infringement contentions were presented to the jury, but also claim 60 of the '608 patent and claim 14 of a continuation patent, U.S. Patent No. 6,189,787 ("the '787 patent"), both of which the district court determined were not infringed by any of the other accused systems.

The jury found for Alexsam on all remaining questions. Specifically, the jury found that the Walgreens, EWI, and SafeNet systems infringed claim 57 of the '608 patent; that the EWI and SafeNet systems infringed claim 58 of the '608 patent;3 and that neither claim 57 nor claim 58 was invalid as anticipated or obvious. The jury awarded Alexsam $9,065,476 in reasonable royalties.


The district court deemed the miscellaneous systems to have infringed Alexsam's patents as a sanction for IDT's failure to disclose the fact that certain of its card products contained BINs in their card numbers. A district court's decision to sanction a litigant under Rule 37 is reviewed for abuse of discretion. Clear Value, Inc. v. Pearl River Polymers, Inc., 560 F.3d 1291, 1304 (Fed. Cir. 2009); Chilcutt v. United States, 4 F.3d 1313, 1319-20 (5th Cir. 1993). Under Fifth Circuit law, which governs here, the propriety of severe sanctions such as dismissing a claim or entering default judgment depends on whether the discovery misconduct "result[ed] from wilfulness or bad faith"; "the deterrent value of Rule 37 cannot be substantially achieved by the use of less drastic sanctions"; "the other party's preparation for trial was substantially prejudiced"; and the misconduct was "plainly attributable to an attorney rather than a blameless client," or to "confusion or sincere misunderstanding of the court's orders." See Batson v. Neal Spelce Assocs., 765 F.2d 511, 514 (5th Cir. 1985); see also Clear Value, 560 F.3d at 1306.

For less severe sanctions, however, including deeming certain facts established for purposes of the litigation, the Fifth Circuit applies a less-rigorous standard, requiring only that the sanction be "[j]ust and [f]air," that it have a "substantial relationship" to the facts sought to be established by the discovery, and that it meet Rule 37's goals of punishment and deterrence. See Chilcutt, 4 F.3d at 1319-21 (citing Ins. Corp. of Ir. v. Compagnie des Bauxites de Guinee, 456 U.S. 694 (1982) and Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639 (1976)).

We conclude that the sanction imposed on IDT falls within the category of less-severe sanctions described in Chilcutt. As in Chilcutt, the court "deemed that the liability facts of the plaintiff['s] case [(in this case, infringement)] were established," while "allow[ing] the [defendant] to present evidence of its affirmative defenses [(in this case, invalidity)] and requir[ing] the plaintiff to prove damages." Chilcutt, 4 F.3d at 1315, 1319. Therefore, we need only ask whether the sanction was just and fair, whether it bore a substantial relationship to the facts sought to be established by Alexsam, and whether it met Rule 37's goals of punishment and deterrence. See id. at 1319-21.***

On review, we consider first whether the sanction was "[j]ust and [f]air." Chilcutt, 4 F.3d at 1321-24. As part of this inquiry, the Fifth Circuit considers factors including (1) whether the sanctioned party was warned of the impending sanctions, (2) whether the party made "[e]mpty [p]romises" that it would "comply with its discovery obligations," (3) whether the claim being pursued through discovery was not so "frivolous" that the use of discovery amounted to "an abuse of judicial process," (4) whether the sanctioned party bore some degree of culpability, and (5) whether the court had previously sanctioned the same party. See id. Here, all five factors support the district court's sanction.***

In addition to considering the justice and fairness of the sanction, we consider whether it bore a "substantial relationship" to the facts sought to be established by Alexsam, and whether it met Rule 37's goals of punishment and deterrence. See Chilcutt, 4 F.3d at 1324-25. Alexsam sought to discover which cards bore BINs in order to establish that the systems associated with those cards infringed the patents in suit. The district court found that IDT's "failure to timely produce th[is] information . . . caused Alexsam severe prejudice in preparing its case for trial," J.A. 17, and as such, a sanction deeming the concealed systems to infringe clearly bore a "substantial relationship" to the attempted discovery.

Finally, while IDT argues that lesser sanctions such as an award of attorneys' fees would have been sufficient to meet the purposes of Rule 37, we see no abuse of discretion in the district court's sanction, especially in light of the failure of its earlier sanctions to secure compliance. We therefore affirm the district court's judgment deeming the miscellaneous systems to infringe as a sanction for IDT's discovery violations.

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