United States District Court, W.D. Virginia, Lynchburg Division
MEMORANDUM OPINION AND ORDER
NORMAN K. MOON, District Judge.
This case comes before this Court on Bell, Inc.'s Motion to Compel (docket no. 1) compliance with a subpoena duces tecum issued in the United States District Court for the District of South Dakota ("D.S.D.") on December 2, 2013 (hereinafter "Subpoena" or "December 2 Subpoena"). Bell, Inc. ("Plaintiff" or "Bell") filed the underlying litigation in the United States District Court for the District of South Dakota, claiming GE Lighting, LLC ("Defendant" or "GE") infringed a patent regarding light-bulb packaging that Bell initially acquired from iPack, Inc. ("iPack"). The December 2 Subpoena seeks a broad range of documents related to GE's counterclaim in the South Dakota litigation that the patent underlying that suit is invalid because iPack or its predecessor in interest "failed to disclose prior art and/or acquired the patent through inequitable conduct." Bell's Br. in Supp. of Mot. to Compel 1.
Bell, GE, and iPack originally began conferring about production in August 2013, after an initial subpoena issued in D.S.D. Ultimately, the parties could not agree on whether Bell and GE should pay for about $14, 000 of the $16, 830 cost of production. The December 2 Subpoena demanded production by December 10, 2013. After not hearing from iPack, Bell filed this Motion to Compel on March 3, 2014. iPack responded to the Motion to Compel on April 4, 2014, with a Motion to Quash the Subpoena ("Motion to Quash") (docket no. 9), in which it requests that this Court either quash the Subpoena, or alternatively, "specify conditions for production that ensure that iPack will be reasonably compensated for the expenses incurred incident to production." Mot. to Quash 1. Bell replied on its Motion to Compel, and on April 17, 2014, this Court held a hearing on the motions.
The parties dispute whether Bell and GE should have to pay the total bill of $16, 830 that iPack incurred in production, including: $1, 372.49 to image and copy electronic information from old hard drives; $4, 770 to set up a searchable database, load the documents into the searchable database, and apply search parameters agreed upon by the parties; and $10, 687.51 for iPack's attorneys and staff to identify privileged, irrelevant, or non-responsive documents among those that matched the search parameters.
Bell is a South Dakota corporation, and iPack is a corporation organized under the laws of Virginia. Neither Bell nor iPack disputes that this Court has jurisdiction over them or over the Motion to Compel. Bell and GE are involved in litigation over a light bulb packaging patent in D.S.D. iPack is a successor in interest to New Dominion Packaging ("NDP"), and in that form iPack used to manufacture packaging materials. Of late, iPack has been involved in out-of-court liquidation proceedings and says its "only substantial remaining asset is a 123, 000 square foot manufacturing plant/warehouse located in Lynchburg... which it leases to various entities to generate funds to service the debt." Br. on Mot. to Quash 3. It notes that any necessary expenses of iPack are now borne by its principals, given this limited income-generating capacity.
At the hearing, Thomas Scott, an officer for iPack, testified that iPack has been involved in two separate acquisitions. Scott testified that iPack was reticent to turn over discovery to Bell and GE without first conducting its own relevance and privilege review over concerns about disclosing "personal" and financial information of its owners, employment data about former employees of its predecessors in interest, and information about the liquidation and creditors of those predecessors in interest, including NDP. The transactions to which Scott refers involve iPack's predecessor in interest, NDP, and another related company called Old Dominion Packaging ("ODP"). There has been continuity of ownership between NDP, ODP, and iPack, according to Scott. ODP was owned by the Buehler family, and Fred Buehler, Scott's father-in-law, was the CEO of ODP. Scott's wife is involved with NDP, his father-in-law is the retired CEO of ODP and is now helping to keep iPack afloat as it operates at a loss. Scott testified that he and Buehler have been paying the legal fees for iPack.
According to Scott, iPack continues to liquidate its assets but is not attempting to sell intellectual property or light bulb packaging designs. When asked whether any of the information on the hard drives requested by Bell and GE has value for iPack as part of this liquidation or otherwise, Scott confirmed there is no value for iPack in this information.
A. The patent and dispute between Bell and GE
The underlying dispute between Bell and GE has involved iPack from its inception. iPack had been providing light bulb packaging for GE, and had applied for a provisional patent for this packaging in April 2003. Bell wanted to expand its packaging business and "approached iPack about acquiring iPack's intellectual property [in the light bulb packaging] and its light bulb packaging relationship with GE." Br. in Supp. of Mot. to Compel 3. Bell and iPack entered into a formal agreement on October 5, 2004 in which "iPack would receive consideration... if Bell and GE made arrangement to produce iPack's alleged intellectual property, " after iPack introduced the two parties. Br. in Supp. of Mot. to Compel 4. Paragraph E of that agreement warranted that iPack:
[H]as no actual knowledge of, nor has it received notice of, any allegations or charges of infringement on the underlying process which is the subject of the Application. For purposes of this agreement, a default by [iPack] will be deemed to have occurred if (1) [iPack] fails, or is unable, to assign title to the [patent] Application, free and clear of all encumbrances, or (ii) [iPack] has breached its warranty regarding no infringement.
Br. in Supp. of Mot. to Compel, Ex. C, ¶ E. The agreement also required Bell's intellectual property counsel to conduct a patent search "with the Patent and Trademark Office... to determine if there exists a claim on the process underlying the Application which would diminish the value fo the Application to Bell." Br. in Supp. of Mot. to Compel, Ex. C, ¶ X. Bell did so, finding no relevant prior art.
GE has counterclaimed in the South Dakota litigation that iPack produced packaging prior to 2003 that constituted relevant prior art, but went unpatented. GE claims the provisional patent application iPack made regarding light bulb packaging, which formed the basis for Bell's patent of that packaging, is thus invalid because of this relevant prior art. Bell argues iPack should have disclosed this information to Bell under their October 5, 2004 agreement, but claims iPack never did so. Therefore, Bell's IP counsel was unable to evaluate those "documents for their impact on the patent, " and its review for prior patented art with the U.S. Patent and Trademark Office did not reveal those documents. See Br. in Supp. of Mot. to Compel 4.
In 2004, after executing the agreement, Bell began manufacturing light bulb packaging for GE, and on April 15, 2008, Bell obtained a patent for the packaging based on the provisional patent application originally submitted by iPack. GE eventually moved much of its packaging production overseas and reduced orders from Bell. Bell "soon discovered that GE was manufacturing and/or selling packaging that Bell believed infringed" the patent originating with iPack's provisional application. Br. in Supp. of Mot. to Compel 5. Bell accordingly filed suit in D.S.D., alleging that GE knowingly infringed its patent. GE counterclaimed that the patent and iPack's original provisional application "were invalid due to undisclosed prior art and inequitable conduct by iPack." Id.
B. The Discovery Dispute
In the South Dakota litigation, Bell and GE agreed to begin by investigating GE's claims about the invalidity of the patent. Bell began corresponding with iPack's counsel on July 15, 2013, when Bell sent iPack a litigation hold letter. iPack's counsel agreed to service, and Bell served a subpoena on iPack in August 2013, by U.S. mail. By September 10, 2013, iPack had found 11 GB of data on old hard drives no longer in use. Bell's counsel suggested to iPack that it turn over the entire amount of data, with a corresponding agreement and claw back provision. See Br. in Supp. of Mot. to Compel, Ex. H. iPack refused this option, preferring instead to keep the data and run search terms to find responsive information. Id. iPack sent Bell proposed search terms on September 10, 2013, and represented that it "should be able to have the search completed and the documents ready for production" in about one week's time. See id., at Ex. G. On September 18, 2013, GE sent additional search terms to iPack for inclusion, at which time iPack agreed to search for the records based on an agreed list of terms. Id. at Ex. J.
On September 30 and October 3, 2013, GE and Bell contacted iPack to check on the status of production, as neither had heard from iPack. Id. at Exs. K & L. iPack responded on October 3 that the original hard drive did not have the documents as expected, and iPack had to procure and image other hard drives for the information. See id. at Ex. M. iPack noted it had just received the full set of potentially responsive documents and had begun reviewing them, absent one potentially responsive hard drive that would arrive soon. Id. iPack's counsel represented that iPack "should be able to send [GE and Bell] the responsive documents next week." Id. That week and the next, on October 11 and 15, 2013, counsel for Bell contacted iPack to check on the status of production, with no response until October 16, 2013. See id. at Exs. N and O.
On October 16, 2013, the first discussion of costs appears in the emails submitted to this Court. iPack's counsel noted "over 5, 000 documents... came through the search filters because some of the search terms pulled in completely irrelevant documents, " and represented iPack was getting the documents ready as quickly as it could, hoping to finish in less than one week. Id. at Ex. O. In that same communication, iPack noted it had "started to receive invoices for the costs associated with this document production, " and asked "[h]ave you all decided how the costs will be split for document production?" Id.
Between October 16 and 26, 2013, the parties attempted to come to a confidentiality agreement or stipulation before iPack turned over production. The parties submitted a stipulated protective order to the district court in South Dakota on October 22, 2013, but did not wish to wait for its delayed entry to receive the documents. See id. at Ex. Q. iPack acknowledged this protective order on October 24, 2013, in an email, saying it had "the initial group of approximately 2, 500 documents ready to send, and the rest are being finalized for production such that we should have additional groups ready tomorrow and beginning of next week to complete it, but we would like to have an Order of the court governing the production ." See id. at Ex. P (emphasis added). The next afternoon, on October 25, 2013, iPack forwarded a draft of an "interim confidentiality agreement, " ostensibly something the parties could sign while awaiting the court's protective order. See id. at Ex. R.
The interim confidentiality agreement included provisions requiring Bell and GE to destroy or send back any privileged or protected documents iPack inadvertently disclosed, without recourse for disputing whether the documents were privileged except by disputing the classification in court after destroying or returning the documents. See Confidentiality Agreement, Ex. R, ¶ 9. It also stipulated that Bell and GE should "agree to inform ND. the apportionment" of costs between them by October 30, 2013, "at which time NDP shall send an invoice for costs associated with NDP's production of Documents, and production of additional documents by NDP may be withheld unless and until payment is made for the costs." Id. at Ex R., ¶ 11. No specific cost estimates had been discussed. Bell and GE made changes to the agreement and requested that the specific amount of costs be added to it. Id. at Ex. S. On October 28, 2013, GE inquired again about the costs, as iPack had not yet supplied them. Later that day, iPack disclosed the following costs:
$1, 372.49 for imaging and copying of the drives by external company $2, 385.00 coordination with outside vendor, loading of documents in database, applying search parameters, bates numbering, copying them to pdf for production $8, 848.00 compilation and review of documents for relevance for production Estimate for future costs to completion $2, 000 Total: $14, 000
See id. Ex. S.
On October 29, 2013, iPack wrote back that it had finalized documents to send and asked how it should proceed. Bell replied that iPack should "send the link at your earliest convenience." See id. at Ex. T. iPack specified that it was "looking for agreement as to the costs associated with the production. We had that incorporated into the Confidentiality Agreement, along with a date by which we would be told of how the costs were being split between the parties." Id.
On October 31, 2013, Bell replied with a formal letter, via email and mail, noting Bell and GE found the costs inappropriate, requesting that the documents be submitted while the cost dispute was resolved, agreeing to pay the $1, 372.49, but refusing to pay the other costs because they seemed related to reviewing the documents for privilege and relevance when Bell and GE had offered to do that work themselves, at their own cost. See id. at Ex. U. The proposed process that iPack had rejected was described as follows:
[iPack] would turn over the imaged hard drives for us to review on an outside counsel eyes only basis to identify the materials that we believe should be produced and where your client would reserve the right to object to (or withhold) the formal production of any identified materials on grounds of privilege, work product and/or relevance. Your clients rejected that proposed, highly efficient approach, and instead elected to incur significant legal fees by having their own counsel perform a detailed review that was not necessary.
Id. iPack did not respond until November 18, 2013, when it sent its own letter arguing the costs were reasonable, claiming for the first time that the initial subpoena was invalid, and averring that although Bell and GE were "correct... that a significant portion of the costs [iPack] incurred to comply with the Subpoena are associated with loading the documents in a system for attorney review for relevance and privilege, and for attorney time spent on that review... these are recoverable costs." Id. at Ex. V.
Bell issued its December 2, 2013 Subpoena from the "United States District Court for the District of South Dakota, " calling for production by December 10, 2013, "[a]t the offices of iPack, LLC - to be sent to Cutler & Donahoe, LLP at the address below (cost of shipping paid by serving party)." Id. at Ex. W. Bell sent a letter explaining its position along with the Subpoena, and apparently iPack responded on December 16, 2013, with a letter that was not mailed and landed only in the spam email folders of Bell and GE. In its December 16, 2013 letter, iPack objected to the Subpoena, as it claimed the Subpoena:
(i) fails to provide a reasonable time for compliance given the scope of responsive documents;
(ii) compels our client to either produce trade secret or other confidential commercial information and privileged and protected matters by producing all documents in its possession or alternatively to be subjected to an undue burden and to incur significant expense to ...