Samsung's Counsel Get a Slap on the Wrist for Breaching Confidentiality

As discussed and predicted here in November 2013, Samsung's outside counsel were found to have violated the Court's "Protective Order" in the Apple patent litigation, but received nothing more than "public shaming" from a U.S. Judge.

To address the potential mishandling of proprietary and confidential information during litigation, parties routinely stipulate to entry of a “Protective Order.”

This stipulation takes the form of a Court Order which allows the parties and their counsel to designate documents and information into categories or tiers.

When documents contain highly sensitive information, such as pricing or key licensing terms, the parties are usually able to mark documents as “Outside Counsel’s Eyes Only,” and file such documents under a strict seal so the public cannot get access through the Court’s docket.

Responsible outside counsel take great pains to respect these orders, often at significant cost and inefficiency. Multiple drafts of the same document must be created and digital firewalls maintained with redactions and password-protected file folders.

These day-to-day procedures involved in handling competitors' sensitive data can be onerous to the parties and their outside counsel litigating these cases, but such measures are viewed as necessary to ensure that litigants feel that their sensitive information is not being acquired by their competitors in the guise of discovery exchange.

In the now famous Apple/Samsung patent case, highly confidential licensing terms were apparently contained in a draft expert report on damages that was forwarded to Samsung’s internal personnel without any redactions whatsoever.

The leak of the confidential information only came to light after the case was effectively over, when Samsung happened to be negotiating a license with third party Nokia.  According to testimony, a Samsung executive told Nokia that he knew the terms of the Apple-Nokia license and was able to recite its terms verbatim during the negotiation.  Nokia told Apple, who demanded a formal investigation.

After a Court-ordered investigation, it became clear that Samsung’s outside counsel had posted a draft of its expert’s report on a client file-sharing site that was accessible by Samsung’s staff, and e-mailed instructions for accessing the site, which included over fifty Samsung employees who were not permitted to access the highly confidential information contained therein.

Samsung's outside counsel essentially admitted that all of the above did indeed occur, but denied that the violation was intentional. Samsung argued that no sanctions whatsoever are warranted, despite the harm to Apple and the threat to the integrity of the discovery process.

Frequently, outside counsel entering into the exchange of sensitive discovery materials during intellectual property litigation are asked by their clients whether to trust that the terms of protective orders are respected by their adversaries.

And the standard response that outside counsel typically give to their clients is supposed to allay their concerns:  Any violations of the Protective Order wil be swiftly punished by the Court, thus deterring misconduct.

Not this time.

The Judge found that the only appropriate punishment for Quinn is its "public shaming."  Apparently, that shame will follow the firm all the way to the bank.

As we previously wrote, Americans live under a legal system that is far too tolerant of discovery abuses.

Trends in the Intellectual Property Legal Marketplace

One of the most frequent questions that I am asked is what trends I see in the areas of intellectual property, brand protection and the marketplace for legal services.

There are a few interesting, long-term trends in the data worth mentioning, that affect everyone and not just lawyers or those who work in the brand protection and IP industry.  Perhaps the most glaring one is that:

The Cost of Doing Business Globally is Going Down, But the Cost of Protecting Intellectual Property Keeps Going Up

By 2014, the out-of-pocket costs of engaging in global commercial activity have become extremely low.  In fact, they are the lowest they have ever been.

For example, a relatively desirable Internet domain name can be leased for only a few dollars a year.  Using templates and shared hosting, virtually anyone can design and host an e-commerce website very cheaply.

This is a departure from a decade ago, when designing a website required an understanding of HTML and related computer languages, technical knowledge generally limited to IT Departments and computer consulting firms.

Similarly, marketing has become cheap.  Today, by using free e-mail accounts and social media platforms like Facebook, Pinterest, Google+ and Yahoo! for communication and marketing, and low-cost international distribution and shipping channels like eBay, Stamps.com, AliBaba and others, a well-managed small business can conceivably generate hundreds of thousands of dollars per year in only a short amount of time.

Yet the out-of-pocket cost involved in protecting a brand against Intellectual Property theft and infringement, both online and in the brick and mortar context, continues to spiral ever upward.

For example, the high-profile attorneys in the Apple v. Samsung patent wars charged their clients $1,200 per hour.  The hourly billing rates at all the large law firms have reached an all-time high, with many lawyers routinely charging well over $1,000 per hour.

And clients who choose smaller law firms and those firms that offer "flat fee" arrangements may get a better deal, but are not immune from the increased competition for high-quality intellectual property legal services.  

For example, one small law firm in Maryland posted its flat fees online, and notes that it is charging up to $12,000 for filing a provisional U.S. patent application.  An appeal if it is denied could add another $8,000.  That may be less than a large law firm's services, but just filing for a patent is still an expensive proposition.

And of course, that is just the first step in protecting Intellectual Property.  Filing for a patent or trademark is no guarantee that it will be respected by others. 

When infringers are inevitably discovered, commencing and pursuing complex litigation against them routinely costs companies many hundreds of thousands of dollars per year.

Therefore, it is clear that while many are finding it easier and easier to start and develop businesses, they are also finding it more and more expensive to effectively protect their Intellectual Property assets against thieves and infringers.

What does this trend signify?  It would appear that the marketplace is beginning to fully understand that the legal services offered by experienced Intellectual Property lawyers are at a premium, because branding and IP assets in general are as valuable -- if not more valuable -- than traditional ones.

Samsung and Its Outside Counsel Facing Sanctions For Breaching Confidentiality: But Will the Punishment Fit the Offense?

Before Apple and Samsung litigated their now epic patent trial before a federal district court, they were engaged in routine discovery practices, which involved the exchange of the fierce competitors’ highly sensitive licensing information.

To be sure, such disclosure is commonplace and indeed required by discovery in the United States' Federal Rules of Civil Procedure.

To address the potential mishandling of proprietary and confidential information, parties routinely stipulate to entry of a “Protective Order.”

This stipulation takes the form of a Court Order which allows the parties and their counsel to designate documents and information into categories or tiers.

When documents contain highly sensitive information, such as pricing or key licensing terms, the parties are usually able to mark documents as “Outside Counsel’s Eyes Only,” and file such documents under a strict seal so the public cannot get access through the Court’s docket.

Responsible outside counsel take great pains to respect these orders, often at significant cost and inefficiency. Multiple drafts of the same document must be created and digital firewalls maintained with redactions and password-protected file folders.

These day-to-day procedures involved in handling competitors' sensitive data can be onerous to the parties and their outside counsel litigating these cases, but such measures are viewed as necessary to ensure that litigants feel that their sensitive information is not being acquired by their competitors in the guise of discovery exchange.

In the now famous Apple/Samsung patent case, highly confidential licensing terms were apparently contained in a draft expert report on damages that was forwarded to Samsung’s internal personnel without any redactions whatsoever.

The leak of the confidential information only came to light after the case was effectively over, when Samsung happened to be negotiating a license with third party Nokia.  According to testimony, a Samsung executive told Nokia that he knew the terms of the Apple-Nokia license and was able to recite its terms verbatim during the negotiation.  Nokia told Apple, who demanded a formal investigation.

After a Court-ordered investigation, it turns out that Samsung’s outside counsel had posted a draft of its expert’s report on a client file-sharing site that was accessible by Samsung’s staff, and e-mailed instructions for accessing the site, which included over fifty Samsung employees who were not permitted to access the highly confidential information contained therein.

Samsung's outside counsel has essentially admitted that all of the above did indeed occur, but denies that the violation was intentional. Samsung incredibly argues that no sanctions whatsoever are warranted, despite the harm to Apple and the threat to the integrity of the discovery process.

The Magistrate Judge appears to be mulling what sanctions are appropriate for the apparent violation of the Court’s Protective Order.

Frequently, outside counsel entering into the exchange of sensitive discovery materials during intellectual property litigation are asked by their clients whether to trust that the terms of protective orders are respected by their adversaries.

And the standard response that outside counsel typically give to their clients is supposed to allay their concerns:  Any violations of the Protective Order wil be swiftly punished by the Court, thus deterring misconduct.

But let’s face reality for a moment:  Unless the fines imposed on Quinn Emanuel, Samsung’s outside counsel here, are truly draconian in nature, the misconduct is likely to go largely unpunished.

Quinn Emanuel undoubtedly billed millions upon millions of dollars in legal fees to Samsung for its litigation services, and any fine imposed is likely to be paltry in comparison to the violence such conduct does to the integrity of the discovery process and the commercial harm to Apple.

And, in the event that the fines imposed the Magistrate were truly draconian in nature, what is the likelihood that Judge Koh would enforce them?  The Court has already reduced the damages awarded to Apple against Samsung by the jury from over $1billion to less than half.

Further, even if Judge Koh found the nerve to impose a draconian penalty against the misconduct, Quinn Emanuel and Samsung will inevitably appeal to the U.S. Court of Appeals for the Ninth Circuit.  What are the odds that that California-based appellate court would sustain a draconian penalty against Samsung and/or its outside counsel?  Slim to none, I suspect.

Therefore, while Quinn Emanuel very well may have inadvertently violated the Protective Order rather than willfully, parties facing high-stakes intellectual property litigation requiring the exchange of highly sensitive data with competitors would be well advised to consider the risks inherent in litigating against a fierce adversary with all the wrong incentives, in a legal system that is far too tolerant of discovery abuses.