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July 07, 2022

Split Federal Circuit Reverses Contempt Order, Sanctions Award in Protective Order Dispute

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A split panel of the US Court of Appeals for the Federal Circuit reversed a district court's contempt order and sanctions award, finding that there was a fair ground of doubt regarding whether the defendant's counsel's disclosure to a third party under a joint defense agreement constituted a violation of a protective order (PO). Static Media LLC v. Leader Accessories LLC, Case No. 21-2303 (Fed. Cir. June 28, 2022) (Dyk, Taranto, JJ.) (Reyna, J., dissenting).

Static Media sued Leader Accessories for infringement of a design patent relating to a stadium seat. The parties entered into a PO that restricted the disclosure of discovery documents designated as confidential. The PO restricted disclosure of confidential-designated documents to a limited group of people, including "outside independent persons" retained to provide consulting, technical or expert services or to give testimony (i.e., an independent consultant). The PO also required that an independent consultant execute a "written assurance." The written assurance required that the independent consultant read and agree to be bound by the terms of the PO and prohibited the consultant from copying or using any confidential information except under the terms of the PO.

After the parties agreed to the PO, Static sent a cease-and-desist letter to another company, OJ Commerce, for infringement of the same patent. Counsel for OJ Commerce contacted Leader's lawyer, and the parties entered into a joint defense group governed by a joint defense agreement. Static subsequently sued OJ Commerce in a different district, after which counsel for Leader shared a copy of the PO and written assurance, which counsel for OJ Commerce signed and returned. Counsel for Leader then shared with OJ Commerce two deposition transcripts containing "a few pages" of confidential-designated information relating to Static's licensing and royalty agreements.

During settlement negotiations, counsel for OJ Commerce revealed to Static's counsel (who was not involved in the Leader case and was not a signatory to the PO) that he was "fully aware" of the actual royalties Static had received in the past. Static moved for discovery sanctions and an order holding Leader in contempt for violation of the PO. The magistrate judge ordered Leader to pay Static's attorneys' fees and a $1,000 sanction. After the district court judge affirmed, Leader appealed.

Reviewing under an abuse of discretion standard, the Federal Circuit evaluated the legal theories used by the magistrate judge and the district court. The district court concluded that Leader's counsel should be held in contempt because he was responsible for OJ Commerce's counsel's improper use of the confidential information. Separately, the magistrate judge based its finding on the fact that Leader's counsel "knew or should have known" that OJ Commerce's counsel would use the information to bolster its defense in its own case. The Federal Circuit disagreed with both of these views, finding that Static failed to prove by clear and convincing evidence that Leader violated the PO. The Court concluded that Leader's counsel "did exactly what was required to ensure [OJ Commerce's counsel] would abide by the protective order," including signing the written assurance and providing email reminders of the PO's obligations. The Court also explained that Static conceded during oral argument that it would be erroneous for Leader's counsel to be held in contempt for OJ Commerce's counsel's improper disclosure. The Court therefore found that the ruling of contempt by Leader's counsel predicated on an act by OJ Commerce's counsel to be an abuse of discretion.

The Federal Circuit next addressed the contention that Leader's counsel's disclosure of confidential information was not "solely" for the purposes of its own litigation, as required by the PO. The Court cited the 2019 Supreme Court opinion in Taggart v. Lorenzen and explained that contempt is a "severe remedy" to which courts should not resort if "there is a fair ground of doubt as to the wrongfulness of the contemnor's conduct." The Supreme Court explained that under the Taggaert standard, a civil contempt charge may be appropriate when one violates a protective order "based on an objectively unreasonable understanding" of the PO. Using that standard, the Federal Court concluded that it was improper to hold Leader and its counsel in contempt, reasoning that the PO's stated goal was to prevent the dissemination of protected information to the public or non-signatories. The Court therefore reversed the district court's contempt order and the corresponding award of sanctions and attorneys' fees.

Dissent

In his dissent, Judge Reyna disagreed with the legal standard applied to reverse the sanctions order. He asserted that under Seventh Circuit law, the Federal Circuit cannot reverse such an order unless "no reasonable person could concur in the trial court's assessment." Judge Reyna also disagreed with the Court's deference to Taggart, finding more plainly that Leader's counsel's disclosure was not "solely" for its action and that any belief otherwise would be unreasonable.

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