Case 6:20-cv-01152-ADA Document 74 Filed 08/01/22 Page 1 of 7
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF TEXAS
`WACO DIVISION
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`DAEDALUS BLUE, LLC,
` Plaintiff
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`-vs-
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`MICROSOFT CORPORATION,
` Defendant
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`W-20-CV-01152-ADA
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`ORDER DENYING MICROSOFT CORPORATION’S OBJECTIONS TO AND APPEAL
`FROM MAY 12, 2022 NON-DISPOSITIVE ORDER OF MAGISTRATE JUDGE
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`Before the Court is Defendant Microsoft Corporation’s (“Microsoft”) Objections to and
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`Appeal from the May 12, 2022 Non-dispositive Order of Magistrate Judge. ECF No. 64. Plaintiff
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`Daedalus Blue, LLC’s (“Daedalus”) Opposition to Defendant’s Motion was timely filed in
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`response. ECF No. 66. Microsoft filed a Notice of Supplemental Authority. ECF No. 67. Having
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`considered all the relevant briefing, the Court DENIES Microsoft’s Objection.
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`I.
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`BACKGROUND
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`On April 18, 2022, the court held a sealed discovery hearing on requests to compel
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`discovery raised by both Daedalus and Microsoft. ECF No. 61 at 1. A follow-up hearing was
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`held on April 26, 2022, concerning Microsoft’s first request. Id. Subsequently, the Court held
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`another sealed discovery hearing on May 11, 2022, on related issues. Id.
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`Of the numerous discovery issues, Microsoft objects to and appeals Magistrate Judge
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`Gilliland’s Discovery Order holding that “communications reflecting negotiations or drafts of
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`unconsummated agreements are not discoverable absent a further showing of good cause.” ECF
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`No. 64 at 1–2 (quoting ECF No. 61 at 4). Microsoft sought production of documents and email
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`communications exchanged with third parties regarding Daedalus’s attempts to commercialize
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`enforce, sell, monetize, or license the Asserted Patents. ECF No. 61 at 2. On May 12, 2022, the
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`Court issued an order consolidating the Court’s ruling from all of the hearings. ECF No. 61 at 1
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`(the “Order”). In this Order, with regard to the communications about prospective monetization
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`or licensing of the patents, the Court held that the identity of the parties contacted about a license
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`to the Asserted Patent are discoverable, as are any final consummated agreements that include
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`the Asserted Patents. ECF No. 61 at 4. Additionally, the Court held that communications
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`reflecting negotiations or drafts of unconsummated agreements are not discoverable absent a
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`further showing of good cause. ECF No. 61 at 4.
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`On May 26, 2022, Microsoft filed an objection to and appeal from the Court’s May 12,
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`2022 Order. ECF No. 64. Microsoft argued that Magistrate Judge Gilliland’s Discovery Order,
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`regarding the communications about prospective monetization of licensing of the patents, was
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`clearly erroneous or contrary to law. ECF No. 64 at 1. In addition, Microsoft argued the
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`Discovery Order incorrectly applies a heightened standard of “good cause” for documents and
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`communications reflecting Daedalus’s efforts to monetize the Asserted Patents. ECF No. 64 at 2.
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`II.
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`STANDARD OF REVIEW
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`“A magistrate judge’s determination regarding a nondispositive matter is reviewed under
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`the ‘clearly erroneous or contrary to law’ standard.” Baylor Health Care Sys. v. Equitable Plan
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`Serves., 955 F. Supp. 2d 678, 689 (N.D. Tex. 2013); see also 28 U.S.C. § 636(b)(1)(A); Fed. R.
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`Civ. P. 72(a).
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`The “clearly erroneous” standard applies to the magistrate judge’s findings of fact. See
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`Baylor Health Care Sys., 955 F. Supp. 2d at 689. That standard is a “highly deferential” one; the
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`Court must affirm the Magistrate’s decision unless “on the entire evidence [the Court] is left with
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`a definite and firm conviction that a mistake has been committed.” Gomez v. Ford Motor Co.,
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`2017 WL 5201797, at *2 (W.D. Tex. April 2017) (quoting United States v. United States
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`Gypsum Co., 333 U.S. 364, 395 (1948)) (internal quotations omitted). In other words, even were
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`the Court disposed to differ with the Magistrate, such a difference of opinion would not alone
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`entitle it to reverse or reconsider the Order. Id. (citing Guzman v. Hacienda Records &
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`Recording Studio, Inc., 808 F.3d 1031, 1036 (5th Cir. 2015)).
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`On the other hand, a magistrate judge’s legal conclusions are reviewed de novo under the
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`less stringent “contrary to law” standard. See id.; Gandee v. Glasser, 785 F. Supp. 684, 686 (S.D.
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`Ohio 1992), aff’d, 19 F.3d 1432 (6th Cir. 1994) (citing 28 U.S.C § 636(b)(1)(A); Fed. R. Civ. P.
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`72(a)); Fogel v. Chestnutt, 668 F.2d 100, 116 (2d Cir. 1981), cert. denied sub nom. Currier v.
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`Fogel, 459 U.S. 828 (1982).
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`III. LEGAL STANDARD
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`A.
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`Relevance of Discovery
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`Parties are permitted discovery of any non-privileged material relevant to a party’s claim
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`of defense that is proportional to the needs of the case. See, e.g., Fed. R. Civ. P. 26(b)(1);
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`Hawkins v. AT&T, 812 F. App’x 215, 218 (5th Cir. 2020) (“the scope of discovery is broad and
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`permits the discovery of ‘any nonprivileged matter that is relevant to any party’s claim or
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`defense.’”) (quoting Crosby v. La. Health Serv. & Indem. Co., 647 F.3d 258, 262 (5th Cir.
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`2011)).
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`The Federal Rules of Civil Procedure grant the courts broad discretionary powers.
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`According to Rule 26(b)(2)(C), the court must limit the extent of discovery otherwise allowed by
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`the rules, or by local rule, if it determines that the proposed discovery is outside the scope
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`permitted by Rule 26(b)(1). Furthermore, even when a party shows information is not readily
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`accessible because of undue burden or cost, the court may nonetheless order discovery from it if
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`the requesting party shows good cause. Fed. R. Civ. P. 26(b)(2)(B).
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`With respect to whether records of unconsummated negotiations should be discoverable,
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`the courts are currently split. Courts have both required and not required parties to produce
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`documents regarding unconsummated negotiations. In Phoenix Sols. Inc. v. Wells Fargo Bank,
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`N.A., the plaintiff was ordered to produce documents regarding settlement negotiations as
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`relevant to show plaintiff’s view of infringement, reasonable royalty, invalidity, and licensing
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`over time. 254 F.R.D. 568, 582–85 (N.D. Cal. 2008). Courts have ordered the production of
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`“ongoing and unconsummated patent licensing communications with third parties in the absence
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`of a consummated agreement” because they are “relevant to whether prior licenses are
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`comparable and to the calculation of a reasonable royalty.” High Point Sarl v. Sprint Nextel
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`Corp., No. 09-2269-CM-DJW, 2012 U.S. Dist. LEXIS 59529, at *28–29 (D. Kan. Apr. 30,
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`2012).
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`On the other hand, the court in Mondis Tech., Ltd. V. LG Elecs., Inc., found
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`unconsummated settlement negotiation communications not to be discoverable for multiple
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`reasons. No. 2:07-CV-565-TJW-CE, 2011 WL 1714304, at *5 (E.D. Tex. May 4, 2011). That
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`court and others have subsequently held that “plaintiff’s ‘ongoing or unconsummated settlement
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`and licensing negotiations with the patent-in-suit are not discoverable’ because they are
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`unreliable absent a final decision and may have a chilling effect on ongoing settlement
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`negotiation.” See, e.g., Sol IP, LLC v. AT&T Mobility, LLC, No. 2:18-cv-00526-RWS-RSP, 2020
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`WL 60140, at *3 (E.D. Tex. Jan. 6, 2020) (citing Mondis); Bergstrom, Inc. v. Glacier Bay, Inc.,
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`No. 08-50078, 2010 WL 257253, at *2–3 (N.D. Ill. Jan. 22, 2010). In Hemphill v. San Diego
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`Ass’n of Realtors, Inc., the court stated, “discovery of evidence pertaining to settlement
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`negotiations is appropriate only in rare circumstances.” 225 F.R.D. 616, 620 (S.D. Cal. 2005).
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`IV. ANALYSIS
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`As previously mentioned, to be reversed, rulings on issues of fact must be found “clearly
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`erroneous,” whereas rulings regarding issues of law must be found “contrary to law.” Before the
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`Judge were issues of both fact and law. The issues of fact were whether the unconsummated
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`negotiations were relevant or “unreliable” sources due to their lack of finality, and if they were,
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`whether they were “too burdensome” by way creating a “chilling effect on current negotiations.”
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`There are two issues of law. First, the courts are currently split with respect to whether records of
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`unconsummated negotiations should be discoverable. Second, whether a magistrate judge has the
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`discretion to implement a good cause standard in discovery.
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`Because the magistrate judge operated within the court’s discretion with respect to the
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`relevance and burden of discovery, and because the courts are currently split with respect to
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`whether records of unconsummated negotiations should be discoverable, this Court cannot find
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`that the magistrate judge’s holding regarding relevance is either “clearly erroneous” or “contrary
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`to law.” In addition, because the magistrate judge has the discretion to implement a good cause
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`standard in discovery, the Court does not find that the magistrate judge’s holding was “contrary
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`to law.”
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`Microsoft argues the Court should compel Daedalus’s production of the discovery at
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`issue because it is relevant to the value of the patents and damages. ECF No. 64 at 5. Microsoft
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`cites “in [the] absence of [a] consummated agreement,” courts have ordered production of
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`ongoing and unconsummated patent licensing communications with third parties. ECF No. 64 at
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`6. In the present case, Daedalus has provided one license that arose out of settlement.
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`In response, Daedalus argues unconsummated settlement negotiations are not
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`discoverable because they are unreliable absent a final decision and may have a chilling effect in
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`ongoing negotiations. ECF No. 66 at 3.
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`In reply, Microsoft provided supplemental authority from the Eastern District of Texas
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`where the court found that offered rates (unconsummated negotiations) may be acceptable if
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`properly considered. ECF No. 67 at 1.
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`Given the standard of review, the Court finds the Magistrate Judge operated within the
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`Court’s discretion in gauging the relevance and burden of discovery as set by the Federal Rules
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`of Civil Procedure and holdings of its sister courts. Therefore, the Order is not “clearly
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`erroneous.” Furthermore, since the courts are currently split with respect to whether records of
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`unconsummated negotiations should be discoverable, and since the Magistrate Judge ruled based
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`on the Mondis line of cases—one of the two lines of cases available—this Court cannot find that
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`the Magistrate Judge’s holding regarding relevance is “contrary to law.” Of course, a split in
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`holdings does not in and of itself justify rulings that are “contrary to law.” However, courts differ
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`in determining the relevance of unconsummated settlement negotiations due to unreliability and
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`their impact in ongoing negotiations. For this reason, this Court, and others, tend to decline
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`entertaining discovery requests for such negotiations absent justifiable facts. Accordingly, any
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`notion of a heightened “good cause” threshold is not tied to elevating the relevance standard;
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`instead, the Court seeks “good cause” or reasons to justify how generally unreliable settlement
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`negotiations raise the discovery request to the threshold relevance standard.
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`Microsoft also argues Daedalus failed to show the requested documents are not
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`proportional to the needs of the case, nor that Daedalus explained why a protective order would
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`be insufficient to avoid any such concerns about the chilling effects of ongoing negotiations.
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`ECF No. 64 at 6. But both of these requirements are circumvented by the Court’s denial based on
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`relevance and reliance on the reasoning in Mondis, which provides that unconsummated
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`negotiations are not discoverable because they are “unreliable absent a final decision.” See, e.g.,
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`Sol IP, LLC v. AT&T Mobility, LLC, No. 2:18-cv-00526-RWS-RSP, 2020 WL 60140, at *3
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`(E.D. Tex. Jan. 6, 2020) (citing Mondis); Bergstrom, Inc. v. Glacier Bay, Inc., No. 08-50078,
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`2010 WL 257253, at *2–3 (N.D. Ill. Jan. 22, 2010). Quite simply, “the communications have less
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`context and therefore less probative value. For example, one party in the negotiation may be
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`puffing by making certain communications.” Mondis, 2011 WL 1714304, at *5. This reasoning,
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`upon which Judge Gilliland relied, sufficiently supports the Order such that Microsoft’s
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`objections and appeal are without merit. Moreover, even under a de novo standard of review, this
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`Court would have reached the same outcome.
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`V.
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`CONCLUSION
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`For the reasons stated above, Defendant Microsoft Corporation’s Objections to and
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`Appeal from May 12, 2022 Non-Dispositive Order of Magistrate Judge (ECF No. 64) are
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`OVERRULED and DENIED.
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`SIGNED this 1st day of August, 2022.
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`ALAN D ALBRIGHT
`UNITED STATES DISTRICT JUDGE
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