Daily Archives: April 20, 2011

Updates on Transfers in the Eastern District of Texas

1. Microsoft: Transferred from Texas to Washington State 

In November 2010, the Federal Circuit ordered a case transferred out of the Eastern District of Texas in In re Microsoft Corporation, No. 2010-M944 (Fed. Cir. Nov. 8, 2010). This is one of a line of cases attempting to transfer lawsuits out of one of the most frequently selected forums for patent infringement claims.

Over the course of the last two years, the Federal Circuit has redefined the landscape for cases brought before the U.S. District Court for the Eastern District of Texas by nonpracticing entities (NPEs—sometimes referred to as “patent trolls”). Specifically, since the Fifth Circuit issued its en banc decision providing new guidance on the standard for transferring cases in In re Volkswagen of America, Inc., 545 F.3d 304 (5th Cir. 2008) (en banc), the Federal Circuit has found ample opportunity to interpret that case and apply its holdings to patent infringement actions in the Eastern District of Texas. Based on the Volkswagen case, the Federal Circuit has granted numerous mandamus petitions forcing the Eastern District of Texas courts to transfer cases out of that district.1  The Federal Circuit in In re Microsoft Corporation rejected another argument that plaintiffs have relied on to keep their cases in the Eastern District of Texas.

In the underlying district court case, plaintiff Allvoice Developments (Allvoice) filed a patent infringement action against Microsoft Corporation in the Eastern District of Texas alleging infringement of patented speech recognition technology based on functionality found in certain Microsoft operating systems. Allvoice incorporated its company in Texas just 16 days before filing the suit against Microsoft and maintains a physical office in Tyler, Texas (located in the Eastern District). However, Allvoice has no employees at its Tyler office or anywhere in the United States. Microsoft sought transfer to the Western District of Washington, where Microsoft’s headquarters and a substantial number of employees are located. Microsoft indicated that all of its witnesses knowledgeable with the sales, marketing, and product direction for its accused products reside in the Western District of Washington, and all of the relevant documents and evidence relating to the marketing, development, and design of the accused products are also in that district.

The district court denied transfer based in large part on the fact that Allvoice was incorporated under the laws of Texas and maintained an office in Tyler, Texas. The district court also held that third-party witnesses located in New York, Massachusetts, and Florida would find Texas more convenient thanWashington, and that access to documents only slightly favored transfer because Allvoice’s documents were at its offices in the Eastern District of Texas.

The Federal Circuit disagreed and ordered the case to be transferred to the state of Washington. The Federal Circuit found that Allvoice’s alleged ties to Texas and the Eastern District forum, including incorporating under the laws of Texas just before bringing suit, were clearly in anticipation of litigation and were nothing more than an attempt to manipulate venue. In reaching its conclusion to order transfer to the Western District of Washington, the Federal Circuit again stressed that “courts [should] ensure that the purposes of jurisdictional and venue laws are not frustrated by a party’s attempt at manipulation.” The Federal Circuit again recounted its recent mandamus decisions that help define the boundaries for bringing—and keeping—cases in a particular district, ultimately deciding that the facts in this case favored transfer.

The Microsoft case is another point of reference for companies that find themselves defending patent infringement cases in the Eastern District of Texas. When the plaintiff has no legitimate ties to that district, but attempts to create ties to that district to manipulate a tie to the Texas venue, there is a higher probability that the case can be successfully transferred to a more convenient forum.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/2010-m944.11-8-10.1.pdf

2. Vistaprint: No Transfer Out of Texas

In December 2010, after ordering the Microsoft case transferred out of Texas in the In re Microsoft Corporation case (discussed above), the Federal Circuit allowed the pendulum to swing back and declined to transfer a case out of the Eastern District of Texas. In the case of In re Vistaprint Limited and Officemax Inc., No. 954 (Dec. 15, 2010), the Federal Circuit clarified the judicial economy standard set out in the earlier case In re Zimmer Holdings, Inc., 609 F.3d 1378 (Fed. Cir. 2010).

The Federal Circuit held that denying a transfer in the Vistaprint case was warranted based in part on “more than negligible” gains in judicial economy. In the Vistaprint case, the district court had substantial experience with the patent based on a prior litigation and had issued a lengthy claim construction opinion; there was also a second co-pending case before the court involving the same patent. Therefore, based on the judicial economy and an individualized consideration of all factors, the Federal Circuit agreed that the case should remain in the Eastern District of Texas.

The Federal Circuit also noted that, oftentimes, a transfer analysis may dictate only one correct outcome, and in those cases (e.g., In re Microsoft), transfer may be appropriate. However, in other cases, the transfer analysis may create a reasonable range of choices. And, “[u]nder such circumstances, it is entirely within the district court’s discretion to conclude that in a given case the . . . factors of public interest or judicial economy can be of ‘paramount consideration,’ and as long as there is plausible support of record for that conclusion we will not second guess such a determination, even if the convenience factors call for a different result” (citation omitted). Such was the case in the case of In re Vistaprint.

However, the Federal Circuit also cautioned that its holding is not intended to give patent owners a free pass to maintain all future litigations involving the same asserted patent(s) in the same venue. Instead, a lower court’s decision to deny transfer will be upheld where there are sufficient gains in judicial economy and when the lower court performs a detailed analysis of the other factors explaining why the case should not be transferred.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/10-m954o.pdf.

3. Aliphcom: Transferred from California to Texas

In February 2011, just a few months after denying a transfer in the case of In re Vistaprint (discussed above) based on judicial economy, the Federal Circuit refused to vacate an order transferring a case into the Eastern District of Texas from California based on similar reasoning. See In re Aliphcom, No. 971 (Feb. 9, 2011).

In May 2010, Aliphcom received a letter indicating that some of its products were infringing two patents owned by patentee Wi-LAN. One week later, Aliphcom filed a declaratory judgment action in the Northern District of California seeking declarations of invalidity and noninfringement of the Wi-LAN patents. Wi-LAN then requested a transfer of the declaratory judgment action to the Eastern District of Texas where it was currently litigating two previously filed suits involving the same patents.

The district judge in the Northern District of California agreed with Wi-LAN and ordered the case to be transferred to the Eastern District of Texas, finding that although certain factors counseled in favor of keeping the case in California, “the risk of inconsistent judgments and waste of judicial resources must outweigh the equitable concerns of Aliphcom’s convenience in litigating its claims.” Aliphcom petitioned the Federal Circuit to order the judge in the Northern District of California to vacate the transfer order and keep the case in California.

The Federal Circuit agreed with the California district court and allowed the transfer of the case to the Eastern District of Texas. In the wake of Vistaprint, it was no surprise that the Federal Circuit reiterated its analysis regarding judicial economy as a factor in determining whether a transfer should be granted.  In particular, the Federal Circuit stated that “having the same . . . judge handle this and the co-pending case involving the same patent would be more efficient than requiring another magistrate or trial judge to start from scratch.” Therefore, the Federal Circuit ruled that the California district court did not clearly and indisputably abuse its discretion transferring the declaratory judgment case to Texas.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/2011-m971.2-9-11.1.pdf

Wells Fargo Takes Up Cudgel to Protect Tax Accrual Workpapers

The IRS, trying to capitalize on the Textron decision, is engrossed in litigation with Wells Fargo over tax accrual workpapers in the U.S. District Court for the District of Minnesota.  This case may well work its way to the U.S. Court of Appeals for the Eighth Circuit and beyond.

On September 1, 2010, Wells Fargo & Company asked a federal district court in Minnesota to quash a summons issued by the U.S. Internal Revenue Service (IRS) to Wells Fargo’s independent auditor seeking “all of the Tax Accrual Workpapers for … taxable years ended December 31, 2007, and December 31, 2008” (hereinafter known as the Auditor Summons).  Wells Fargo v. United States, No. 10-mc-57 (D. Minn.).  The Auditor Summons defines these documents as “any and all analyses, computations, opinions, notes, summaries, discussions, and other documents relating to such reserves and any footnotes.”  On November 1, 2010, the government filed a response seeking to enforce the Auditor Summons and asking for a hearing.  In a related case, the government asked the same court to enforce summonses issued to Wells Fargo seeking the same documents and corresponding witness testimony.  The court combined the two cases and, based on the court filings, an evidentiary hearing appears imminent.

Wells Fargo’s action to quash the Auditor Summons is the most recent effort by a large corporation to maintain the protected nature of its tax accrual workpapers.  Circuit courts have reached different outcomes with respect to the issue of whether so-called tax accrual workpapers are protected by the work-product doctrine.  These documents generally contain legal analyses, opinions and discussion of the merits and odds of success in tax litigation regarding uncertain tax positions, and support the creation and entry of tax reserves on a company’s financial statements.

Wells Fargo seeks to protect its tax accrual workpapers, which reside in its own files, as well as those in the auditor’s possession.  With respect to Wells Fargo’s files, its brief identifies the following categories of documents for which it seeks protection from disclosure: memoranda based on advice of in-house tax controversy attorneys identifying and evaluating the legal merits of uncertain tax positions and selecting a reserve percentage based on the likelihood of settlement; meeting agendas and e-mails identifying and/or evaluating litigation risks associated with uncertain tax positions, including the corresponding reserve percentage and correspondence regarding settlement negotiations with the IRS; and spreadsheets, reports and electronic data files identifying uncertain tax positions, and/or evaluating appropriate legal tax reserve percentages and/or reserve amounts.  Wells Fargo also seeks to protect tax accrual workpapers in the auditor’s files, which Wells Fargo identifies as replications of some of the disputed tax accrual workpapers in Wells Fargo’s files, and documents created by the auditor that reflect opinion work product of Wells Fargo.

The work-product doctrine finds its origins in the Supreme Court of the United States case, Hickman v. Taylor, 329 U.S. 495 (1947), which provided for protection from disclosure to an adversary of materials prepared by or for a party or by or for that party’s representative (including a consultant or agent) in anticipation of litigation.  Relevant to the Wells Fargo case is how courts deal with a dual-purpose document, or one created for both litigation and non-litigation purposes.   When applying the “in anticipation of litigation” standard to dual-purpose documents, most courts use what is known as the “because of” test, which focuses on whether “in light of the nature of the document and the factual situation in a particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation.”  United States v. Adlman, 134 F.2d 1194, 1202 (2d Cir. 1998) (citation omitted).  At least one circuit court has fashioned a more restrictive test, which requires that the “primary motivating purpose” behind the creation of a document be to aid in possible future litigation.  United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982).

For almost 30 years, corporate America and the federal government have been battling over the disclosure of tax accrual workpapers.  The U.S. Court of Appeals for the First Circuit is the most recent circuit court to hold that tax accrual workpapers are not protected by the work-product doctrine.  United States v. Textron, 577 F.3d 21 (1st Cir. 2009) (en banc), cert. denied 130 S. Ct. 3320 (2010).  View 3-2 En Banc First Circuit Decision in Textron Rules That Tax Accrual Workpapers Are Not Protected Work Product for further background regarding the history of the Textron litigation. Arguably, the First Circuit fashioned a new test for the “anticipation of litigation” standard by protecting only those documents “prepared for use in potential litigation.”

Since the government’s win in Textron, the pendulum has swung the other direction courtesy of the D.C. Circuit in United States v. Deloitte, LLP, 610 F.3d 129 (D.C. Cir. 2010).  A detailed discussion of this decision can be found in Deloitte Decision Protects Work Product Disclosed to Independent Auditor. Deciding to protect a document prepared by an independent auditor containing work product of the taxpayer’s attorneys, the Deloitte court focused on the content of the document as opposed to its function.  Addressing an issue of first impression, the court also determined that disclosure of work-product material to the taxpayer’s independent auditor did not constitute a waiver because such auditor was neither a potential adversary nor a conduit to another adversary.  The government did not seek Supreme Court review.

The litigation in Wells Fargo is focused on whether the work-product doctrine applies to dual-purpose documents prepared by taxpayers to support their FIN 48 tax reserves, which but for the anticipated litigation would not have been necessary (e.g., Regions Financial Corp. v. United States, 101 A.F.T.R.2d (RIA) 2179 (N.D. Ala. 2008).  The court will also confront tax accrual workpapers that were prepared by the auditor, but that contain opinion work-product material of Wells Fargo’s attorneys.  Additional issues are, assuming work-product protections apply, whether the government can overcome the privilege by making the required showing and whether Wells Fargo has waived the protections by disclosing the documents to the auditor.

When defining the “anticipation of litigation standard,” the Eighth Circuit adopted the “because of” test.  Simon v. G.D. Searle & Co., 816 F.2d 397 (8th Cir. 1987); PepsiCo, Inc. v. Baird, Kurtz & Dobson LLP, 305 F.3d 813 (8th Cir. 2002).  This is the same “broad” test applied in a majority of circuits, including the circuit in which Deloitte was decided.  Eighth Circuit law also dictates that for an adversary to obtain ordinary work product (such as raw factual information), it must demonstrate a “substantial need,” but to obtain opinion work product (such as counsel’s mental impressions, conclusions, opinions or legal theories), it must demonstrate “rare and extraordinary circumstances.”  Baker v. General Motors Corp., 209 F.3d 1051 (8th Cir. 2000).

Relying on Simon v. G.D. Searle & Co., 816 F.2d 397 (8th Cir. 1987), the government’s primary position is that the tax accrual workpapers were prepared in the ordinary course of business as part of Wells Fargo’s obligations pursuant to regulatory requirements, and not in anticipation of litigation.  Additionally, the government asserts that the prospect of litigation was “too remote” to invoke the protections because the procedural events of having to create tax reserves (in some cases pre-return filing) and being under IRS examination are not “tantamount to anticipated litigation.”  The government argues that even if the work-product doctrine applies, the protection is “vitiated” because the IRS “has shown a substantial need” and the documents “cannot be obtained from another source.”

The government also argues that even if the tax accrual workpapers are protected, Wells Fargo has waived the work-product privilege by providing the documents to the auditor’s audit team.  Citing In re Chrylser Motors Corp. Overnight Evaluation Program LitigI., 860 F.2d 844 (8th Cir. 1988) and other cases, the government asserts that disclosure of documents to an adversary or potential adversary, even with respect to a different action, waives work-product protections.  The government takes the position that nothing prevents the auditor from becoming an adversary or a conduit to other adversaries.

For its part, Wells Fargo vigorously objects to the government’s attempts to obtain its tax accrual workpapers, whether from Wells Fargo or the auditor.  It explains that its tax accrual workpapers are, by their very nature, prepared in anticipation of litigation because they are created “because of the prospect of litigation.”  Wells Fargo states that but for the anticipated litigation with the IRS over its uncertain tax positions, Wells Fargo would have no need to create the tax accrual workpapers containing its attorneys’ legal analyses and settlement positions.  Wells Fargo also points out that Eighth Circuit law has no requirement that litigation be “imminent” to invoke the protections.  Addressing the government’s claim that it can overcome the protections of the work-product doctrine, Wells Fargo asserts that the government has failed to meet the required showing of “substantial need” (for ordinary work product) and made no effort to meet the Eighth Circuit’s “rare or extraordinary circumstances” standard (for opinion work product).

With respect to the government’s waiver argument, Wells Fargo relies on Pittman v. Frazier, 129 F.3d 983, 988 (8th Cir. 1993), which explains that a waiver occurs when the party who made the disclosure does so “with an actual intention that an opposing party may see the documents … .”  Wells Fargo asserts that no waiver occurred because the disclosure to the auditor was neither to an adversary, nor is there any evidence Wells Fargo intended that the auditor would share the documents with an adversary.  Rather, Wells Fargo relied on the auditor’s legal and ethical obligations to maintain confidentiality.

Initially, the court set this matter for an evidentiary hearing to take place in March 2011.  For logistical reasons, the hearing was vacated, but all indications are that it will take place in the near future.  Each side has thoroughly briefed the issues and has chosen experienced litigation counsel to represent their respective interests.  Considering the importance of the disputed issue and its potentially broad implications beyond tax accrual workpapers to a vast array of other types of dual-purpose documents, large corporations and their legal and tax representatives should be waiting with great anticipation as this case is ruled on by the trial court, and unquestionably as it is appealed to the Eighth Circuit (and potentially beyond).

Arbitration and Mediation Clauses: Helpful Tools for Managing International Disputes

At a time when companies and individuals find themselves making difficult decisions about how to allocate their legal dollars when a dispute arises, it is important to remember alternatives to traditional litigation, such as arbitration and mediation. This is particularly true when disputes arise in the international context. In our increasingly global economy, U.S. companies face numerous challenges when conducting business abroad, including intellectual property and tax issues, contract enforceability and changing political environments that influence legislation. These issues—and many others—can give rise to international disputes. The important question for U.S. companies is how to level the playing field so as to avoid bias, unfamiliar court procedures and delays in rulings far greater than those we might expect at home.

One way to level the playing field is to provide for arbitration (and possibly mediation) in all contracts. A key benefit of this approach is that arbitration clauses can be tailored (in the beginning of the relationship) to meet the needs of both parties—including establishing when the arbitration will take place, where it will take place, parameters for discovery and motion practice, and when the arbitration decision must be made.

There are many options when it comes to choosing the appropriate forum for international arbitration. Many of these administrative bodies can also suggest appropriate language for arbitration clauses that can be used in contracts. Here are a few of the most noteworthy:

In addition to an arbitration clause, U.S. companies should consider inserting a mediation clause into their international contracts to provide for a step before arbitration. Such a clause can include (1) which entity, if any, will administer the mediation, (2) where it will take place (ideally somewhere neutral and convenient for both parties) and (3) a time frame within which the mediation must be completed after one party to the dispute makes a written demand for mediation. For any number of reasons, parties to a dispute may need resolution in a much shorter time frame than traditional litigation can provide. Given how long it can take for a dispute to make its way through the court systems in most jurisdictions, the parties simply may not have the time to wait.

The bottom line is that U.S. companies must be prepared in advance for disputes arising out of their international business relationships. Going to court in the United States is difficult enough. Trying to resolve a dispute on foreign soil has additional layers of complications.