After Bench Trial, Court Concludes That Rambus’ Adoption and Implementation of Document Retention Policy Was a “Permissible Business Decision” and “Shred Days” Did Not Constitute Unlawful Spoliation

Hynix Semiconductor Inc. v. Rambus, Inc., 591 F. Supp. 2d 1038 (N.D. Cal. 2006)

In this opinion, the court issued its findings of fact and conclusions of law on Hynix’s unclean hands defense to Rambus’ patent infringement claims. The essential issues of the trial were: (1) whether Rambus adopted a document retention plan in order to destroy documents in advance of a planned litigation campaign against DRAM manufacturers, and (2) whether in light of any such conduct, the court should dismiss Rambus’ patent claims against Hynix as a sanction for unclean hands.

Hynix asserted that Rambus’ contemplation of litigation against DRAM manufacturers triggered a duty requiring Rambus to retain all documents relevant to any potential patent litigation between it and any DRAM manufacturer. Hynix further argued that since Rambus adopted its document retention policy and destroyed documents at the same time it was contemplating litigation, it spoliated evidence. This spoliation, Hynix claimed, prejudiced its rights and warranted the application of the unclean hands doctrine and the dismissal of Rambus’ patent claims.

The court’s opinion set out a detailed chronology of events surrounding Rambus’ formulation and implementation of its licensing and litigation strategy, and its document retention policy. It also described “Shred Days” that occurred in 1998 and 1999, in which Rambus employees participated in a company-wide purging event. On these days, Rambus employed an outside company to provide on-site document shredding services. Employees were instructed to follow the Document Retention Policy guidelines to determine what to keep and what to throw away, and were given burlap sacks for material that needed shredding. Rambus destroyed approximately 185 bags and 60 boxes of material on Shred Day 1998, and “mountains of printouts” on Shred Day 1999.

The court found that the use of burlap bags and shredders, the volume of material shredded, and the social events at the end of the “shred days” were “unexceptional,” and that there was nothing unusual about the volume of material that Rambus shredded. The court cited testimony from a shredding company representative that Rambus’ disposal practices were no different from those of other similarly situated companies, that the company frequently provided pick-up services when it was time to purge records on an annual basis or where a company has just begun a document destruction program, and that on these annual “purge days,” companies often have an “event” and serve food as part of that “event” as Rambus did.

The court found that Rambus initiated its first suit against a DRAM manufacturer, Hitachi, in January 2000, and thus, litigation was not pending at the time of the 1998 and 1999 Shred Days. The question then became when such litigation was “reasonably foreseeable” to Rambus. The court observed that Rambus’ “path to litigation” was neither clear nor immediate. It found that, although Rambus began to plan a litigation strategy as part of its licensing strategy as early as February 1998, the institution of litigation could not be said to be reasonably probable because several contingencies had to occur before Rambus would engage in litigation. Among other contingencies, Rambus’ board had to approve commencement of negotiations with a DRAM manufacturer and the targeted DRAM manufacturer had to reject Rambus’ licensing terms.

The court concluded:

In sum, although Rambus began formulating a licensing strategy that included a litigation strategy as of early 1998, Rambus did not actively contemplate litigation or believe litigation against any particular DRAM manufacturer to be necessary or wise before its negotiation with Hitachi failed, namely in late 1999. While hiring of litigation counsel or actually filing suit is certainly not necessary to demonstrate that a company anticipates litigation, in light of the record presented, it would appear that litigation became probable shortly before the initiation of the “beauty contest” in late 1999 in which litigation counsel for the Hitachi matter, Gray Cary, was selected. Thus, Rambus’ adoption and implementation of its content neutral Document Retention Policy in mid-1998 was a permissible business decision. The destruction of documents on the 1998 and 1999 Shred Days pursuant to the policy did not constitute unlawful spoliation.

The court ruled that dismissal was not an appropriate sanction because application of the unclean hands doctrine was unwarranted. The evidence did not show that Rambus adopted its Document Retention Policy in bad faith, or that Rambus targeted any specific document or category of relevant documents with the intent to prevent production in a lawsuit such as the one initiated by Hynix.

A copy of the full opinion is available here.