Network Access Agreement Evidences Control of Third Party Documents; Defendant Fined $500,000 for Willful Disregard of Discovery Orders

Kamatani v. Benq Corp., 2005 WL 2455825 (E.D. Tex. Oct. 4, 2005)

Yasuo Kamatani and LaserDynamics, Inc. sued Benq Corporation and Benq of America Corporation (collectively “Benq”) for patent infringement in connection with optical disk drive recognition technology. Several discovery disputes developed, and sanctions were issued against Benq on two occasions. A show cause hearing was held in August, 2005 to address allegations of further discovery abuses related to the belated identification of new DVD products and the production of technical documents from third parties.

Philips and LaserDynamics, Inc. were subject a license agreement under which plaintiffs agreed not to sue the customers of Philips and its subsidiaries for infringement of the patent. PBDS is a Philips subsidiary under the agreement (51% owned by Philips) and a joint venture with Benq. Benq asserted that it buys all of the optical drives that it sells in the United States from PBDS, and is thus a customer of a Philips subsidiary and protected by the covenant.

One of the discovery disputes was in connection with Benq’s obligation to produce Philips’ technical documents. The Court looked to the nature of the relationship between the companies to determine whether Benq had requisite control such that it could obtain the documents. It found that Benq did have the “practical ability, and therefore the requisite control, to gather and produce technical documents from Philips.”

Benq had produced more than 700 emails from Philips (which included technical materials), a Benq deponent said that Philips almost always responds to informal requests for materials made by Benq, and under the Network Access Agreement Benq was provided access to parts of Philips’ computer network (including source code). However, Benq failed to timely produce the source code, claimed that it did not have access to Philips’ technology, and also failed to timely produce the Network Access Agreement.

The Court found that Benq worked with Philips in avoiding court-ordered discovery. After telling the Court that Philips failed to produce requested documents, Benq served Philips with a subpoena. Hans Pennings of Philips told Linh Ha of Benq that a subpoena was not necessary and Benq could have simply requested the information instead. When Linh Ha told Mr. Pennings that Benq was forced by plaintiff’s counsel to serve the subpoena, Pennings responded, “…I assume that you have no objection that we refuse to accept service, and will let this go through the Hague Convention if you or Laser Dynamics decide to pursue the matter.”

The Court ordered severe sanctions against Benq for “blatant and extensive discovery violations far in excess of anything this Court has ever encountered.” It held that Benq made repeated misrepresentations regarding its search for documents as well as its relationship with PBDS and how sales are handled. The Court struck any defense related to the Philips/LasterDynamics license agreement, awarded plaintiff attorney’s fees and costs incurred in attending the show cause hearing, and fined Benq $500,000.