In Episode 129, our CEO and Founder, Kelly Twigger discusses Beacon Navigation GmbH v. Bayerische Motoren Werke AG, 2023 WL 8981689 (E.D. Mich. 2023), in which the delay seeking third party discovery led to a motion to strike the evidence obtained after the close of fact discovery that could have been dispositve of the case for Plaintiff.


Introduction

Good morning and welcome to this week’s Case of the Week series brought to you by eDiscovery Assistant in partnership with ACEDS. My name is Kelly Twigger. I am the CEO and founder at eDiscovery Assistant, your GPS for ediscovery knowledge and education. Thanks so much for joining me this morning.

Each week on the Case of the Week I choose a recent decision in eDiscovery and talk to you about the practical implications of what that means for you, your clients, and your practice. This week’s decision discusses the critical issue of timing in third party discovery and when sanctions are available under Federal Rules of Civil Procedure 37(c), which is a lesser known section of Rule 37 for sanctions.

A couple of announcements. First, eDiscovery Assistant will be in New York City at LegalWeek, and we’d love to talk to you about whether the platform can provide value for your practice or organization. Here is a link to schedule time with us at the conference: schedule a meeting or demo at LegalWeek 2024 or to join us for coffee in our suite on Tuesday or Wednesday.

Second, the 11th Annual University of Florida eDiscovery Conference is coming up on February 28th and 29th in Gainesville, Florida. I’ve had the privilege of being part of the planning committee for that event for the last ten years, and this event proves to be our best ever. We’ve got an incredible lineup of speakers and topics to be covered. That conference is live streamed for free, so if you register, you can sign up to view it for free within your organization. So get a group together and get some good great CLE credit. You can register here.

Now, let’s dive into this week’s case. This week’s decision comes to us from the case of Beacon Navigation GmbH v. Bayerische Motoren Werke AG. It’s a decision from December 28, 2023, written by United States District Judge Mark Goldsmith. Judge Goldsmith has 31 decisions in our ediscovery Assistant database, and as always, we tag each of the decisions in our database with our proprietary issue tagging structure. This week’s issue tags include initial disclosures, failure to produce, exclusion of evidence, sanctions, and source code.

Background

This is a patent infringement case in which Beacon contends that BMW infringed on a Beacon patent for its vehicle navigation technology. Of interest is that this case sat for eleven years during a succession of proceedings in the United States Patent and Trademark Office and comes back to this Court following the close of fact and expert discovery. We are before the Court on BMW’s motion to strike, and BMW is asking the Court to preclude Beacon from relying on the computer source code as evidence of infringement for failure to produce the source code prior to the close of discovery.

Facts

The Court entered the scheduling order in October of 2022, and that scheduling order provided for fact discovery to run through July 27, 2023, with expert discovery to close in November of 2023. Beacon served a subpoena on Harman — who was the third party provider for BMW that manufactured their vehicle navigation technology — more than 30 days before the close of fact discovery, but ultimately obtained and produced the source code after the close of fact discovery, and then relied on the source code to allege infringement for the first time in its opening expert report on infringement.

BMW’s motion to strike is to exclude that source code that Beacon relied on in its expert report. This motion came about a year later and alleged that Beacon admittedly delayed third party discovery of the source code that described how the infringed navigation systems worked.

The source code at issue that was used in the BMW vehicles was not owned by BMW. It was owned and operated created by BMW’s third party supplier — a company called Harman — that Beacon subpoenaed, as I mentioned, about 30 days before the close of fact discovery. In its motion papers, Beacon noted to the Court that the Court had ordered the parties to work with the Special Master towards settlement, and that, during the eight months of discovery, it had settled with all of the other defendants and that it held off in seeking the third party discovery from Harman until it knew that settlement could not be reached with BMW.

Beacon served the subpoena on Harman on June 23, 2023, which was just a month and four days before fact discovery closed. You know from our discussions previously on the Case of the Week that that’s not going to be sufficient time for that third party to respond with appropriate information prior to the close of fact discovery.

Now, at the same time, Beacon and BMW met and conferred on an extension of fact discovery via the scheduling order. And on July 26, 2023, Beacon submitted a stipulated amendment to extend fact discovery for source code production, including a provision to delay depositions of the parties until after the source code production. That was one day before the discovery cut off in the original scheduling order.

Harman and Beacon then met and conferred on the scope of the subpoena on August 2nd and agreed to a narrowed scope for response, in which Harman agreed to make the source code available for inspection and provide a declaration that the source code was authentic and representative. Beacon then agreed to withdraw its other document requests and not seek a deposition of Harman.

On August 9th, the Special Master advised Beacon that the Court was not going to enter the July 26, 2023 stipulation to extend fact discovery. Just six days later, on August 15th, Beacon submitted a stipulated amendment to extend expert discovery by eleven days to accommodate its technical expert’s vacation. The Court then entered the stipulation on August 17th, extending the deadline for opening expert reports from August 28th to September 8, 2023. Harman made the source code available for inspection on September 5th by giving the parties access to his source code computer.

The parties then took turns with their experts in reviewing the source code and selecting excerpts from the source code produced by Harman and requesting printouts of their sealed excerpts from Harman. After reviewing the source code on September 5th and 6th, Beacon served its opening expert report on infringement on September 8th and later produced the source code from its review on September 14th. BMW reviewed the source code on September 20th and 21st, served its rebuttal report on infringement on October 9th, and later produced the source code from its review on October 12th.

The source code must have ratcheted up the game for BMW in terms of its liability, as it subsequently filed its motion to strike, arguing that Beacon had violated Federal Rule of Civil Procedure 26(a) or (e) and moving for discovery sanctions under Federal Rule of Civil Procedure 37(c)(1). Specifically, BMW asked the Court to strike portions of Beacon’s infringement report that rely on the source code, to preclude Beacon from relying on the source code, and to award BMW reasonable costs and attorney’s fees related to Beacon’s disclosure of the source code.

Analysis

How does the Court engage here?

Well, the Court begins with an analysis of the applicable rule sections and the parties’ obligations under them. Federal Rule of Civil Procedure 37(c)(1) states that a district court may exclude evidence that a party seeks to offer but failed to disclose pursuant to the party’s discovery obligations under Federal Rule of Civil Procedure 26(a) and (e).  Rule 26(a)(1) requires a party to disclose the information and identify the witnesses that the party may use to support its claims or defenses. And Rule 26(e)(1) essentially requires those parties to supplement an incomplete or incorrect initial disclosure in a timely manner. Now, under Rule 37(c)(1), a party who fails to disclose information or identify a witness as required by Rule 26(a) or (e), “is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless.”

Although exclusion of late or undisclosed evidence is the usual remedy for non-compliance with Rule 26(a) or (e), Rule 27(c) also requires that the district court has an option to order alternative sanctions instead of exclusion of the late or undisclosed evidence on a motion or after giving an opportunity to be heard. So it’s not an absolute sanction that must be entered for failure to disclose under Rule 26(a) or (e).

Now, turning to the facts of the case, the Court notes right away that both parties knew that the source code from Harman was “necessary infringement evidence” and that the Court even noted in its scheduling order that discovery would be required from defendant’s third party vendors who provided the accused GPS systems. Beacon did not dispute that review and production of the source code was fact discovery — and not expert discovery — in terms of the timing. Recall that they extended expert discovery and that the source code was produced during the time for expert discovery, but after fact discovery was closed. So that’s why that’s relevant.

The situation here is pretty clear. Both parties knew that the source code was relevant and would be discovered. The only real issue is the timing of when it was done and whether it was sanctionable under Rule 37(c)(1) for failure to comply with Rule 26(a) and (e).

BMW argued that Beacon’s disclosure of the source code was untimely because it did not seek the source code and supplement its infringement contentions, and did not obtain the source code during fact discovery. Beacon didn’t disagree, but rather asked the Court to take into account the entirety of the matter and the fact that the parties agreed to extend fact discovery, as well as that BMW knew Beacon would be relying on the source code.

The Court found that Beacon did violate Rule 26(e) by failing to timely disclose the source code in its infringement contentions and pointed to the discovery responses from Beacon with language that specifically informed BMW that it would rely on source code from suppliers, but never produced any source code or relied on any source code to allege infringement. The Court also noted that in response to BMW’s interrogatories, Beacon stated that it would supplement its infringement conditions “when additional discovery is obtained from Defendants and their suppliers.” The Court found that without references to the actual source code, Beacon’s infringement contentions were incomplete and that Rule 26(e)(1) required Beacon to supplement them. The Court also noted the language of the scheduling order that required Beacon to “timely conduct discovery so that these contentions can be updated as soon as possible.”

So we’ve got specific language that the Court is pointing to here that really shows that violation of Beacon’s discovery obligations under Rule 26(a) and (e). The Court also found that Beacon was required to obtain the source code during fact discovery and, instead, that it was produced seven weeks after the close of fact discovery.

The Court noted as well that the stipulation to extend fact discovery was withdrawn when Beacon submitted a stipulation to extend expert discovery. Now, that’s sort of weird, because in the facts of the case that I mentioned to you earlier, it states that the Special Master went to Beacon and said that that stipulation would not be entered. But in the timing of when the stipulation to extend expert discovery was submitted, it doesn’t say that Beacon withdrew the other one (to extend fact discovery). Rather, it says that the Special Master said that it would not be granted. So there’s a little bit of confusion here in the case, but this is what the Court rules.

Having found that Beacon violated its Rule 26(e) obligations to update its contentions regarding the infringement, the Court addressed sanctions under Rule 37(c) and identified the five factor test applied by the 6th Circuit for determining whether a party’s nondisclosure of evidence is substantially justified or harmless: (1) the surprise to the party against whom the evidence would be offered; (2) the ability of that party to cure the surprise; (3) the extent to which allowing the evidence would disrupt the trial; (4) the importance of the evidence; and (5) the nondisclosing party’s explanation for its failure to disclose the evidence.

On the first factor, the court agreed with Beacon and weighed against exclusion. Both sides knew the source code from Harman was the key evidence of infringement, so there was no surprise. The Court weighed the second and third factors together as related, and found that BMW could “cure any remaining surprise” without disrupting a trial as a trial date had not been set and it granted BMW leave to depose Harman relating to the source code. The Court also gave BMW the ability to supplement its defenses before trial. As such, the Court found that the second and third factors weighed against exclusion of the source code as evidence.

On the fourth factor — the importance of the evidence — the Court agreed with Beacon that exclusion was not warranted where discovery was complete and the case was ready to move forward on the merits. Now, that’s a pretty big ruling in favor of Beacon, because clearly this source code — as it was the actual code for the navigation of the vehicles which are allegedly infringing on Beacon’s patent — was, the weight of that evidence was tremendous. I mean, it was the entire case for Beacon. So exclusion here would have been essentially dispositive of the case.

The fifth factor here weighed in favor of exclusion. The Court found that Beacon’s explanation for its failure to disclose the source code was unreasonable and noted “delaying third-party discovery of source code was Beacon’s own litigation strategy.” Beacon knew about Harman and planned to rely on the source code, yet it did not seek that discovery until almost just a month before the close of fact discovery. The Court also rejected Beacon’s argument that it was working towards settlement and stated that “compliance with the scheduling order necessarily entails parallel, not successive, settlement discussions and fact discovery.”

Summing up, the Court found that four of the five factors weighed against exclusion, leading the Court to conclude that the untimely disclosure was harmless and to deny BMW’s motion to strike and for sanctions.

Takeaways

So what are our takeaways here? Well, we’ve talked about it several times on Case of the Week, but it’s worth reiterating. Identifying third parties from whom discovery is needed and starting that process very early in discovery is critical.

Your cases are not as likely to have the facts here that allowed Beacon to escape exclusion of the key evidence to its case. Here, Beacon disclosed the need for the source code and both parties knew which third party had it. Even with those facts, it’s fair to say that Beacon escaped here by the skin of its teeth. The timing here in which Harman produced the source code — a mere three months after the subpoena from Beacon — is fast for a third party production. In my experience, they take a lot longer and you need to start earlier.

That means that waiting to start third party discovery is very, very risky, and you risk not being able to rely on any evidence from a third party if you wait and don’t receive it during fact discovery. You also lose the ability to follow up on that third party evidence. Do you want to take a deposition of the person most knowledgeable about the information that was provided? Do you need to supplement the request from that third party because all the evidence that you got is not what you needed? Do you need to engage in a sampling process with the third party, because the volume of information that you want from that third party is tremendous and the third party is reluctant to engage given the costs associated with providing that information on a third party subpoena? You may need to negotiate into a sampling procedure, which takes time. You’ve got to have them provide that information, review it, go back to them. Constant negotiation. So, you’ve got to keep that in mind in terms of fact discovery and advise the Court of what is happening on that procedure so that something can be done outside of the scheduling order if necessary.

We have seen a remarkable uptick in decisions barring evidence that is not disclosed on the initial disclosures or where a party failed to supplement. We’ve seen exclusion of witnesses, exclusion of evidence, exclusion of expert reports. Today’s decision adds third party discovery to that mix.

Conclusion

That’s our Case of the Week for this week. Thanks so much for joining me. We’ll be back again next week with another decision from our eDiscovery Assistant database. As always, if you have suggestions for a case to be covered on the Case of the Week, drop me a line. If you’d like to receive the Case of the Week delivered directly to your inbox via our weekly newsletter, you can sign up on our blog. If you’re interested in doing a free trial of our case law and resource database, you can sign up to get started.

Thanks so much. Have a great week.

The post Episode 129: How Delaying Third Party Discovery Can End Up Costing You Dearly first appeared on eDiscovery Assistant.