The opinion of the court was delivered by: Randall R. Rader Circuit Judge
Hon. Randall R. Rader, Circuit Judge, United States Court of Appeals for the Federal Circuit, sitting by designation
Presently before the court are eight motions in limine by plaintiffs Cornell University and Cornell Research Foundation, Inc. (collectively, "Cornell") and five motions in limine by defendant Hewlett-Packard Company ("Hewlett-Packard") to exclude various submissions and testimony from trial. After oral argument on May 6, 2008, this court ruled as follows:
CORNELL MOTION IN LIMINE No. 1: Cornell moves in limine to exclude evidence involving its negotiations with Intel and Hewlett-Packard regarding U.S. Patent No. 4,807,115 (the '115 patent), as well as evidence about the two licenses that matured from the Intel negotiations. Cornell invokes Federal Rules of Evidence 402, 403, and or 408 for this motion. Cornell seeks to exclude those portions of these documents that refer to the dollar amounts of negotiation offers and of the Intel license. Cornell also seeks to exclude the amount of the royalty base. This court grants Cornell's motion in part.
For many years before this lawsuit, Cornell negotiated with Intel and Hewlett-Packard over the '115 patent. As early as May 1988, before issuance of the '115 patent, Cornell sent a letter to Intel stating that introduction of Intel's 80960 processor led Cornell to believe Intel may want to license the '115 patent. Cornell attached to that letter a copy of the patent application (without claims). Several years later, in August 1993, Cornell sent a similar letter to Intel notifying Intel that the introduction of Intel's Pentium processor led Cornell to believe Intel may want to license the '115 patent. Intel first answered in January 1994. In that letter, Intel asserted, "After reviewing the '115 patent, we have determined that none of Intel's current microprocessors use the claimed invention, and that our future microprocessors are unlikely to use it."
Later Cornell strengthened the tone of its communications with Intel. On August 30, 1996, Cornell sent claim charts to Intel along with a letter proclaiming its opinion "that the Intel Pentium Pro microprocessor infringes" the '115 patent. Two months later, not having heard back from Intel, Cornell wrote again, emphasizing "the serious nature of our allegations that Intel infringes our patent." In February 1997, Intel responded with a denial of infringement and questions about the validity of the '115 patent:
We conclude that Intel's Pentium Pro processors do not infringe the valid and enforceable scope, if any, of any claim of the '115 patent.. [Intel] would very much like to resolve our disagreement regarding the '115 patent and also reach an understanding on how we will deal with future intellectual property related issues..
Having staked out their positions, Intel and Cornell entered in to licensing negotiations. After months of counter proposals back-and-forth, Intel and Cornell came to agreement in August 1997, when they agreed to the "Patent License Agreement." In September, Intel and Cornell entered into a second agreement, the "Intellectual Property Agreement," an umbrella agreement granting Intel licenses for technology arising from any Intel-funded university research and mandating binding arbitration for future intellectual property disputes between the parties.
Cornell's interactions with Hewlett-Packard follow a similar pattern. In December 1994, Cornell sent a letter to Hewlett-Packard's managing council stating that Hewlett-Packard's PA-8000 processor "uses a central issuing facility that look [sic] reasonably similar to the subject matter of Cornell Research Foundation's ['115 patent]." Cornell directly accused Hewlett-Packard of infringing the '115 patent in a letter dated August, 30 1996. Subsequently, in February 1998 and March 1999, Cornell offered to license Hewlett-Packard to the '115 patent on the same terms as the Intel agreement.
Rule 408 of the Federal Rules of Evidence, provides, in pertinent part: Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount ...:
(1) furnishing or offering or promising to furnish--or accepting or offering or promising to accept--a valuable consideration in compromising or attempting to compromise the claim; and
(2) conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority.
Fed.R.Evid. 408(a). The rule "does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a)." Fed.R.Evid. 408(b).
"Bottomed upon notions of public policy and fundamental fairness, Rule 408. enshrouds settlement discussions conducted in the context of actual or threatened litigation with a privilege, precluding their admission into evidence for purposes of proving either liability or the value of the claim." Cornell Research Found., Inc. v. Hewlett-Packard Co., 5:01-CV-1974, 2007 WL 4349135, *15 (N.D.N.Y., Jan. 31, 2007) (citing Commodity Futures Trading Comm'n v. Rosenberg, 85 F.Supp.2d 424, 433-34 (D.N.J. 2000)). To facilitate settlement, Rule 408 protects negotiations between one of the parties to a case and a third party. United States v. Am. Soc. of Composers, Authors & Publishers, Civ. No. 13-95, 1989 WL 222654, at *8 (S.D.N.Y. Oct. 12, 1989), aff'd, 912 F.2d 563, 580 (2d Cir.1990).
Hewlett-Packard contends that "[o]ffers to license and license agreements are highly probative of a reasonable royalty and are admissible, except for those negotiated after an explicit threat of litigation." Hewlett-Packard both overstates the law and errs in its application.
The Supreme Court opined on the dangers of considering license fees negotiated in the shadow of a litigation threat more than one hundred years ago, noting that "[t]he avoidance of the risk and expense of litigation will always be a potential motive for a settlement." Rude v. Westcott, 130 U.S. 152, 164 (1888). Relying on that motivation, the Court determined that a license negotiated under threat of litigation "cannot be taken as a standard to measure the value of the improvements patented, in determining the damages sustained by the owners of the patent in other cases of infringement." Id.
Relying on Rude, the Sixth Circuit stated, "[l]icense fees negotiated in the face of a threat of high litigation costs 'may be strongly influenced by a desire to avoid full litigation.'" Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1164 n. 11 (6th Cir. 1978). Several district courts have elaborated on the admissibility of third party license agreements negotiated against a backdrop of litigation. In Century Wrecker Corp. v. E.R. Buske Mfg. Co., Inc., the Iowa District Court held that Rule 408 precludes agreements "specifically entered into under the threat of litigation or against the backdrop of continuing litigation, with the intention of avoiding the risks and expenses of that litigation." 898 F.Supp. 1334, 1340 (N.D. Iowa 1995) (citations omitted). More recently, the court in PharmaStem Therapeutics, Inc. v. Viacell Inc., held that when offered to support a reasonable royalty analysis, license agreements with third parties arising" in a context where litigation was threatened or at least probable" are properly excludable under Rule 408. No. C.A. 02-148, 2003 WL 22387038, at *2-*4 (D.Del. Oct.7, 2003).
Cornell's negotiations with both Intel and Hewlett-Packard occurred in the shadow of threatened litigation. While Cornell initiated licensing negotiations with Intel before any dispute arose as to the infringement or validity of the '115 patent, Intel and Cornell did not commence discussion of a potential license until after such a dispute emerged. Intel's statement in January 1994 that "none of Intel's current microprocessors use the claimed invention, and that our future microprocessors are unlikely to use it" established Intel's non-infringement position. Cornell responded to this denial by asserting outright that "the Intel Pentium Pro microprocessor infringes" the '115 patent, and providing Intel with claim charts of the type used to show infringement in litigation. Further cementing its allegations in later correspondence, Cornell characterized its infringement charge against Intel as "serious." Intel again denied and suggested that the "valid and enforceable scope" of the '115 patent might be nil. These escalating threats show a dispute between the parties regarding the infringement and validity of the '115 patent. Later Intel and Cornell began negotiations.
Hewlett-Packard's only support for the proposition that Cornell did not threaten Intel with litigation comes in the form of deposition testimony from Cornell's President and Director of Patents and Technology Marketing, H. Walter Haeussler. (Hewlett-Packard does not offer any support for the proposition that Cornell had not threatened it with suit.) During his deposition, Mr. Haeussler stated that Cornell would not "under any circumstances ever file an action for infringement of the '115 patent against Intel." However, Cornell's internal business decision that it would not execute suit against Intel has no bearing on the threats it made against Intel or the fact that Intel and Cornell disputed the validity and infringement of the '115 patent. In the poker game of license negotiations, the nature of the exchange between the players, not the cards each is holding, sets the tenor of the game. In this case, the record shows that the parties entered into licensing negotiations in the midst of threats of litigation that tainted the nature of their settlement discussions. These negotiations show few signs of an arms-length transaction between willing bargainers, but instead show an effort to avoid the expense and adverse publicity of litigation.
Hewlett-Packard also contends that Cornell should not be allowed to use the Intel license agreements to rebut Hewlett-Packard's defenses while simultaneously keeping "the most probative fact" from the jury. However, Hewlett-Packard does not explain the relevance of these license fees to any of its defenses, but instead simply returns to the refrain that ...