The Federal Trade Commission’s (“FTC”) case against Qualcomm Inc. — alleging Qualcomm unlawfully maintained a monopoly in baseband processors — is in the midst of a contentious discovery period that has each side scrambling to subpoena documents from various third parties. Apple Inc. is one such third party and is now in hot water for missing a document production deadline, presumably by 12 days. In response, the Northern District of California magistrate judge sent a message to other third parties by sanctioning Apple to the tune of $300,000 ($25,000 per day). Tech companies may view the sanctions as a blessing or a curse, depending on what end of a subpoena they find themselves on.

Background

In January 2017, the FTC filed a complaint against Qualcomm in the Northern District of California, alleging that the company unlawfully maintained a monopoly in baseband processors — semiconductor devices that enable cellular communications in cellphones. In typical fashion, dozens of follow on civil suits were lodged against Qualcomm shortly after the FTC filed its complaint, including civil antitrust and securities class-action cases. Apple filed its own complaint against Qualcomm in the Southern District of California, alleging Qualcomm overcharged for licenses to use its chip patents. Apple has also withheld over one billion dollars in royalties that Qualcomm claims it is owed. Most of the civil suits have been consolidated in the Northern District of California, but Apple’s suit against Qualcomm was not consolidated since it contained unique contract and patent claims.

In both its FTC case and the consolidated antitrust cases, Qualcomm subpoenaed Apple for documents “concerning Apple’s dealings with Qualcomm, Apple’s patent licensing and baseband chipset procurement practices, Apple cellular devices, and numerous other issues.” See Apple’s Mot. For Relief From Sanctions at 1, FTC v. Qualcomm Inc., Case No. 5:17-cv-00220 (N.D. Cal. Jan. 3, 2018). The parties began negotiating over the subpoenas in June 2017, but Qualcomm alleges that Apple dragged its feet on negotiating the scope of review, and that little progress had been made by October. See Qualcomm Reply Br. at 1-2 (Jan. 26, 2018). When the parties reached an impasse on proposed search terms in October, the magistrate judge ordered Apple to run all of Qualcomm’s proposed search terms — which Apple claims queued at least 4 million documents. The magistrate judge set a November 17, 2017 deadline by which Apple needed to produce 50% of the responsive documents, and a final December 15, 2017 deadline for the “substantial completion” of its document production.

Fearing that manual review of that quantity of documents would not be possible, on November 3, Apple proposed using a “Continuous Active Learning Technology-Assisted Review System” (“CAL”) to reduce the number of documents requiring manual review. The Court recognized the potential benefits of CAL, but ruled that Apple could use such a system “only to the extent that it could satisfy Qualcomm” — which rejected any use of CAL. Apple claims it subsequently increased its document review team from 115 attorneys in November to over 500 by the December 15 deadline. Although Apple produced 2.6 million documents by the deadline, the Court found that it had not “substantially completed” its document production and sua sponte imposed sanctions of $25,000 per day until completion. See Apple’s Mot. For Relief From Sanctions at 3.

Apple Appeals the Sanctions

On January 3, 2018, Apple appealed the magistrate’s sanctions order to the district court. Apple argued that because it was a “non-party,” it could only be sanctioned based on contempt, under Rule 45(g) of the Federal Rules of Civil Procedure. See Apple’s Mot. For Relief From Sanctions at 3-5. Under Rule 45, the court “may hold in contempt a person who, having been served, fails without adequate excuse to obey the subpoena or an order related to it.” Apple contended that it had an adequate excuse because, given the number of documents and “unrealistic” deadline, it took all reasonable steps within its power to meet the deadline. Id. Apple further claimed that it was not given adequate notice of the possibility of sanctions, and that the magistrate judge had improperly focused on sending a message to other third parties in the case, rather than assessing whether Apple had performed all reasonable steps to meet the deadline. Id.

In its reply brief, Qualcomm argued that Apple’s invocation of its non-party status was misleading since it has its own suit against Qualcomm and therefore had a strong common interest with the FTC in coordinating their litigation against Qualcomm. See Qualcomm Reply Br. at 5. Furthermore, Qualcomm claimed that Apple hardly took “all reasonable steps” given its record of delays and its failure to meet both the November 17 and December 15 deadlines. Id.

Each side believes the other is to blame for any delay in the document production. Apple has received some support from a legal industry advocacy group, Lawyers for Civil Justice, who described the sanction as being “without adequate notice, without request, without any demonstration of prejudice, without need, without findings, and respectfully, without proper legal justification.” See Lawyers for Civil Justice Amicus Brief at 2 (Jan. 31, 2018).

Implications

For high-tech companies subject to litigation in the Northern District of California, this dispute is a reminder of the perils of discovery and the consequences that may result from missing discovery deadlines. Even more concerning, the dispute exemplifies how companies who are not parties to litigation can get dragged into risky waters when they receive document production subpoenas. If Judge Lucy H. Koh upholds the sanctions, litigants seeking documents from third parties may have a powerful tool at their disposal to incentivize those third parties to comply with their requests.