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In IOEngine v. Paypal Holdings, Inc., C.A. No. 18-452-WCB (D. Del.), the inventor kept a box of 33 prototypes for his invention in his basement "laboratory."

One of the prototypes—the "MediKey device"—had been the subject of intense dispute in a previous case on his patent. It had been analyzed by experts for both sides, who disputed its functionality and whether he had accurately described it to the PTO (as part of an inequitable conduct claim).

After a series of electrical incidents and fires in his laboratory, involving visits from various electricians and fire control personnel, the inventor discovered that the prototypes were in a new box and that the MediKey device was missing.

The Parties Take a Fair Bit of Discovery on Spoliation

Upon hearing that the device was missing, it looks like the defendants here went all-out in their pursuit of a spoliation finding. It appears that their main goal was for the Court to issue an adverse inference that the prototype functioned in the way they said it did.

In pursuit of that, the defendants took a number of depositions and even performed third-party discovery. They deposed the inventor as well as his wife and the chief of the local fire department. It looks like they also pursued third-party discovery from the fire department, including incident reports.

The Court held an evidentiary hearing on the issue, hearing live testimony from the inventor as well as deposition testimony from his wife, an expert, and the chief of the fire department.

. . . But Little Comes of It

The Court mostly denied sanctions, noting the lack of a smoking gun:

Other aspects of the story also give cause for concern. The fact that the MediKey’s disappearance was not communicated to PayPal until shortly after I denied IOENGINE’s motion to dismiss PayPal’s inequitable conduct claim supports an inference that [the inventor] Mr. McNulty may have wanted to avoid having the MediKey device become a central focus of the inequitable conduct proceeding, as it was in the Imation case. And it is difficult to account for the fact that only the MediKey and two other prototypes disappeared, while the other prototypes that were stored in the same box remained in Mr. McNulty’s possession.
The problem for the defendants, however, is the absence of the proverbial smoking gun. While the scenario suggested by Mr. McNulty’s account of the loss of the MediKey seems somewhat far-fetched, unlikely events do sometimes occur, and there is nothing in the record as it now stands that convinces me that Mr. McNulty’s story is a wholesale fabrication. Given the absence of any affirmative evidence indicating that Mr. McNulty took steps to dispose of the MediKey, I am not prepared to conclude that Mr. McNulty has repeatedly perjured himself, has fabricated an unlikely story to explain the disappearance of the MediKey device, and has intentionally disposed of potentially important evidence. To be sure, he may have been negligent in failing to examine the box of prototypes following the incidents in August and September 2018, as discussed below. But negligence is not sufficient to justify a sanction for spoliation under the court’s inherent authority. . . . Accordingly, based on the record before me at present, I find that PayPal and Ingenico have not established that the MediKey was actually suppressed or withheld. Therefore, absent the development of further evidence bearing on the disappearance of the MediKey, I will not impose a spoliation sanction at trial under the court’s inherent authority.

The Court found that the inventor's negligence actually did support FRCP 37(e) sanctions, rather than sanctions under the Court's inherent authority. But the defendants didn't actually show that the lost prototype was even relevant to the jury trial (as opposed to the inequitable conduct allegation that is decided by the judge):

Because I find that Mr. McNulty was negligent, Rule 37(e)(1) authorizes me to enter a sanction to cure any prejudice to PayPal and Ingenico. At this point, however, the risk of prejudice to PayPal and Ingenico at the jury trial from the disappearance of the MediKey device appears to be minimal. . . .
The only purpose for which it appears that the MediKey is likely to be offered at the jury trial is as part of the “invention story,” i.e., as part of the background events leading to the issuance of the patents in suit. But the MediKey device appears to be of little importance in the invention story, and IOENGINE has disclaimed reliance on the MediKey to establish “any particular functionality” for purposes of showing diligence by IOENGINE in developing the claimed inventions. Dkt. No. 374 at 18. Moreover, to the extent that IOENGINE might offer evidence that Mr. McNulty was generally developing the MediKey for some period of time, the MediKey’s disappearance would appear to have little impact on that assertion or the defendants’ ability to respond to it. After all, no one appears to dispute that the MediKey existed and was one of Mr. McNulty’s prototypes. The live dispute with respect to the MediKey is whether that device performed certain specific functions as described by Mr. McNulty to the PTO. That issue may well be important in the inequitable conduct proceeding before me, but it is not clear how that issue could be implicated in the jury trial in this case.

Ultimately the Court held that the defendants could introduce evidence of the MediKey's disappearance to the jury at trial if the device became relevant at the jury trial, but denied any further sanction (including attorneys' fees).

Was It Worth It?

Knowing the outcome, no. It wasn't worth it. The Court denied defendants' adverse inference instruction and awarded basically zero relief. And, between the amount of discovery pursued, the briefing, and the in-person hearing, this effort was likely very expensive for defendants.

Even before the opinion, the defendants probably knew that an adverse inference was always going to be a fairly heavy lift, since it requires a finding of bad faith or intent, and there just wasn't evidence of that.

That said, I certainly wouldn't blame defendants for pursuing it. Inequitable conduct can be tough to win, and having the Court make an adverse inference as to a key piece of inequitable conduct evidence would be huge. But, after discovery, the facts just didn't come out in a way that supported that.

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