In Clearvalue, Inc., et. al. v. Pearl River Polymers, Inc., et. al., 560 F.3d. 1291 (Fed. Cir. Mar. 24, 2009), the Court of Appeals and Circuit Judge Schall, writing for the majority affirmed the district court's award of monetary sanctions for plaintiffs' discovery misconduct, but reversed and remanded the district court's order striking plaintiffs' pleadings, entering judgment for the defendants and awarding attorney's fees.  The appellate court further held that the district court abused its discretion in using its inherent powers when plaintiffs' discovery misconduct falls squarely under FRCP 37.

Plaintiffs brought this action for patent infringement, misappropriation of trade secrets, breach of confidentiality and unfair competition against defendant Pearl River, with whom it had a former business relationship.  Plaintiffs retained an attorney who helped them assemble a litigation team and also participated as a member of the plaintiffs' legal team.  One critical issue identified early in the litigation related to the molecular weight of a particular Pearl River product.   Plaintiffs alleged that Pearl River's product was a high molecular weight polymer which infringed plaintiffs' patents.  At trial, plaintiffs' testifying expert revealed that he had reviewed testing information related to certain Pearl River products that had not been made available to the defendants.  The court deemed the work-product privilege waived and ordered plaintiffs to produce the test results.  The next day, the court held an all-day sanctions hearing and found that plaintiffs and their counsel willfully and in bad faith withheld the testing information from defendants.  As a sanction, the district court struck plaintiffs' pleadings, invalidated their patent, entered judgment for the defendants and awarded monetary sanctions in excess of $2.7 million, including more than $120,000 joint and severally with plaintiffs' counsel.

On appeal, the court affirmed the district court's award of sanctions against plaintiffs, but reversed the award of joint and several liability as against plaintiffs' counsel, holding that the court failed to take counsel's ability to pay the sanction into consideration.  The court, citing Fifth Circuit case law, held that the sanction of dismissal under F.R.C.P. is only appropriate in the rarest of cases involving not only willfulness and bad faith but also substantial prejudice to the non-sanctioned party's trial preparation. The appellate court agreed that the discovery misconduct was sanctionable, the court held that plaintiffs' and their attorney's conduct were "less egregious" than the discovery violations in other cases in which the Fifth Circuit declined to award terminating sanctions.  The court also held that the district court abused its discretion by using its inherent powers to impose sanctions against plaintiffs for discovery violations that were appropriately addressed through FRCP 37.  "A district court should only use its inherent powers when ‘neither the statute nor Rules are up to the task.'"