Filing Damage Expert's Reports Under Seal: Some Bright Line Rules

There are two trends increasing the costs of patent litigation.  

The first is the increased use of Daubert motions to exclude the opinion of opposing damage experts as unqualified or unreliable. The practical result is that parties are filing an increased number of motions to seal in order to protect the sensitive financial, marketing and licensing data that typically are contained in expert damage reports.  

The second is the court’s increased reluctance to find that a party’s interest in preventing disclosure of sensitive business information overcomes the strong common law presumption favoring public access. This raises the bar in terms of the minimum support necessary to succeed on a seal motion.  The seal motion typically trickles down to lesser experienced attorneys who are both working under short deadlines and attempting to apply often byzantine local sealing rules, however.  Thus, the seal motion is often denied on first submission and is subsequently followed by repeated do overs requiring the application of more experienced staff and attorney resources. The work on the motion to seal is inefficient and unduly expensive and a prejudicial (to the client) diversion of scarce resources from more substantive projects.  

While by no means exhaustive, recent cases in the Ninth Circuit and Northern District of California provide some bright line rules [provided after the jump] that can streamline the approach to sealing a damage expert’s report. 

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Patent Troll Required to Explain "Sham Venue" and "Sham Employees" to the Jury

Judge Alsup of the ND California clearly embraces the concept that "judges already have the authority to curtail [non-practicing entity patent litigation] practices: they can make trolls pay for abusive litigation."  Randall R. Rader, Colleen V. Chien & David Hricik, Make Trolls Pay in Court, NY Times, June 5, 2013.

In his order leading up to trial later this month of the patent infringement claims brought by non-practicing entity ("NPE" or "patent troll") Network Protection Services, LLC ("NPS"), Judge Alsup suggested he'd allow the jury to hear evidence of how:

NPS manufactured venue in Texas via a sham.  [NPS founders] Ramde and Lam rented a windlowless file-cabinet room with no employees in Texas and held it out as an ongoing business concern to the Texas judge.  They also held out [alleged employee] Cuke as its 'director of business development' but this too was a sham, a contrivance to manufacture venue in the Eastern District of Texas.

Order dated Aug. 20, 2013, NPS v. Fortinet [PDF].

The story of how the Judge came to threaten to admit evidence of sham offices and employees is best understood as Judge Alsup seizing an opening on an otherwise innocuous standing issue to "curtail" abusive NPE litigation.  Any doubt in this regard is dispelled by Judge Alsup's lengthy citation to Make Trolls Pay in Court at the outset of his order.

Defendant moved to dismiss because assignment of the patent to NPS did not occur until after NPS filed suit, such that NPS lacked standing to bring the lawsuit.  Judge Alsup denied the motion, finding that there was a disputed factual issue whether NPS's conduct in filing the lawsuit was a sufficient substitute under Texas law for the tardy signature of the assignment.

Key exercise of judicial discretion point #1 - although there is no right to jury trial on the issue of standing, Judge Alsup ruled that the underlying factual dispute whether NPS by its conduct accepted the assignment could be given to the jury for "advisory finding of fact."  In practical terms, NPS, in the middle of its case in chief, will have to spend time and evidence proving up that it is the true owner of the patent.  The practical significance of the NPS spending limited in-court time on an issue that is both distracting from core patent infringement issues and also reflects poorly on NPS ("You filed suit as the alleged owner of the patent but did not sign anything until later? Can you do that? And why would you do that?" - well, you get the idea).

But it gets worse for the NPE.  Much worse . . . 

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Awarding e-Discovery Costs to Prevailing Party: Billing Descriptions Dictate What is Recoverable

E-discovery costs incurred by the prevailing party – easily running into the hundreds of thousands of dollars in complex commercial and IP litigations – may be compensable under 28 U.S.C. § 1920(4).

I say ESI costs "may be compensable" advisedly. Not all of them are. Most importantly, the likelihood of recovering tens if not hundreds of thousands of dollars of ESI costs depends in significant part upon  the billing descriptions used by your vendor (or your firm's in-house e-discovery group).

By specifying at the beginning of the case the billing format for ESI costs, you greatly increase the amount of these costs you will recover at the end of the case.

ESI costs deemed not compensable

The vendor's primary responsibility was collecting data (e.g., by imaging hard drives) and de-duplication of electronically-stored information so that it could be reviewed in-house by Aliph and produced in discovery. Tasks on the bills include the following: pick-up and imaging of computer; local email extraction; network email merge and de-dupe (eliminating duplicates); normalize, prep, index, and search email; extract, de-archive, hash, filter, de-dupe, normalize, index, and search user files; and computer media.

Plantronics v. Aliph, 2012 WL 3822129, at *17 (N.D. Cal. 2012) (citations omitted) (refusing to tax third party vendor costs of $100,948.17).

Other ESI costs deemed not compensable:

The problem with Google's e-discovery bill of costs is that many of item-line descriptions seemingly bill for “intellectual effort” such as organizing, searching, and analyzing the discovery documents. Most egregious are attempts to bill costs for “conferencing,” “prepare for and participate in kickoff call,” and communications with co-workers, other vendors, and clients.

Oracle v. Google, 2012 WL 3822129, at *3 (N.D. Cal. 2012 ) (citations omitted) (refusing to award $2.9 million of ESI costs).

But compare - ESI costs deemed compensable:


Cost of assembling, ordering, tagging, and QA for document release to Kelora. Includes the creation of metadata load files as requested by Kelora and image “placeholders” for documents and ESI that the requesting party asked to receive in native format. $ 43,500.00

Cost of feeding assembled documents into an image printer for the creation of image copies of those documents to the requesting party. The cost includes imaging, de-blanking, bates stamping, assignment of protective orders and confidentiality designations, insertion of slip sheets, and native file place holders, image quality QA and final export to production media. $ 22,450.00

[Cost of] isolating and presenting eBay source code on a secure and locked down machine in anticipation of inspection by the requesting party.  $ 1,800.00

eBay v. Kelora Systems, 2013 WL 1402736, at *6 (N.D. Cal 2013).

So why are costs taxed on some of these ESI vendor invoices and not the other? There are several reasons, each of which highlights the importance of being smarter about the manner in which ESI providers bill for their services. Let’s break this down.

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Comparing Suicide Pricing by Lawyers and Antitrust Claims for Below-Cost Pricing

Seemingly unrelated, the WSJ’s discussion of antitrust claims challenging below-cost pricing (Antitrust Busters with Gavels, 4/26/2013) and the Internet tabloid Above the Law’s discussion of increased use of “suicide pricing” by Biglaw (Buying In: Suicide Pricing, 4/16/2013), have at least one thing in common; in each instance, the consequence of the irrationally low pricing is that the consumer gets screwed. At least antitrust laws recognize the problem as a matter of public policy and provide a remedy where this occurs in covered marketplace activities. With respect to legal services, there is no such remedy – caveat emptor, let the legal services buyer beware.

How these antitrust claims and below cost lawyer fees are connected after the break.

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eDiscovery Vendors Should Not Charge for Collecting and Preserving Data

Why?

Our clients, as parties to litigation, are often required to collect and preserve all potentially relevant data.  When this happens, they often believe that they have had to pay far more for these services than what was necessary under the circumstances, particularly in the earlier stages of litigation.  As our clients put it, “I’m going to get out of the case before I need to buy all these services,” or, “The other defendants are going to pull the laboring oar in this case so I don't need to buy all these services,” or "Doing things as late as possible (and not paying for anything now) is the right strategy for me, so I'm not going to buy anything now."

eDiscovery vendors have technology that allows them to identify, collect, preserve and store data at little or no cost. Instead of overcharging up front, what the vendors should be doing is giving clients a low or no cost solution, thereby levering far more lucrative processing, review and production work that will be required if the case does not go away, i.e., at that later point in time when clients can better appreciate the need for high quality and more expensive ESI services and are willing to pay accordingly.

The Left Side of the EDRM

eDiscovery services encompass searching for electronically stored information and searching within this information for specific people, places or things. The Electronic Discovery Reference Model (EDRM) breaks out these services as different phases along a chronological spectrum:

The left hand side of the EDRM encompasses early stage litigation activities of identification (locating and determining the scope and breadth of data), preservation (protecting against alteration and destruction), and collection (gathering data), as more fully explained at edrm.net, "EDRM stages."

Left Side EDRM Work Almost Always Needs to Be Done

Most if not all clients use litigation hold notices. While this is the right thing to do, the sad truth is that rarely will a court deciding a discovery dispute deem the litigation hold as having been sufficient to preserve relevant information where the opposing party can show that relevant information was destroyed or lost prior to collection. The courts have the benefit of and are happy to apply 20-20 hindsight (enhanced by carefully highlighted deposition testimony and documents supplied by the challenging party for the purposes of showing the “obvious” and “egregious” omissions in the client’s production).

Clients have businesses to counsel on operating matters, and, particularly early on, tend to be low-informed about, and low-motivated to find, all specific sources of information within the company that may be material to a specific litigation claim.  As the client might say:

You want us to find and save all data on suppliers of power trench MOSFETS before 2005, something we no longer use in our ICs, have no designated file or department that handles, and where the team leader no longer works for the company?  Really?  We don’t have that.

The litigation hold memos and otherwise sincere efforts to implement these holds nonetheless manifest the early stage litigation reality of a lesser informed and low motivated client.

Almost without exception, clients relying solely on preservation via litigation hold, if unable to get themselves out of the case before discovery begins in earnest, find themselves conducting untimely, inefficient, unduly expensive, piecemeal collections, laden with surprise developments, not the least of which is discovering the inadvertent deletion of information that the opposing party NOW says they can’t live without.

The practical insight is that all left side work (through collection and storage, but short of any processing or review) should be performed if the client is reasonably going to avoid the risks and expense of a subsequent determination of noncompliance with their preservation and collection obligations.

The problem is that left side services are so expensive that clients often will defer such things as collecting and preserving data, notwithstanding the high risk of noncompliance with common law discovery obligations. More after the jump.

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Free Riding and Other Costs to Newegg of "Crushing" NPE Soverain

Kudos to online retailer Newegg and its Chief Legal Officer Lee Cheng on the Federal Circuit decision handed down last week holding that three patents covering basic online checkout technology were invalid. [PDF] The decision reversed the judgment of the ED Texas trial court that the patents were not invalid and vacated the patent infringement judgment entered in favor of NPE Soverain and against Newegg by the trial court.

Check out Joe Mullin's arstechnia post "How Newegg crushed the 'shopping cart' patent and saved online retail" for a full and insightful accounting of the litigation, which highlight’s Newegg’s commitment to never, ever settling with NPEs. CLO Cheng fleshed out the strategy to reporter Mullin:

 

We basically took a look at this situation and said, 'This is bullshit,' . . . We saw that if we paid off this patent holder, we'd have to pay off every patent holder this same amount. This is the first case we took all the way to trial. And now, nobody has to pay Soverain jack squat for these patents.

Without a doubt, Newegg and its counsel have achieved a very big legal victory. Soverain previously received a $40 million in settlement from Amazon, an additional undisclosed settlement from The Gap, and, while the Newegg appeal was pending, obtained a patent infringement jury verdict of $18 million from Avon and Victoria’s Secret. Due to the broad scope of online shopping technology allegedly covered by the asserted patents, InternetRetailer.com's researcher Mark Brohan described Newegg’s decision to go to trial on Soverain’s claims (and after the other six online retailers named as defendants settled out) as creating “the mother of all patent battles.”

Yet even as we applaud both Newegg’s principled stand and the victory realized through the implementation of this strategy, we find ourselves asking whether the costs outweigh the benefits.

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Shorter Patent Office Delay Could Increase Chance of Stay

The U.S. Patent Office (“PTO”) has historically moved at a snail’s pace in conducting reexamination proceedings. The length of these reexamination proceedings have typically been the Achilles heel in getting a district court to issue a stay. If the District Court for the Central District of California is any guide, though, this may be changing due to the new time limits for post-grant patent review procedures, which became effective September 16, 2012 and are specified in the America Invents Act (“AIA”). In a recent order issued in Semiconductor Energy Laboratory Co., Ltd. v. Chimei Innolux Corp., et al., 8:12-cv-00021, (CACD December 19, 2012 Order), Judge Josephine Tucker granted defendants request for a stay, explaining as a basis for granting the stay that:

The delay caused by the new inter partes review (“IPR”) procedure is significantly less than the delay caused by the old procedure.

Based on the Court’s ruling, a practical consequence of the new IPR procedure is that the odds of getting the district court to enter a stay have improved. Here is why.

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Apple Denied Permanent Injunction: Is "Right to Exclude" a Hollow Relic of the Past?

U.S. District Judge Lucy Koh recently ruled that Apple did not meet its burden of proof to permanently enjoin Samsung from continuing to make and sell the twenty-six (26) products that a San Jose jury found infringed six Apple patents and Apple’s trade dress, to the tune of $1.05 billion.  “[T]o the limited extent that Apple has been able to show that any of its harms were caused by Samsung’s illegal conduct (in this case, only trade dress dilution), Apple has not established that the equities support an injunction,” Judge Koh wrote. This result, if affirmed, unduly limits the scope of one of patent law’s fundamental principles – “the right to exclude” – with respect to all complex, high-tech, multi-feature devices. 

The foundation of this longstanding principle of patent law is expressed in Article I, Section 8, Clause 8 of the U.S. Constitution

The Congress shall have the power . . . to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their writings and discoveries.

(emphasis added).

In fairness to the District Court, the U.S. Supreme Court arguably laid the groundwork for this divergence six years ago by striking down the “general rule” that once patent infringement and validity were established, an injunction would necessarily follow.  See eBay v. MercExchange, L.L.C., 547 U.S., 388 (2006). Indeed, an argument can be made that the Federal Circuit has further eroded that general rule since the eBay decision, ultimately culminating in the recent Apple II decision that reversed the court’s earlier ruling granting Apple preliminary injunctive relief against Samsung’s Galaxy Nexus phone.  See Apple, Inc. v. Samsung Electronics Co., Ltd., 695 F.3d 1370 (Fed. Cir. 2012). However, neither eBay nor Apple II require the District Court to go as far as it did in its recent analysis.

 

The District Court cited to eBay in laying out the standards for issuing a permanent injunction:

(1) That [the patentee] has suffered an irreparable injury;(2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;(3) that, considering the balance of hardships between the plaintiff and defendant, remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

(citing eBay at 391.) In applying those broad standards, however, the court proceeded to demonstrate why the devil is often found in the details. In attempting to show that certain infringed elements of its asserted ’381 utility patent were the features consumers most desired in purchasing the smartphones at issue, Apple presented a report produced by a consulting firm hired by Samsung that identified features that Apple customers like about their phones. Among those desired features expressed by customers were the iPhone’s ability to enlarge pictures, as well as the “two finger pinch and flick” feature. Rejecting such evidence as unpersuasive to meet Apple’s burden, the District Court wrote:Apple must show that "the infringing feature drives consumerdemand for the accused product." (quoting Apple II, 695 F.3dat 1375).  

Apple did not establish [that] the '381 patent was central enough to Samsung's products to drive sales. . . .  Without a causal nexus, this Court cannot conclude that the irreparable harm supports entry of an injunction.  See Apple II,695 F.3d at 1377.

To reach this conclusion, the court relied heavily on language from Apple II:

[A] showing that a patentee has suffered harm is insufficient. Rather, "to satisfy the irreparable harm factor in a patent infringement suit, a patentee must establish . . . 1) that absent an injunction, it will suffer irreparable harm, and 2) that a sufficiently strong causal nexus relates the alleged harm to the alleged infringement." 

(quoting Apple II) (emphasis added). 

 

The District Court’s application of Apple II’s “sufficiently strong causal nexus” language was too far-reaching. For example, the court’s rationale suggests that unless the infringing feature is so influential in the purchasing decision that it warrants the application of the Entire Market Value Rule (allows use of the total revenue earned on sale of the product – as opposed to using as the royalty basis the lesser revenue apportioned to the patented feature’s contribution to revenue – as the basis for applying the reasonable royalty), there is not a sufficient basis for enjoining infringing conduct. The major problem with the court’s analysis is that it would establish a virtually impossible standard for patentees claiming technology found in high-tech devices that embody hundreds of complex features – some of which infringe and some of which do not – to permanently enjoin infringers. In other words, for such patentees to successfully exclude those found to have violated their intellectual property, it might be easier to crack the DeVinci code than to demonstrate that the specific infringing features are what primarily drove consumers’ buying decisions.     

  

Maybe the court was taking another bite at the apple (no pun intended) to force Apple to craft a licensing arrangement permitting Samsung to keep many of its accused products in the U.S. marketplace. Or maybe it was simply overly cautious about being reversed again, in light of Apple II. Whatever the case, I must agree with the question posed by my law partner upon his reading of the court’s decision: “If you can’t get an injunction where the jury found infringement and a billion dollars in damages, when can you get an injunction?” 

 

The Federal Circuit likely will have to answer that question soon.

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Court Lets Vringo Bring in Entire Market Value Through Back Door

Vringo bought Lycos patents on search technology that keys ads to user search queries, then sued Google.  At the recently completed trial, Vringo convinced a Virgina jury to award, see page 11 of its Nov. 6 verdict, a reasonable royalty of 3.5% of that portion of Google's revenue purportedly connected to the stolen technology, which the jury calculated as $15.8 million.

While the verdict (which to-date has not been entered as the court's final judgment) might look like it satisfies the increasingly strict limitations against using unduly large revenue bases to calculate reasonable royalty damages, this may not be the case.

Vringo's damage theory is effectively captured in the following trial exhibit:

 

Vringo introduced Google documents that supported Vringo's theory that it's search technology provided a quantifiable increase in revenue:

This approach appears to comply with the rule that patent royalty damages may be assessed against only the smallest portion of overall revenue attributable to the patented technology.  Vringo assessed what might be considered a small royalty percentage against only a "smaller" portion ($14 billion) of Google's overall ad revenue.  Yet Vringo was nonetheless able to introduce the OVERALL revenue ($70 billion) to the jury, effectively bringing in entire market value through the back door.  See why after the jump.

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Court Recognizes BigLaw Rates Are Too High

This is something companies already know, but the Court has acknowledged it. The billing rates BigLaw charges for intellectual property litigation are too high.

Magistrate Judge Goldman recently found that Jones, Day’s rates in a discovery dispute to compel the production of documents were too high. In Etagz, Inc. v. Quicksilver, Inc., 10-00300-DOC, Central District of California, the Court ordered Etagz to pay “reasonable” costs and attorneys fees incurred by Defendant in bringing its motion for contempt and sanctions for Plaintiff’s failure to comply with an earlier order to produce documents.

The Defendant filed its statement of cost and attorney fees. In that statement, the Defendant asserted that it was entitled to $15,510.00 in attorney fees arising from 20 hours of work on its motion for sanctions. The Jones, Day attorneys listed their rates as $775/ hour and $675/hour. The Magistrate found 20 hours to be a reasonable amount of time for the motion. The Magistrate, however, said the rates Jones, Day charged were “excessive and unreasonable” and continued:

This Court is not aware of any case before it where
an attorney has sought that high an hourly rate for
an ordinary discovery dispute.

This case is another indication that BigLaw rates are not justifiable. 

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