This post summarizes Proportionality Compels Early Disclosure of Patent Damages, found here, first published by the IP Law Section, State Bar of California in connection with the March 23, 2016 seminar “Patent Disputes for our Time: New Realities, New Approaches.” 

Patent litigation norm: bludgeon one another before determining case value
Patent litigation norm: bludgeon one another before determining case value

The Dec 2015 amendments to the Federal Rules of Civil Procedure call for greater effort on the part of the court and the parties to ensure that the time and expense invested in a case is proportional to value of the case.  The typical practice in patent litigation of bludgeoning first and valuing later presents a particularly compelling focus for the renewed emphasis on achieving proportionality.

Since there is a direct causal relationship between early disclosure of patent damages and achieving proportionality, the high likelihood is that courts, going forward, will strictly enforce the requirement that a patent plaintiff provide its damage computations in its Rule 26(a) initial disclosures.  To avoid prejudice to the patent plaintiff, any such early disclosures should be non-binding and subject to revision as the case proceeds.

  1. Amendments elevate time-worn proportionality standard as express limitation on scope of discovery.

Federal Rule of Civil Procedure 26(b)(1) was amended effective December 1, 2015 to require that the parties and the court tailor discovery so that it is “proportional to the needs of the case.”  But requiring proportionality in discovery is nothing new. The requirement can be found in old Rules 26(b)(2)(C)(iii) and 26(g)(1)(B)(iii), plus numerous pre-amendment decisions refer to a “rule of proportionality.”

Patent cases are particularly susceptible to disproportionately high costs relative to the stakes.  Nonetheless, proportionality typically is not achieved in patent cases.  Judge Grewal, in Corning Optical Communications Wireless Ltd. v. Solid, Inc., 306 F.R.D. 276, 277 (N.D. Cal. 2015), bemoaned that, although the case was within a few months of trial, it was “remarkabl[e], [that] neither side has any firm sense of whether this is a $1 case or a case worth billions. Even more remarkable, the parties here are not unusual. For years it has been the norm in patent cases to bludgeon first and value second.

Potential relief is available in the form of Rule 26(a)(1)(A)(iii), which requires early disclosure of “a computation of each category of damages claimed by the disclosing party” and the supporting documents.  Courts have long-recognized that providing damage-related information as part of Rule 26(a) disclosures is necessary to achieve proportionality.

Theoretically then, the parties and the court should know whether “this is a $1 case or a case worth billions” before the parties and court embark upon a pre-trial schedule of any particular size and scope.  The problem is that the Rule 26(a)(1)(A)(iii)’s damage disclosure requirement is not being enforced.  Judge Grewal in Corning: “But in patent cases, that rule is honored as much in the breach.”

  1. So what will change?

Under the circumstances, will adding proportionality as an express limitation on the scope of discovery change anything?  While no decisions as yet interpret the proportionality amendment as requiring strict enforcement of damage-related initial disclosures, this is going to happen.  Here’s why:

  1. Decisions manifest commitment to change.

Courts have interpreted the amendments as requiring real change and based thereon have expressly refused to compel discovery that might have passed muster under an earlier regime.  In Gilead Sciences, Inc. v. Merck & Co., Inc., 2016 WL 146574, at *2 (N.D. Cal. Jan. 13, 2016), the court refused to compel discovery designed to test the accuracy of evidence introduced by the accused infringer to show that it was the first to conceive the compound at issue.  In the court’s view, the propounding party was challenging the veracity of a discovery response without any basis for doing so.  Therefore the discovery was “exactly the type of disproportionate demands that Rule 26(b)(1) proscribes.”

Likewise, in ChriMar Sys. Inc. v. Cisco Sys. Inc., 2016 WL 126556, at *3 (N.D. Cal. Jan. 12, 2016), the court denied a motion to compel Cisco to reproduce its corporate representative for a second deposition on a topic allegedly not addressed at the first deposition.  The court refused to allow additional discovery “in light of the recently revised Federal Rule of Civil Procedure 26(b)(1), which balances the proportional needs of the case, ‘considering the importance of the issues at stake in the action…the importance of the discovery in resolving the issues, and why the burden or the expense of the proposed discovery outweighs its likely benefit.’”

Gilead and ChriMar interpreted the amendments as compelling them to limit discovery costs to levels commensurate with what the case was worth and based thereon they imposed more aggressive limitations on discovery than what might have occurred before.

  1. Amendments to Rule 1.

The December 2015 amendment of Rule 1 also compels early enforcement of damages.  The amendment provides that parties share with the court the responsibility to secure the just, speedy, and inexpensive determination of every action and proceeding.  As recognized by the court in Oracle USA, Inc., 264 F.R.D. 541, 549 (2009), early damages disclosures is crucial to securing the Rule 1 mandate of a just, speedy and inexpensive resolution of a case.

  1. Core principles behind the amendments.

Justice Roberts, in his 2015 year-end address on the federal judiciary, said a core principle behind the amendments is “careful and realistic assessment of actual need” for any proposed discovery.  Courts seeking to implement this core principle will require early disclosure of damage-related information.  There is no better way to timely “assess[] actual need.”

  1. Specific examples of damage-related information that could and should be provided in initial disclosures.

A limited number of decisions predating the amendments have required patent plaintiffs to provide in their Rule 26(a) initial disclosures a computation of damages that is as complete as possible.  Assuming greater enforcement of damage-related initial disclosures going forward, these pre-amendment decisions are instructive as to the type of damage-related information that courts in future cases will find is both available and should be disclosed at the outset of a patent case.

For example, in Brandywine Communications Technologies, LLC v. Cisco Systems, Inc., 2012 WL 5504036, at *1-2 (N.D. Cal. Nov. 13, 2012), the court interpreted Rule 26(a) to require a patent plaintiff to disclose and specify damages at the outset of the litigation in its initial disclosures even though some of the necessary information was in the hands of the accused infringer.  In reaching this decision, the court said that the patent plaintiff must “do the best it can on pain of preclusion, subject to supplementation as more information becomes available.” Specifically, the court ordered the patent plaintiff to provide in its initial disclosures specific calculations of reasonable royalty damages, including application of the relevant Georgia Pacific factors and identification of comparable licenses.

  1. Addressing the elephant in the room – patent damages are often uncertain pending discovery.

The countervailing viewpoint to strict enforcement of damage-related initial disclosures is that calculation of damages early on in a case is difficult because the patent plaintiff requires discovery in the possession of someone else before they can make the calculation, and therefore early disclosure should excused.

i).         Solution – Supplement under Rule 26(e)

Nonetheless, the fact is that some if not lots of damages-related information is available to a patent plaintiff at the outset of the case.  And, even assuming new information comes to light as the case proceeds that alters the damages claimed by the patent plaintiff, the solution is supplementing the disclosure under Rule 26(e).  Initial disclosures of damage-related information are not directed to calculating actual liability or actual costs, but instead are intended to provide a reasonable forecast of estimated damages so that the opposing party may prepare for trial and make an informed decision about settlement.  Winfield v. Wal-Mart Stores, Inc., 2016 WL 259690, at *2 (D. Nevada Jan. 20, 2016).  Because the initial disclosure is an estimation, “it is necessarily uncertain and may be corrected.”

ii).        Rule 26(e) Supplementation May Prejudice Patent Plaintiff

However, notwithstanding the ability to correct and supplement early damage disclosures under Rule 26(e), there is something of a “damned if you do” prejudice that may arise where the patent plaintiff attempts to make as full a disclosure as possible of their damages at the outset of the case.

The range of permissible supplementation under Rule 26(e) has been narrowly construed.  “Only to the extent that, and only for so long as, the patent plaintiff is unable, despite its Rule 11 obligations, to fully satisfy the Rule 26(a) disclosure requirement, a patent plaintiff is temporarily excused from disclosing a shortfall in information (but it must disclose the rest at the outset). Brandywine, at *3.

A well-meaning patent plaintiff who strives to provide as much information as it can about its damages claims in its initial disclosures demonstrates through such a fulsome disclosure that large amounts of information were “reasonably available” at the outset of the case, thereby reducing the nature and scope of new or different damages claims and computations that may be allowed under Rule 26(e).  Worse, should a court determine that the proposed supplementation was reasonably available at the outset of the case, this effectively confirms a failure to comply with Rule 26(a) initial disclosure obligations and triggers mandatory preclusion sanctions under Rule 37(c)(1).

Yet another adverse consequence is that the supplemental information might be used at hearing or introduced at trial to contradict or impeach the patent plaintiff’s damages presentation.  The reality is that after the parties make their infringement and invalidity disclosures, after they argue and receive claim construction rulings, and after significant fact discovery, the patent plaintiff may need not just to alter its initial disclosure of damages, but dramatically so.  See Corning, 306 F.R.D. at 279 (the court acknowledged that following initial damages disclosures “new information may come to light as the case proceeds that might drastically alter [patent plaintiff’s] positions”).

Whether these anticipated alterations are favorable or not, their consideration by the court or the jury is detrimental to the patent plaintiff.  If they lower the claimed damages, the patent plaintiff is portrayed as greedy and not credible in its assertions.  If they increase the claimed damages, the patent plaintiff is portrayed as having embraced a lower, contradictory claim that becomes an alternate potential award.

iii).       Sedona Conference Proposes Non-binding Initial Damage Disclosures

A possible solution to the conflict between requiring early damages disclosures on the one hand and likely, potentially prejudicial, alterations in these projections on the other is suggested in recent commentaries by The Sedona Conference’s Working Group 10 (“WG10”) on Patent Litigation Best Practices and Working Group 9 (“WG9”) Patent Damages and Remedies.

Each of the Working Groups deems early disclosure of damages crucial to achieving proportionality.  At the same time, each of them acknowledges the practical reality that patent damages are complex and uncertain such that they cannot be calculated to any degree of accuracy and reliability pending significant discovery.   The trade-off for requiring early disclosure is to make the disclosures non-binding and subject to revision.  The court and the parties better fulfil their responsibility of securing a just, speedy and inexpensive resolution of the patent litigation, but without penalizing the disclosing party (particularly the patent plaintiff) for providing the case value information necessary to achieve this result.

Sedona WG10 Patent Litigation’s commentary proposes that the parties should provide the court at the initial Rule 16 case management conference with estimates of the range of damages the case is likely to involve, along with high level explanations of their estimates.  At the same time, WG10 emphasizes that given the early timing of these disclosures, they necessarily are non-binding and subject to revisions.  Similarly, WG10 rejects the idea that alterations in the damages claim as the case proceeds may be introduced to the prejudice of the disclosing party.

Sedona WG9 Patent Damages’ commentary recommends early disclosure of what it calls Preliminary Compensatory Damages Contentions (“PCDCs”). Under this proposal, as part of the parties’ Rule 26(f) conference, a schedule should be established for the exchange of PCDCs.  In jurisdictions that require infringement contentions, the recommended deadline for patentee’s PCDCs is simultaneous with the infringement contentions, with the accused infringer expected to submit its PCDCs thirty days thereafter. Alternatively, in jurisdictions that do not require infringement contentions, a similar schedule would be keyed to exchange of infringement information in the parties’ interrogatories.  WG9’s suggested content of the PCDCs is they should identify the theory or combination of theories on which its PCDCs are based, plus a brief explanation of the factual bases that they reasonably know to support the stated theory or theories of recovery.

Here again, as did WG10, the making of these early disclosures should not prejudice the parties.  WG9 recommends that the parties and the court set a deadline for what WG9 refers to as “final damage contentions.”  WG9 anticipates these contentions would be exchanged before the inception of expert discovery but after fact discovery relating to damages discovery is sufficiently well-developed, and ordinarily after exchange of final infringement and invalidity contentions.  The timing of the exchange would allow the parties to obtain the factual development and expert technical and economic counseling necessary to prepare accurate and reliable damage claims and defenses, but still early enough in the process to focus and narrow the damage issues a reasonable time before trial.  The parties thereafter could amend their damages positions, but would be required to show good cause (which previously was not a requirement).

The practical consequence of making proportionality an express limitation on discovery is that the party bringing a patent infringement lawsuit can no longer avoid providing damage computations as part of its initial Rule 26(a) disclosures.  However, any such disclosure must be non-binding and subject to revision in order to avoid undue prejudice to the disclosing party.