Damages discovery in patent cases is usually contentious, expensive, and non-uniform in application by the courts. The patent owner, on one hand, wants to discover all possible revenue streams for settlement and resource allocation. The accused infringer, on the other hand, wants to minimize disclosure, because of the sensitivity of financial information and the belief that the suit is meritless. And the courts are caught in the middle. Compounding these issues, fulsome damages contentions typically are not defined until expert reports are presented, meaning the parties (and the court through a Daubert motion) will not know whether there is sufficient basis for the damages sought until late in a case.
The Northern District of California’s recently revised local patent rules reduce much of this uncertainty by requiring damages disclosures early and often. You can also see the redlined rules where the changes made are more readily apparent.
Initial Case Management Conference.
At an early stage of the litigation (Rule 26), the parties are to submit a “non-binding, good-faith estimate of the damages range.” Patent L.R. 2-1 (b)(5). If a party cannot provide an estimate, it “shall explain why it cannot and what specific information is needed before it can do so.” This rule will likely engender motion practice over whether an accused infringer’s damages of zero (meritless case) is a “good-faith estimate.” Parties may also litigate whether this “good-faith” requirement is violated (and the appropriate remedy for such a violation) if the damages disclosed early in the case differ significantly from the range provided later in the damages contentions.
The patentee in its infringement contentions must now identify the time period of damages and will likely be held to this period unless an amendment is permitted. Patent L.R. 3-1(h); Patent L.R. 3-7. This is an important disclosure because that period could meaningfully affect the total damages. The new rule does not specifically require the patentee to identify the event that starts the damages period. But an accused infringer will likely request such information (e.g., filing of complaint, marking, notice letter) to properly scrutinize the period.
Automatic Document Production.
Both the patentee and accused infringer have document production obligations relating to damages when providing infringement and invalidity contentions, respectively. Generally, they are to produce agreements (licenses, agreements transferring an interest in the patent), patented product financials if claiming lost profits (sales, revenues, and profits), and accused infringer’s financials (“[d]ocuments sufficient to show the sales, revenue, cost, and profits for accused instrumentalities . . . for any period of alleged infringement”). Patent L.R. 3-2 (f)-(j); Patent L.R. 3-4 (c)-(e). This rule provides both parties with relevant damages documents, allowing the accused infringer to challenge patent owner’s standing early in the litigation. Disputes will likely persist over whether the production is “sufficient to show” and whether the accused infringer should have produced all license agreements – not just the ones it contends are comparable (if any).
Damages Contentions (and Responses Thereto).
Most importantly, a patentee is to provide damages contentions 50 days after invalidity contentions (that is, the patentee must provide a fairly definite position on damages early in the case). Patent L.R. 3-8. This includes its damages theories (such as reasonable royalty, lost profits, or otherwise) and “factual support” for each theory. Patent L.R. 3-8(a). But the patentee can state that “a fulsome response” cannot be provided until the accused infringer (or third party) provides certain information. Patent L.R. 3-8(b). Thirty days later, the accused infringer is to provide a response (“affirmative position”) on the damages contentions or state what specific information is necessary for “a fulsome response.” Patent L.R. 3-9(a)-(b). This rule is silent on whether the parties will be pinned to the contentions and responses (much like with infringement and invalidity contentions) and whether these can be amended. As written, the rule for amending contentions (Patent L.R. 3-6) was not revised to reference damages contentions. Also, it is likely both patentee and accused infringer will attempt to reserve all rights by providing a long list of the documents, deposition testimony, and third-party discovery each requires before “a fulsome response” can be provided – but whether such a tactic will be permitted by the courts is another story.
The new damages rules will change how parties litigate patent cases in the NDCA, including the following:
- Bring uniformity, especially once NDCA courts interpret the rules, in damages disclosures.
- Require a patentee to prepare its damages case well before filing, and if the case is transferred to the NDCA, the patentee will have to devote significant resources early to developing and disclosing a fulsome damages case.
- Force a patentee to disclose a realistic damages amount early (see “good-faith”) rather than an exorbitant number, thereby promoting early settlement.
- Decrease the ability to bifurcate liability and damages discovery.
- Create Daubert-type motion scenarios, i.e., motion to strike damages contentions as insufficient.
- Suggest that a party should consider filing an expert declaration with its contentions (and responses) to preserve all rights for a future expert report.
- Provide another ground for parties to strike an expert, i.e., the report is outside of the damages contentions disclosed.
- Increase early fees and costs for the parties by requiring work that otherwise might have been spread across a longer period of time, or might not have been required at all.
The NDCA continues to be a leader in developing procedures for patent litigation by adopting new local patent rules that move damages to the beginning of the case. Time will tell whether other patent-centric jurisdictions adopt similar damages-related provisions.