New Patent Damages Handbook for use by Federal District Court Judges

As reported today by Justin Gray at his patent blogsite, Gray on Claims, a new Patent Damages Handbook has been prepared at the direction of Fed. Circuit Chief Justice Michel for use by federal district court judges in patent cases.

Needless to say, this new Patent Damages Handbook is required reading for all patent litigation attorneys.  A free copy of the Handbook can be downloaded from Gray on Claims, here.

Highlights of the 34-page handbook are outlined below under the following headings:

• Types of Damages
  
• Initial Estimate of Damages and Rule 26 Disclosures
• Limits on Depositions
• Possibility of Bifurcated Trial
• Protective Orders
  
• Confidential Information
  
• Limits on Depositions
• Document Production
• SJ Motions on Damages
  
• Daubert Motions
  
• Verdict Forms at Trial

Types of Damages

Compensatory patent infringement damages attempt to assess the difference between the patentee’s pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred. The question to be asked in determining such damages is: “had the Infringer not infringed, what would [the] Patent Holder have made?”

Compensatory patent damages traditionally fall into three categories: lost profits; established royalty, and reasonable royalty.

Lost profits normally are profits that would have been made by the patentee “but for” the infringement.

Established royalty can be shown when the patentee has consistently licensed others to engage in conduct comparable to the defendant’s at a uniform, established royalty rate.

Reasonable royalty damages can be calculated by determining what a willing licensee in the place of the infringer reasonably would have paid and what a willing licensor in the place of the patentee reasonably would have accepted for the grant of a license, had such a license been negotiated just before the infringement began, with both parties assuming the patent was valid, enforceable and infringed.

Initial Estimate of Damages and Rule 26 Disclosures

Any lack of specificity in the complaint may well be overcome by the requirement of Rule 26 that the patent owner voluntarily provide damages information and documents as part of its initial disclosures. Any initial damages calculations that are provided reasonably may be considered preliminary or approximate. At the same time, courts should not accept skeletal initial damages disclosures uncritically.

Meaningful compliance with the initial damages disclosure requirements can be essential to the efficient management of the litigation, and courts overseeing damages disclosures should be mindful of the role these disclosures may play in the early resolution of the litigation.

Failure to provide good faith damages disclosures and at least “high level” damages discovery at the outset of the litigation may hinder settlement discussions, delay settlement, and result in unnecessary expenditure of time, money and judicial resources.

Phasing Discovery

To minimize burden and improve efficiency, courts should consider, as part of the initial case assessment and scheduling, whether the interests of justice would be served by phasing damages discovery. For example, after the mandatory Rule 26 damages disclosures and the above-described initial “top level” damages disclosures from both parties, the court may choose to stay some or all damages discovery until after the court’s ruling on claim construction.

Possibility of Bifurcated Trial

Some courts opt to bifurcate patent infringement cases into liability and damages phases for both discovery and trial. Rule 42 gives courts wide discretion to separate issues or claims at trial “[f]or convenience, to avoid prejudice, or to expedite and economize . . . .” Damages can be tried by a different jury after all issues of liability have been finally resolved, both at trial and on appeal.

Under this approach, the court can streamline the case and reduce the burden on judicial resources by trying damages only when (and if) it becomes necessary to do so.

Early Protective Orders

It is important that a protective order be in place early in the case: Most patent litigants will not produce documents without one, and there is no reason to allow this issue to cause any delay in conducting discovery.

Confidential Information

One of the most common areas of dispute in protective orders is who will be allowed access to the confidential information and whether a two-tier protective order is necessary or appropriate. One approach is to have a single-tier protective order that provides only a single level of “confidential” protection that allows designated materials to be disclosed to both in-house and outside counsel.

In many cases, one or both of the parties believe the information to be disclosed is so highly confidential and competitively sensitive as to merit an extra level, or “second tier,” of confidentiality protection. Such additional protection is often necessary where employees or in-house counsel for the receiving party are involved in competitive decision making, “e.g., patent strategy, licensing negotiations, sales and marketing, and research and development in
[the] relevant product market.”

Limits on Depositions

Absent agreement by the parties, courts should permit deviations from the ten-deposition limit only with a cogent and particularized explanation of what specific additional depositions are necessary – and why – and a showing that the additional depositions genuinely are necessary and will not be redundant. Vague references to the complexity of the case or to large amounts at stake should not be sufficient. One approach that is gaining favor is that of limiting the number of deposition hours to be allowed to each party. This may be the preferred approach in highly complex cases, as many different witnesses may need to be deposed. Limiting the number of deposition hours forces counsel to plan carefully for each deposition and to use their time wisely. The result is often more efficient discovery than would be achieved by simply limiting the number of deponents.

Rule 30(b) (6) depositions often are useful in patent infringement cases. Courts should guard against “runaway 30(b) (6) depositions,” however, and ensure that they are not used to evade the limits on the number of depositions. One effective approach is for the initial scheduling order to provide that “each day of [Rule] 30(b) (6) deposition counts as a separate deposition for purposes of the per-side deposition limit.

Document Production

Courts should be particularly cautious about granting requests for production of “all documents” relating to a particular issue, especially when dealing with electronically stored information, unless it is clear that such production is reasonably calculated to lead to the discovery of better or more probative evidence on that issue, and is not propounded for the purpose of increasing cost, disrupting the litigation, or otherwise harassing the party from whom discovery is sought. Courts also should ensure that Rule 34 requests for production are not abused and should take steps to facilitate effective, cost-efficient document production. The need for judicial control and oversight is particularly acute when addressing requests directed to electronically stored information

The parties’ discovery plan also should address the format for document production, particularly as it relates to electronically stored documents. Courts should consider the potential cost and time savings that may result by allowing (or requiring) production of financial or other damages-related data in a format that permits ready manipulation for purposes of damages analyses.

SJ Motions on Damages

It is often appropriate for the court to consider summary judgment motions relating to damages at the same time as – but separate from – Daubert challenges to the experts’ opinions. Delaying resolution of summary judgment motions until the eve of trial is inefficient for both the parties and the court. It is best to resolve summary judgment motions well in advance of the final pretrial conference (indeed, well in advance of the meetings of counsel that typically precede the final pretrial conference), so that the court and the parties can prepare their pretrial submissions and prepare for trial knowing precisely what issues must be tried.

There are damages-related issues that may not depend on expert testimony, and it is often best to resolve such issues as early as possible since they, too, can affect a damages expert’s analysis. Where it is possible to do so, addressing such issues before the exchange of expert reports can yield significant efficiencies and cost savings.

Daubert Motions

Critical to managing a patent trial is the court’s ability to control expert testimony. No issue in a patent trial cries out for strict application of the gatekeeping tools of Federal Rule of Evidence 702 and the Supreme Court’s Daubert decision more than damages.

Challenges to expert testimony on patent damages usually focus on the qualifications of the expert to opine on the issues and the reliability of the expert’s analysis of those issues.

The reliability analysis focuses on the expert’s analysis itself, that is, whether the analysis is conclusory or misapplies an accepted methodology. This issue arises most often in connection with the determination of a reasonable royalty, which is usually based on a multi-factored framework for identifying the royalty to which the parties would have agreed had they conducted a negotiation when the infringement first began, knowing that the patent was valid and infringed, and willing to enter into a license agreement.

Verdict Forms at Trial

Although the law does not require a trial court to use a special verdict in patent cases it is advisable for the court to do so. The Supreme Court has noted, “in cases that reach the jury, a special verdict and/or interrogatories on each claim element could be very useful in facilitating review, uniformity, and possibly post-verdict judgments as a matter of law.”

Summary

The above excerpts are only a few highlights from the new Patent Damages Handbook for use by federal district court judges. Obviously, practitioners and judges need to familiarize themselves with this Handbook at a detailed level.