Judges Toy With One-Strike Policy on Patent Damages

Judges Toy With One-Strike Policy on Patent Damages Nicholas Koon / The Recorder William Rooklidge, Jones Day partner.

SAN FRANCISCO — Even in the Wild West of patent damage standards, Adobe Systems Inc. and patent assertion entity Digital Reg of Texas are miles apart.

Poised to go to trial Aug. 25 in an Oakland courtroom, Digital Reg has been seeking some $48 million for Adobe’s alleged infringement of its patents on digital-rights management. Adobe’s calculations put the number at $150,000.

U.S. District Chief Judge Claudia Wilken had qualms with the damages theory advanced by Digital Reg’s expert witness, which brought her to a tricky issue at an Aug. 13 hearing: “I don’t know what we’d do,” she said, “if we did have to exclude him on Daubert grounds.”

It’s an increasingly common predicament. With the U.S. Court of Appeals for the Federal Circuit tightening up on the law of patent damages, patent litigators are bringing waves of Daubert motions challenging their opponents’ methodologies. The motions are often considered on the brink of trial and district judges can’t seem to agree on what penalty to impose when the challenges succeed.

Adobe, represented by Weil, Gotshal & Manges, argued that Digital Reg would forfeit the opportunity to present any expert testimony on damages. Instead, it would be welcome to rely on Adobe’s own expert. “It’s not going to be the number they want,” said Weil Gotshal partner Edward Reines, “but it’s testimony.”

Wilken ultimately cut Digital Reg a break. After granting Reines’ Daubert motion “in full,” she gave the company’s expert, Russell Parr, one chance to revise his damages report, even at the cost of severely disrupting the trial. “If Mr. Parr’s report is again deficient, the court will preclude him from testifying,” Wilken wrote in an Aug. 19 order.

To date, there’s no clear guidance from the Federal Circuit, leaving trial judges to plot their own courses on what some litigators have started to call a “Daubert do-over.”

Earlier this year, Judge Leonard Stark of Delaware refused to give Intellectual Ventures’ expert a chance to revise his report in circumstances similar to the Adobe case. Instead, Intellectual Ventures was forced to rely on opponent Xilinx Inc.’s expert testimony. U.S. Magistrate Judge Paul Grewal of San Jose allowed Golden Bridge Technology one do-over this year but then refused to permit a second. U.S. District judges William Alsup of San Francisco and Andrew Guilford of Orange County have warned counsel not to count on any do-overs. Instead, they say, damages experts should be more careful not to overreach.

“I see this as a cutting-edge issue of law,” said Jones Day partner William Rooklidge, who represented Xilinx before Stark. “We’ve had these two poles where some judges are saying ‘absolutely not’ and some who are giving these free do-overs.”

Rooklidge would like to see more judges crack down, “especially when you have this debacle when you’re in the middle of trial, and someone’s coming up with a brand new theory.”

“There’s a wide spectrum of approaches,” agrees K&L Gates partner Michael Bettinger. “My personal view is if the expert you paid to do it gets it wrong, you’re out. It seems to me there’s enough warning now.”

GETTING REAL IN A HYPOTHETICAL WORLD

Calculating damages for patent infringement has never been easy. To start with, they’re typically based on a hypothetical negotiation between patentee and infringer.

“It is hypothetical because it is based on assumptions that never happen in the real world,” said McKool Smith partner Lawrence Hadley, who represented Golden Bridge before Grewal. For example, the hypothetical negotiation assumes that only the patents-in-suit are in play, and both parties agree they are valid and infringed.

The Federal Circuit has sought to impose additional rigor over the past five years with a series of decisions tying royalty calculations more closely to the value of a patented invention. But, Hadley said, “real-world limitations on a hypothetical negotiation—one that would never happen in the real world—is self-contradictory. All this has led to the point where no lawyer or damages ‘expert’ can accurately predict whether a damages report will survive a Daubert challenge.”

Consequently, such challenges, once a rarity in patent cases, have grown increasingly popular. When Seventh Circuit Judge Richard Posner ended a high-profile trial between Apple Inc. and Motorola Inc. in 2012 by granting each side’s Daubert motions, that put the issue on a lot of attorneys’ radar screens, says K&L Gates’ Bettinger.

Judge Grewal has compared the phenomenon to faddish football schemes. “One team enjoys certain success with a spread offense, and suddenly every team is running no-huddle with a quarterback shotgun and four receiver sets,” Grewal wrote last year in Dynetix Design Solutions v. Synopsis. “With a few high-profile successes, now every patent trial lawyer worth her salt brings a challenge to the damages opinions offered by her adversary.”

Most of them fail, Grewal wrote. But when Synopsis succeeded, he gave its opponent a second chance. “On balance, and in consideration of its due process rights, the court is loathe to leave Dynetix stripped of any damages expert testimony whatsoever,” Grewal wrote. Although no Federal Circuit authority was directly on point, Grewal noted that then-Chief Judge Randall Rader had permitted a Daubert do-over while presiding over a 2009 trial.

“It’s definitely an interesting issue,” said Durie Tangri partner Daralyn Durie, who noted that Grewal discussed the issue at a patent damages conference in May. “Grewal’s point is that the legal standard is sufficiently unsettled that there shouldn’t usually be a case-dispositive consequence to getting it wrong.”

Durie said experts can avoid the problem by proffering alternate analyses up-front, so that if plan A fails, they still have plan B. “My own view,” she says, is “having multiple rounds of expert reports is a bad idea.”

Grewal again faced the do-over issue in June, in Golden Bridge Technologies v. Apple. The judge struck an expert’s damages theory but gave him another shot. When that second try failed too, Grewal said no more.

That left Golden Bridge dependent on the testimony of its CEO, Elmer Yuen, who at one point described his theory as “the higher the better.”

The jury ultimately found no infringement, rendering the damages issue moot.

NO RESCUE FOR ‘PLAINTIFF’S OWN OVERREACHING’

The case once billed as the World Series of IP trials gave Judge Alsup multiple swings at the do-over issue. He permitted Oracle Corp. three tries at submitting admissible damages testimony in its case against Google Inc. over Java APIs. Oracle v. Google was exceptionally complex, though, causing Alsup to appoint an independent damages expert for the trial.

Since then, Alsup has taken a harder line. “Over the course of many years and more than a dozen patent trials, the undersigned judge has concluded that giving a second bite simply encourages overreaching on the first bite (by both sides),” Alsup wrote last year in Network Protection Sciences v. Fortinet. Because the damages analysis in that case was “not even close” to meeting Daubert, and trial was only four days away, Alsup said Network Protection Sciences would have to rely on other witnesses. If it can’t, “it is a problem clearly of plaintiff’s own overreaching,” the judge wrote.

Judge Guilford, meanwhile, has enshrined a similar caution in his Standing Patent Rule 5.3, which is titled “Hypothetically Negotiate with Care.”

“A legally and methodologically sound damages report is far more valuable to you than a more aggressive report that is subject to exclusion under Daubert,” Guilford’s rule cautions. “Requests for a second bite at the apple may be met with a citation to S.P.R. 5.3.”

Quinn Emanuel Urquhart & Sullivan partner Claude Stern would like to see more judges take that kind of approach. Stern persuaded an Eastern District of Texas judge to exclude expert testimony in a 2011 case. Not only was the expert allowed to return with a new theory—claiming double the previous amount of damages—Stern wasn’t allowed to cross-examine about the inconsistency.

“We wanted to impeach them with the original report,” Stern said. “Judge [Leonard] Davis said, ‘You can’t do that. That first report doesn’t exist.’”

‘DEVASTATING TO OUR CASE’

In the Adobe case, Wilken took issue with several aspects of the report prepared by Digital Reg’s expert witness. Parr relied on data for the entire software industry, instead of Adobe specifically, and he used an arbitrary 50 percent of profits as the starting point for a hypothetical negotiation.

Wilken explored a variety of options at the Aug. 13 hearing, though it didn’t appear she liked any of them.

“My real concern is what we would do if you didn’t have that witness,” the judge said, according to a transcript of the hearing. Digital Reg could take an appeal, she said, or limit its case to liability and bring another new suit for damages.

Adobe lawyer Reines noted there is evidence Digital Reg settled similar claims against 10 other companies.

“Just throw it out in front of the jury,” Wilken asked, “and say, ‘Here’s 10 settlements, what do you think?’”

Digital Reg’s attorney, Andrew DiNovo of DiNovo Price Ellwanger & Hardy, pleaded with Wilken for a chance to revise Parr’s report. “To exclude Mr. Parr,” he said, “would be devastating to our case at this late juncture.”

The do-over Wilken ultimately allowed is extremely limited. She instructed Digital Reg’s expert to make corrections without adding any new information. Adobe will get a chance to depose Parr by Aug. 28, four days into trial.

Speaking at the May damages conference, Grewal suggested that litigants and their counsel could avoid such disruptions by bringing their damages contentions earlier in litigation, rather than waiting until motions in limine. But some lawyers interviewed for this story weren’t warm to that idea, pointing out that litigants may want to see what happens on summary judgment before investing in expensive damages discovery.

In the meantime, expert witnesses will have to continue negotiating the Federal Circuit’s evolving damages law while hoping that district judges allow them some measure of flexibility.

“There’s no prevailing paradigm for how patent damages should be calculated in intellectual property cases,” said damages expert Alan Cox of National Economic Research Associates. “Anyone who is making a bona fide effort to apply rigorous economic and financial techniques” ought to get a second try, he said.

“On the other hand,” he added, “someone who does not make that effort, there’s a good case to be made not to get a do-over.”

Contact the reporter at sgraham@alm.com.

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