This article first appeared in The AIPLA Antitrust News, February 2011

Evidence relating to a party’s possible antitrust violations can be highly relevant to important infringement and damages issues in a patent litigation. For example, evidence establishing that a party knew its prices were higher than they would have been absent a constraint of trade may be probative of a party’s expected profits under a reasonable royalty analysis. At the same time, however, antitrust evidence can be prejudicial, confusing, or misleading to a jury. A party intending to rely on such evidence in a patent case is likely to face a battle, in the form of an in limine challenge by the defendant to exclude such evidence from being introduced. This article will present strategies for increasing the likelihood of a court permitting the use of antirust-related evidence in patent litigation.  

I. Applicable Law For Determining Admissibility Of Antitrust Evidence

Under Federal Rule of Evidence 403, relevant evidence should be admitted unless the probative value of the evidence is substantially outweighed by the danger of unfair prejudice. U.S. v. Matera, 489 F.3d 115, 120-21 (2d Cir. 2007) (upholding finding that probative value of evidence of bad acts outweighed potential for unfair prejudice). Unless evidence meets this high standard, evidentiary rulings should be deferred until trial so that questions of foundation, relevancy, and potential prejudice may be resolved in proper context. Worthington v. County of Suffolk, No. 02-cv-723, 2007 WL 2115038, at *6 (E.D.N.Y. July 20, 2007) (finding that evidence could be damaging but was relevant, so that determination on exclusion was best deferred to trial); see also Leopold v. Baccarat, Inc., 174 F.3d 261, 270 (2d Cir. 1999) (finding evidence properly admitted when both probative value and danger of unfair prejudice were significant but not overwhelming).

In particular, evidence of previous actions developed and proffered in a first litigation are admissible when relevant and probative of an issue in the second case, such as a party’s knowledge or intent. RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc., No. 94-cv-5587, 2002 WL 31780188, at *2-3 (S.D.N.Y. Dec. 11, 2002) (admitting Federal Trade Commission settlement agreement on issue of intent); see also U.S. v. Pepin, 514 F.3d 193, 208-09 (2d Cir. 2008) (finding abuse of discretion when evidence from an earlier case probative of intent was excluded).

II. Potential Relevance Of Antitrust Evidence In Patent Litigation

Antitrust evidence can be relevant to a number of different issues in a patent case, depending upon the particular facts and circumstances of the case. Litigation counsel should seek to determine what the opposing party pled or was found culpable of in a prior antitrust action, and how such a plea or finding is relevant to the facts of the patent litigation. Put differently, what fact admissions did the party make that can be used against it in the patent litigation?

One particular area of the patent litigation in which the antitrust evidence may be probative is damages. The Patent Statute provides that on a finding of infringement of a valid patent, the patentee should be entitled to damages “in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” 35 U.S.C. § 284. A reasonable royalty is determined on the basis of a “hypothetical negotiation” occurring between the parties at the time just before infringement began. See Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1554 (Fed. Cir. 1995).

In order to determine that royalty, the parties’ respective damages experts will testify concerning various facts the parties would have known during the hypothetical negotiation. See id. Under this analysis, an accused infringer’s knowledge and future expectations concerning competition and profits is highly probative. Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1081 (Fed. Cir. 1983) (holding that infringer’s expected profits at the time it commenced infringement, rather than its actual profits, are relevant to a reasonable royalty), Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y. 1970) (listing the established profitability, commercial success, and current popularity of the patented invention as factors).

Therefore, if a party was involved in antitrust violations at the time of first infringement, there may be no more relevant information with regard to the issue of the hypothetical negotiation than the antitrust evidence. In such cases, the accused infringer would have expected it could set prices high and could make extraordinarily large profits, and would therefore be willing to pay a higher royalty rate in the hypothetical negotiation. Notably,

[T]he reasonable royalty rate does not reflect the infringer’s actual profits, but rather the parties’ expectations and bargaining positions at the time of the first infringement.

Micro Motion, Inc. v. Exac Corp., 761 F.Supp. 1420, 1434 (N.D. Cal. 1991); see Hanson, 718 F.2d at 1081.

Further, the antitrust evidence may well include admissions by the party concerning the size of the affected market or the amount of sales the defendant made, which is likewise relevant to the size of the damages base that the plaintiffs would be entitled to. Other potential admissions could include evidence of knowledge and/or intent to sell products to a particular company or particular location, which could be relevant to any issues requiring such knowledge or intent, such as induced infringement. Finally, the antitrust evidence could include bad faith character evidence that could be used to negate any good faith defenses relied upon by party, such as a lack of willfulness.

III. Why Antitrust Evidence Might Be Excluded From A Patent Litigation

Assuming the antitrust evidence is relevant and probative to issues in the patent litigation, the opposing party will likely move the court in limine to exclude such evidence on the basis that the resulting prejudice would substantially outweigh any probative value of such evidence. Park West Radiology v. Care Core Nat’l LLC, 675 F. Supp. 2d 314, 329 (S.D.N.Y. 2009) (excluding evidence of other litigations because “any probative value of references to the Other Litigations is substantially outweighed by the risk of unfair prejudice, confusion of the issues, misleading the jury, and waste of time under FRE 403.”). Such prejudice could result if a juror misuses the antitrust evidence. For example, if the jury hears the defendant was found culpable of antitrust violations, the jury may conclude that the party’s propensity to commit crimes must mean that it is guilty of patent infringement.

In addition to prejudice, allowing the jurors to hear the antitrust evidence could confuse and/or mislead them. For example, the jury would have to be instructed on the elements required under antitrust laws and how such requirements differ from the elements of a claim for patent infringement, which may result in confusion and unnecessary waste of time. For these reasons, a judge may exclude the evidence because the harm or prejudice that could result may outweigh the probative value of the evidence.

IV. Impeachment

Another avenue for potentially introducing the antitrust evidence in a patent litigation is for impeachment purposes. While this area of law is not settled and can depend upon a particular district court’s rules, Federal Rule of Evidence 609 provides that in certain circumstances, evidence that a witness has been convicted of a crime can be admitted for the purpose of attacking the character for truthfulness of a witness. For example, in State of Oklahoma v. Allied Materials Corp., the state was allowed to cross-examine defendant’s witnesses and to introduce evidence of defendant corporation’s prior criminal antitrust conviction to impeach witnesses who were themselves convicted, or who were officers, directors, or managing agents of the convicted corporation. 312 F.Supp. 130, 133 (W.D.Okla. 1968).

Federal Rule of Evidence 609(a)(1) states that evidence that a witness has been convicted of a crime punishable by death or imprisonment in excess of one year shall be admitted for the purpose of attacking the character for truthfulness of the witness, if the court determines that the probative value of admitting the evidence outweighs the prejudice. Fed. R. Evid. 609. Because antitrust violations of the Sherman Act are punishable by fine and/or imprisonment of up to 10 years, evidence of such violations likely can be introduced for the purpose of impeachment so long as the court believes the probative value is greater than any potential prejudice. 15 U.S.C. §§ 1-3.

Federal Rule of Evidence 609(a)(2) states that evidence that a witness has been convicted of a crime shall be admitted regardless of punishment, if it readily can be determined that establishing the elements of the crime required proof or admission of an act of dishonesty or false statement by the witness. Importantly, evidence of such crimes is automatically admissible regardless of any potential prejudice. According to the committee notes to Rule 609, crimes requiring proof or admission of an act of dishonesty or false statement include “crimes such as perjury, subornation of perjury, false statement, criminal fraud, embezzlement, or false pretense, or any other offense in the nature of crimen falsi, the commission of which involves some element of deceit, untruthfulness, or falsification bearing on the [witness's] propensity to testify truthfully.” Federal Rule of Evidence 609, Committee Notes to 2006 Amendments.

While the antitrust statutes, e.g. sections 1-3 of the Sherman Act, do not appear to establish some or all criminal antitrust violations as crimes of deceit, the committee notes to Rule 609 state that “where the deceitful nature of the crime is not apparent from the statute and the face of the judgment . . . a proponent may offer information such as an indictment, a statement of admitted facts, or jury instructions to show that the fact finder had to find, or the defendant had to admit, an act of dishonesty or false statement in order for the witness to have been convicted.” Id. A party attempting to introduce evidence under Rule 609(a)(2) should review the indictment, statement of admitted facts, plea agreement, and related materials to determine if the opposing party had admitted or was found to have made any false statements or acts of dishonesty that were necessary for the conviction.

V. Steps To Increase Likelihood Of Admissibility

A party in a patent litigation intending on relying upon antitrust evidence should take proactive measures during fact discovery and expert discovery to build a strong foundation for introduction of such evidence at trial. Document requests and interrogatories that explore the facts and circumstances of the antitrust evidence should likely be part of the case strategy, and depositions of suitable witnesses may need to be taken. At a minimum, by taking these steps, counsel will be able to determine which of the opposing party’s employees are knowledgeable about the relevant facts, and use that information in preparing trial strategy. Additionally, relevant expert witnesses, such as the patent owner’s damages expert, should be informed of the facts from any prior antitrust dispute as early as possible, so that the expert can analyze the information in reaching his or her opinions.