In a patent infringement action between Kimberly-Clark ("K-C") and First Quality Baby Products ("First Quality") pending in the United States District Court for the Eastern District of Wisconsin, K-C filed a motion to compel First Quality to produce sales evaluation files relating to products accused of infringement. K-C asserted that the files were necessary because they might lead to admissible evidence regarding damage claims for a reasonable royalty and for lost profits due to price erosion. First Quality admitted in a deposition that the sales evaluation files contain information that is used in setting prices.
In analyzing whether the files should be produced, the district court began by stating that "[i]n calculating a reasonable royalty courts consider, among other things, the 'infringer's anticipated profit from the use of the patented invention.'" The district court found that First Quality's sales evaluation files contain contribution margin analysis, which is a profitability measure used by First Quality to set prices. As a result, the district court noted that "it logically follows that First Quality's sales evaluation files should be produced as they may aid in any calculation of reasonable royalties."
K-C also argued that the sales evaluation files could be relevant to the calculation of lost profits due to price erosion. First Quality responded by asserting that the information sought by K-C was overbroad and unnecessary because First Quality had already produced documents reflecting its actual pricing, sales and margins. Thus, First Quality argued that the sales evaluation files would be cumulative and would also be overbroad as the sales evaluation files spanned many years.
To resolve the dispute, the district court examined K-C's stated purpose in seeing the evaluation files, i.e., for determination of a reasonable royalty. Beginning with the well-settled legal standard that "in calculating reasonable royalties Courts imagine a 'hypothetical negotiation between the patentee and the infringer when the infringement began,'" the district court rejected First Quality's argument that four years of sales evaluation files were not relevant to the calculation of a reasonable royalty because K-C had not identified the date of the hypothetical negotiation. The district court stated that "no authority requires K-C to identify when a hypothetical negotiation would have taken place. Indeed, Courts can and do consider information available as of the date of a hypothetical negotiation and 'events and facts that occurred thereafter.'"
The district court also did not agree with First Quality's argument that only K-C's prices, and not its own, were relevant to a calculation of price erosion. "If First Quality's sales evaluation files show that First Quality engaged in vigorous price competition with K-C, such that K-C was forced to lower its prices relative to First Quality's prices, the sales evaluation files are relevant to a calculation of price erosion."
Accordingly, the district court ordered production of the sales evaluation files.
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The types of files ordered produced here usually contain highly sensitive and proprietary information and may be difficult to obtain in many cases. Nonetheless, the district court's decision is a good example of when pricing and profit information may be relevant to determining patent infringement damages.