Chief Judge Rader recently stated, “Still I am concerned that our system as a whole tends to overlook and ‘undervalue’ the damages and valuation stage of our adjudicatory process.”ii In response, this article proposes earlier use of damages experts, compared to their traditional use toward the end of a patent litigation, as part of alternative dispute resolution (ADR) processes to provide superior ADR proceeding results while more effectively using damages experts in a less costly manner.
A. Overview of Current Use of Damages Experts in Patent Litigation
The determination of damages in patent litigation typically requires the testimony of an expert witness. Damages experts typically provide damage reports under Federal Rule of Civil Procedure 26(a)(2). These reports and associated testimony allow the court to make a determination as to damages for infringement and provide valuable economic information regarding the technology, products and markets at issue in the dispute.
The importance of such damage reports was demonstrated in the recent case between Apple and Motorola. Judge Posner, sitting by designation, determined that the trial would be cancelled because neither side had proven that it was entitled to any form of relief. Judge Posner found that the expert reports of both parties were deficient.iii Earlier Judge Posner had made a Daubert ruling on the sufficiency of the experts’ reports where he excluded certain testimony of Apple’s and Motorola’s damages experts.iv Judge Posner was very critical of the one-sided nature of each of the experts’ reports and their failure to consider neutral sources of information. Judge Posner stated that a “competent damage witness would be one who was involved in the procurement of chips, or who advised as a consultant on the choice of chip[s].”v
Due to common discovery schedules and the high cost of patent litigation (including the damages experts), preparation of expert reports may occur in a hurried manner near the end of the case. Typically, case management schedules place the requirement for disclosure of expert reports after the close of fact discovery. As patent cases can take many years to work through fact discovery, the large cost of employing experts, preparing expert reports and preparing experts for deposition testimony are commonly pushed back as long as possible. In addition, many patent cases settle well before trial or before the matter is fully adjudicated. Parties may attempt to avoid the costs involved in employing damages, validity or liability experts until after the likelihood of early settlement has passed. Such an approach can have adverse consequences at trial. However, even more importantly, during the early part of a lawsuit, the parties do not have a clear view of the real value—upside or downside—of a case because an expert has not been engaged, or if engaged, has not yet been asked to estimate damages.
Earlier engagement of damages experts can lead to a clearer understanding of the true value of a case and, therefore, quicker settlement. For example, merely retaining a damages expert earlier in the case to perform some high level analyses and to quickly consider the Georgia-Pacific factors (nearly always relied on in patent cases to determine a reasonable royalty rate) can uncover many important issues for the parties to consider early in the case and help move more quickly towards an understanding of the damages that may be available.
Chief Judge Rader stated, “The parties also benefit from early damages discussions and disclosures because it can provide a realistic evaluation of both Defendant’s exposure and Plaintiff’s damages calculation and further promote early and effective mediation. This inquiry can occur at the onset of the case during case management conferences or even a little later in connection with Markman hearings.”vi Many parties in a patent infringement matter focus almost solely on liability at the beginning of the case. As Judge Posner points out, the question of damages can be case dispositive as well; and should be looked at just as early as, if not earlier than, the liability issues.
B. Use of an Independent Damages Expert During ADR Could Improve ADR Outcomes
In the Apple and Motorola lawsuit, Judge Posner appointed an independent expert for the patent litigation lawsuit. He recently stated, “The idea of expert witness who are not beholden to the parties who can provide information to judges and juries on technical issues, I think is a terrific opportunity worth exploring.”vii Judge Posner had strong support for appointment of an independent expert. The Federal Rules of Civil Procedure 53 and Federal Rules of Evidence 706 grant the court wide discretion in using independent experts or special masters.
The use of independent damages experts has been undertaken previously by courts.viii In this article, one of our proposed alternatives calls for a damages expert from each side, while our illustrative alternative approach calls for an independent damages expert to be used as a neutral on behalf of both parties. Regardless of how the damages expert is selected or whether there is a damages expert for both parties, we believe that an early use of damages experts who can capably apply sound economic damages principles and knowledgeably adhere to case precedent with respect to patent damages will result in a much earlier and clearer understanding of the economics involved in a patent infringement suit—which will, in turn, promote earlier resolution of these complicated and often costly matters.
C. Refined Use of a Damages Expert as Part of ADR
There are many different ways to use damages experts in an ADR format. Our proposals could be used during litigation or prior to litigation. We discuss two ADR processes below.
- Use of Early Expert Valuation (EEV) as part of an adversarial early case assessment ADR process
In the Early Expert Valuation (EEV) scenario, each side hires a damages expert who performs an early case valuation for a mediation or arbitration proceeding. The plaintiff presents its expert’s analysis in the form of a report which includes appropriate source documents and references to interviewees.ix Next, the defendant responds with its expert’s affirmative valuation analysis, critiques of the plaintiff’s expert’s work, and provides source documents and references to interviewees relied upon.
Based on the new information from the defendant, the plaintiff updates its expert’s valuation report, as necessary, and submits it to an arbitrator/mediator. Shortly thereafter, the defendant submits its revised report. Plaintiff and defendant present their valuations during an agreed-upon, relatively short, time period—say one hour or less. Cross examination is similarly limited to a short period of time. Soon thereafter, an independent arbitrator/mediator provides a decision as to a final valuation.
- Use of Early Neutral Valuation (ENV) as part of a facilitated early case assessment ADR process
In an alternative Early Neutral Valuation scenario the parties also select a neutral arbitrator or mediator. However, the arbitrator/mediator then selects a single damages expert to act in a neutral fashion considering the positions of all involved parties. The arbitrator/mediator would make her selection based on prioritized lists of damage experts submitted by both sides. The neutral expert, essentially hired by both sides in the dispute, is fully informed by both parties. After completing an analysis, the damages expert provides a preliminary damages determination to which both sides can respond. After considering the arguments by both sides, the damages expert will finalize a report and make recommendation to the arbitrator/mediator. Each side would then have time to present their concerns and suggestions relating to the final damages report to the arbitrator/mediator who can accept, reject or amend the report of the damages expert.
D. Improving Early Case Damages Assessments Through Inclusion in an ADR Process
Incorporating early case damage assessment into an ADR process is not unprecedented but, despite its merits, is not commonly done. In our view, this potentially valuable approach to ADR, especially given recent guidance by the courts, is an idea that merits being revisited.
More common than early case damage assessment as part of an ADR process, but still relatively rare, are professional early case damage assessments performed unilaterally by either or both parties to a litigation. Although infrequently used, when performed, these early case assessments have typically been created by one or both parties as a privileged analysis in a litigation matter. Consequently many damages experts, litigators and litigants are at least somewhat familiar with a unilateral early case assessment.
Unilateral early case damages assessments outside of an ADR process differ from traditional damages analyses supporting damages deposition and trial testimony in two primary ways. First, the amount of information available to the analyst is more limited, typically reflecting the fact that discovery has probably not been completed and may not have even been started. The second major difference is the amount and detail of the analysis performed. Primarily reflecting data and time limitations, early case assessments normally will not include as much detail and nuance in the various calculations as will a final damages calculation. However, despite these limitations, unilateral early case assessmentsx can provide a number of important benefits. Most importantly, the results of an early case assessment are often surprisingly close to the final damages amounts presented by the damages expert. Of almost equal importance, the early case assessment provides counsel and their client important information about damages including: insights into the likely range of damages, key variables determining the amount of damages, sensitivity analysis focused on key damage variables, and data limitations or data proof issues upon which important case strategy decisions can be made. Additionally, an early case assessment provides counsel and their clients with an independent, third party perspective by an expert on damages. Patent damages are guided by economic factors, legal precedent and specific case facts, among other considerations. An experienced, independent damages expert can relatively quickly sort through these considerations alerting counsel to strengths and weaknesses in the damages calculations. Often, the damages expert is able to suggest appropriate steps to mitigate some or all of the weaknesses in the initial damages determinations.
Because fully developed damages testimony at trial is carefully scrutinized by opposing counsel, their experts, and often by the court as part of its gatekeeper function, these analyses must be performed very carefully and thoroughly. Often thousands of pages of documents, numerous depositions, and several sets of interrogatories must be reviewed, and substantial outside research must be performed, in order to adequately support and document a final damages opinion. Typically, much, in fact most, of this work need not or cannot be done as part of an early case assessment. Consequently, an early case assessment is often only 5 to 10 percent of the cost of a traditional damages analysis and is often completed in only a few weeks. Of course, the real savings flow from the early settlement of a complex litigation for an equitable amount.
The goal of ADR procedures incorporating early case assessments is to assist in quickly and equitably settling the litigation. However, from a damages perspective, a goal of incorporating early case damages assessments into an ADR process is to capture, or ideally even enhance, the benefits of unilateral early case assessment while mitigating some of the traditional challenges associated with unilateral early case assessments. The result provides inexpensive, reliable information to facilitate a fair and equitable settlement.
For instance, one of the primary shortcomings of an early case damage assessment is that there is a data quality and availability difference between the damages expert’s client’s data and the opposing party’s data. Much more is typically known regarding the damages expert’s client’s economic and financial situation than is known about the opposing side’s situation. The expert’s client is often quick to provide the expert with data, documents and access to key people, while information from the opposing side is typically gleaned from public filings (if available), press releases, user manuals, instruction manuals, analyst’s reports, government reports and other publicly available information. Inferences about the opposing side’s operations are also drawn based on the client’s data, the relationship in the marketplace between the client and the opposing party and the client’s insights about the opposing party’s products and market success. Both ADR alternatives suggested in this article attempt to avoid or mitigate the problem of disparate information pertaining to the litigation parties by positioning the damages expert(s) in such a way that both parties have ample incentives to provide information and access to key people in order to fully inform the expert(s).
E. Use of Early Expert Valuation In Standard Essential Patent Disputes
The ENV process proposed by this article could also provide a valuable tool for standards setting organizations (SSOs) and standards participants to use in order to efficiently determine fair reasonable and non-discrimination (FRAND) terms prescribed by SSOs. Apple’s Vice President and General Counsel recently stated that an equitable means to determine whether a license offer complies with a standard essential patent (SEP) owner’s FRAND obligations would be to engage “an independent decision maker” to set a FRAND royalty in order to avoid a patent holder’s subjective, often self-serving, interpretation.xi The ENV process would provide an independent valuation expert to analyze the circumstances involving the SEP owner and consider factors such as a royalty “range of other similarly situated companies.”xii SSOs could help their members avoid time consuming and costly litigation over FRAND commitments by mandating an ENV ADR process for all SEP owners. Such an SSO mandate need not foreclosure litigation. An ENV process would merely be a useful first step, when conflicts arise over SEPs. Having attempted such a process could also provide a bright line guide for determining whether a SEP owner could subsequently pursue an injunction. Having undertaken an ENV process, a SEP holder will have clearly undertaken good faith efforts to negotiate FRAND terms. A potential licensee who turns down a FRAND rate provided by a neutral expert during an ENV proceeding would be hard-pressed to claim that the SEP owner’s only motive was “hold-up” or an attempt to merely provide a “License offer As a Ticket to an Injunction.”xiii
The accuracy and cost effectiveness of early case damages assessment has been proven over many years through application of pre-case and early case damage assessment for the parties involved in patent litigation. We suggest in this article that this proven approach to damages estimation could easily be incorporated into ADR procedures to facilitate both the effectiveness and success of those ADR efforts. Chief Judge Rader implored the legal community, “Therefore, I suggest to my fellow judges that we are going to have to take the initiative to improve patent procedure by intervening ourselves to get a realistic valuation of the case much earlier.”xiv We suggest judges and litigants carefully consider the pros and cons of early use of damages experts in ADR proceedings amongst their other litigation and settlement options.
Bruce W. Burton and Scott Weingust
First published in the May 2013 American Bar Association Intellectual Property Newsletter