EON Corp IP Holdings LLC v. Sensus USA Inc et al

Filing 657

ORDER REGARDING EARLY DISCLOSURE OF DAMAGES IN PATENT INFRINGEMENT ACTION. Signed by Chief Magistrate Judge Elizabeth D Laporte on 3/8/2013. (knm, COURT STAFF) (Filed on 3/8/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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EON CORP IP HOLDING LLC,
Plaintiff,

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United States District Court
For the Northern District of California

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No. C -12-01011 EMC (EDL)
ORDER REGARDING EARLY
DISCLOSURE OF DAMAGES IN
PATENT INFRINGEMENT ACTION

v.

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SENSUS USA INC, et al.

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Defendant.

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The parties in this patent infringement case disputed the extent to which Plaintiff Eon should

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be required to disclose the damages it seeks and the basis therefore early in the case, before

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Defendants respond to Plaintiff’s discovery requests, and how strictly Plaintiff should be held to

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such early damages contentions. The parties filed a letter brief laying out their positions. Docket

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No. 586. The Court held a hearing on the dispute. See Docket Nos. 629, 631. The Court gave the

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parties detailed guidance and instructed them to meet and confer in light of that guidance to reach an

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agreement, which they then did.

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Because the question of early damages disclosure in patent cases is a recurring and important

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one, the Court issues this order to explain its reasoning and guidance to the parties. Early damages

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disclosure promises many advantages but is challenging to put into practice and necessarily varies to

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some extent with the nature of the particular case (e.g., the number of and variation among types of

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defendants, the variety of accused products, and the availability of relevant information in the public

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domain versus confidential licenses and other information in the hands of the patent holder or the

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sole possession of the defendant and third parties). Courts must balance competing considerations

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when evaluating the extent and specificity of early damages disclosures that should be made in
patent cases, including: the desirability of narrowing issues at an early stage versus the disclosure of

strategically sensitive information; the possibility of settlement versus the early intrusion of

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expensive discovery requests and disputes; and the need for early disclosures versus the need for

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costly expert analysis that may be premature. On the one hand, as Chief Judge Rader observed,

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“[t]he parties . . . benefit from early damages discussions and disclosures because it can provide a

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realistic evaluation of both Defendant’s exposure and Plaintiff’s damages calculation and further

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promote early and effective mediation.” Docket No. 586 Ex. F at 15 (“The State of Patent

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Litigation,” Address of Chief Judge Randall R. Rader of the United States Court of Appeals for the

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Federal Circuit, E.D. Tex. Judicial Conf., Sept. 27, 2011). In addition, an early estimate of the order

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of magnitude of damages at issue (e.g., less than $10 million; $25 million; more than $100 million)

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United States District Court
For the Northern District of California

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is important to the application of the principle of proportionality set forth in Federal Rule of Civil

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Procedure 26(b)(2)(C)(iii) to ascertain the burden and expense of discovery that is warranted.

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On the other hand, Defendants’ desire to pin down Plaintiff to detailed early damages

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contentions before any significant discovery and allow amendment only on a showing of good cause

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goes well beyond the initial damages disclosures contemplated by Rule 26(a), which can be readily

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amended without leave of court, and requires Plaintiff to do so without access to information in the

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sole possession of Defendants or third parties. See Fed R. Civ. P. 26(a)(1)(A)(iii); 26(d)(1). In

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addition, as Plaintiff noted, the relevant Advisory Committee notes to the 1993 amendment to Rule

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26(a)(1)(C) specifically relaxed the initial disclosure requirement for damages in cases like this one,

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where precise calculations depend on information not initially available to the patent holder: “a

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party would not be expected to provide a calculation of damages which, as in many patent

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infringement actions, depends on information in the possession of another party or person.” Fed. R.

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Civ. P. 26(a)(1)(C) advisory committee’s note (emphasis added). Plaintiff here gave as one example

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other licenses taken by Defendants to relevant patents. Further, the Patent Local Rules of this

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District do not require disclosure of damages contentions, although the Committee on these rules (of

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which this judge is a member) has discussed doing so. The Patent Local Rules “seek to balance the

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right to develop new information in discovery with the need for certainty as to the legal theories.”

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02 Micro Int’l v. Monolithic Power Sys., Inc., 467 F.3d 1355, 1365-66 (Fed. Cir. 2006).

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Defendants argued that Plaintiff should be required to disclose its damages theory and the
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factual support underlying that theory in significant detail early in the case in the form of

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contentions in order to narrow the issues and focus discovery, and to avoid a costly foray into topics

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that would ultimately prove irrelevant. Defendants requested disclosure by Plaintiff of: 1) the legal

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and factual bases for any lost profit damages sought, including whether there is a demand for the

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inventions described, whether Plaintiff has the capacity to manufacture and market any infringing

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products, and whether alleged economic damages can be quantified; and 2) the legal and factual

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bases for any reasonable royalty damages sought, including all evidence known to Plaintiff that

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affects one of the 15 non-exclusive Georgia Pacific factors with respect to the appropriate royalty

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base and the methodology for determining it, whether apportionment applies, the date of the

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United States District Court
For the Northern District of California

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hypothetical negotiation, any “joint and several liability” calculations, and relevant licensing

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policies regarding lump sum versus running royalties. See Georgia-Pacific Corp. v. U.S. Plywood-

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Champion Papers, Inc., 318 F. Supp. 1116 (S.D.N.Y. 1970). Defendants also proposed that any

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amendment of damages contentions later in the case be permitted only upon order of the Court for

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good cause shown. Defendants cited a recent order in Brandywine Communications Techs., Inc. v.

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Cisco Systems, Inc., No. 12-1669, Docket No. 114 (N.D. Cal. Nov. 13, 2012), in which Judge Alsup

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ordered the plaintiff to provide very thorough damages information as part of its Rule 26(a) initial

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disclosures. That order called for information on competing products and how sales had been

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affected by the alleged infringement, as well as information on the royalty rate and royalty base,

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including the basis for that computation, and information supporting each asserted Georgia Pacific

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factor and any relevant license agreements.

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Plaintiff in this case responded that Defendants’ approach was unrealistic and prejudicial,

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because Plaintiff had not yet conducted discovery and needed information in possession of

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Defendants or third parties to calculate its damages. If early damages contentions were required,

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Plaintiff asked that Defendants first produce categories of information such as: 1) sales, pricing, and

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margin information for accused products; 2) analyses of the value of infringing systems; and 3)

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patent licensing practices. Plaintiff also argued that requiring it to demonstrate good cause to make

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any changes was too restrictive, given the limited information at its disposal early in the case. Even

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in non-patent cases, courts must take care that early contention interrogatories not lead to abuse.
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They “can be used to impose great burdens on opponents, and can generate a great deal of

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counterproductive friction between parties and counsel. Moreover, at least in cases where

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defendants presumably have access to most of the evidence about their own behavior, it is not at all

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clear that forcing plaintiffs to answer these kinds of questions, early in the pretrial period, is

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sufficiently likely to be productive to justify the burden that responding can entail.” In re

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Convergent Techs. Secs. Litig., 108 F.R.D. 328, 337-38 (N.D. Cal. 1985).

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A plaintiff must, of course, have a basis for its damages when it files suit. The Court noted
at the hearing that some early discovery into Plaintiff’s damages case was appropriate, but that it

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would not require good cause and an order of the Court for Plaintiff to amend its early disclosures.

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United States District Court
For the Northern District of California

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Such a requirement would pin Plaintiff down before it had an opportunity to sufficiently develop its

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theories based on relevant information exclusively in the hands of others. At the same time, the

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Court noted that Plaintiff had sued several different categories of defendants in this case, including

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cellular network providers, handset manufacturers, and other software and hardware providers, and

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that Plaintiff would need to provide its damages theory as to each category. Further, the Court

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cautioned that broad discovery requests propounded indiscriminately to all Defendants, without

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careful crafting of requests to the particular Defendant and its role in the case, could result in cost

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shifting. In order for Plaintiff to make reliable early disclosures, the Court required Defendants to

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disclose generally their revenue as well as relevant license information.

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The Court then turned to the specifics of the parties’ letter brief, in particular the information

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Defendants claimed was currently within Plaintiff’s possession, which was laid out on page 10 of

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the brief: whether Plaintiff is seeking a royalty based upon handset sales, and, if so, which handsets

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are part of the royalty base; whether Plaintiff is seeking a royalty based upon sales of network

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components and, if so, which products are part of the royalty base; whether Plaintiff believes that the

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entire sale of the handsets or network components is subject to inclusion in the royalty base (based

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upon an entire-market value rule analysis) or, if not, what portion of the sales of the accused

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products can be attributed to the patented functionality; whether Plaintiff has a licensing policy and,

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if so, whether that licensing policy is applicable to the current action; and whether Plaintiff is

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seeking a lump-sum royalty or a running royalty. See Docket No. 586 at 10.
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Plaintiff acknowledged that Defendants’ desire to know its theory of damages was

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reasonable, and the Court encouraged the parties to look at Defendants’ questions as standard

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discovery requests that could be answered promptly, to the extent Plaintiff possessed the

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information, rather than as comprehensive contention disclosures. For example, information about

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Plaintiff’s own licensing program or third-party analysts’ reports used to bolster Plaintiff’s damages

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theory should be disclosed. The Court again noted that it would not require a showing of good cause

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to amend those disclosures at a later point, although Plaintiff should make all reasonable efforts in

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good faith to provide the information to avoid adverse consequences.

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The parties met and conferred and then memorialized their agreement. They stipulated that

United States District Court
For the Northern District of California

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Plaintiff would amend its initial disclosures and include the questions that are set forth above on

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page 4. The parties and the Court agreed that requiring a specific computation of the royalty rate

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would be premature but that otherwise Plaintiff would comply with Rule 26. In addition, Plaintiff

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agreed that, to the extent it believed that its claims against products subject to a license were not

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exhausted, it would provide to Defendants an explanation as to why those claims remain at issue.

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IT IS SO ORDERED.

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Dated: March 8, 2013
ELIZABETH D. LAPORTE
United States Chief Magistrate Judge

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