New ADR Process Facilitates Call by Judges Rader and Posner for Better Use of Damages Experts in Patent Litigation

New ADR Process Facilitates Call by Judges Rader and Posner for Better Use of Damages Experts in Patent Litigation

September 01, 2012

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.”1 In response to Judge Rader, the concerns of others, and certain challenges associated with the current use of damages experts in patent litigation, this article proposes earlier use of damages experts as part of an improved alternative dispute resolution (ADR) process. We argue that, in many circumstances, earlier use of damages experts will 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 reports under Federal Rule of Civil Procedure 26(a)(2). These reports and associated testimony allow the court or jury 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 damages 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.2 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.3 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].”4

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 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. Consequently, during the majority of a lawsuit, the parties may 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. Such an approach can have adverse consequences for settlement or trial.

On the other hand, earlier engagement of damages experts, even by a single party acting unilaterally, can lead to a clearer understanding of the true value of a case and, therefore, a quicker, more advantageous 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 the parties more quickly toward an understanding of the damages that may be available. Based on our experience, this process of early case damages assessment using damages experts unilaterally by one or both parties to a litigation is seldom done today. Even when it is done, such early case assessments typically suffer from certain infirmities that could be significantly mitigated by wrapping them into an appropriate ADR process.

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.”5 Many parties in a patent infringement matter focus almost solely on liability at the beginning of the case. As Judge Posner points out, with respect to the Apple v. Motorola suit, the question of damages can be case dispositive as well and should be understood just as early as, if not earlier than, the liability issues, as suggested by Chief Judge Rader.

B. Current ADR Procedures for Settlement

The settlement of patent infringement cases typically occurs as a result of private negotiations between the parties or court-sponsored ADR processes. Some courts have mandatory ADR programs and others merely offer ADR options when the parties request such ADR. The most popular ADR process is mediation (See Figure 1). A mediator can be retained privately by the parties or obtained from a court-certified list of mediators. During mediation, a mediator typically uses shuttle diplomacy moving between conference rooms that separate the plaintiffs from the defendants in order to negotiate some middle ground where the parties can settle the litigation.

Courts also typically provide for settlement conferences with a magistrate judge (See Figure 1). In many circumstances, the magistrate judge acts in manner as a mediator to determine whether a middle ground can be arrived at for settlement. Many times the mediator does not attempt to opine or even comment on the liability issues during mediation. The main focus of the mediation is typically the economics involved in the case and whether a reasonable royalty can be arrived at that is suitable to both sides. Therefore, the mediation process clearly calls for an understanding of the potential damages in the case, the factors involved in calculating a reasonable royalty and points again to the importance of retaining a damages expert early in the case so that the parties can be prepared for such settlement situations.

Other types of ADR, such as early neutral evaluation (ENE) and arbitration are less frequently used by parties (See Figure 1) – although these ADR processes do provide the parties an opportunity to obtain comments, or even a written opinion, with respect to liability issues in the case (e.g., infringement and validity). Arbitrations are sometimes referred to as “mini trials” due to the relatively complex level of briefing, introduction of fact and expert witnesses and argument before the arbitrator. These ADR processes usually also require the input of a damages expert. Although ENE and arbitration are much more time consuming than mediation or a settlement conference, and are less commonly employed (See Figure 1), the use of a neutral (e.g., arbitrator) can facilitate settlement of the dispute or, at least, provide valuable information so that the parties can move forward in understanding weaknesses or strengths in their positions. The present ADR solutions proposed by this article are modeled after ENE and we use similar acronyms EEV (Early Expert Valuation) and ENV (Early Neutral Valuation).

C. Use of an Independent Damages Expert During ADR Could Improve ADR Outcomes

In the Apple v. Motorola lawsuit, Judge Posner appointed an independent expert for the patent litigation lawsuit. He recently stated, “The idea of expert witness (sic) 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.”6 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.7 In this article we have chosen to specifically discuss two ADR approaches. One of our proposed alternatives calls for a damages expert from each side (EEV), while a second alternative approach calls for an independent damages expert to be used as a neutral on behalf of both parties (ENV). 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. This will, in turn, promote earlier resolution of these complicated and often costly matters.

D. Illustrative Uses of a Damages Expert as Part of ADR Processes

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 our two suggested ADR processes below.

1. Use of EEV as part of an adversarial early case assessment ADR process

In the EEV scenario, each side hires a damages expert who performs an early case damages 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.8 Next, the defendant responds with its expert’s affirmative damages 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 damages valuation report, as necessary, and submits it to an arbitrator/mediator. Shortly thereafter, the defendant submits its revised report. Plaintiff and defendant present their damages 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 damages valuation.

The advantages of this process include:

  • It is fast and relatively inexpensive compared to damage analysis for trial.
  • Each side would present its best evidence through its own representatives, thus rapidly surfacing positions and relevant issues.
  • Both experts and litigation teams would be fully informed of the key damages facts.
  • An impartial arbitrator/mediator would hear and rule on the damages issues and facts.

The chief disadvantage, in addition to the general disadvantages of early case assessment identified and discussed below, is that this methodology has many steps and moving parts. The number of steps may slow down the process and may make it relatively complex, thus requiring more time and potentially challenging interactions between the parties.

2. Use of ENV as part of a facilitated early case assessment ADR process

In an alternative ENV 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 its selection based on prioritized lists of damages 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 a 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.

The advantages of this process include:

  • It is very fast and relatively inexpensive (less costly than hiring an expert for each side).
  • A single expert would present a neutral view of positions and relevant issues.
  • If this process were used as part of a litigation process (not ADR), such a neutral review and analysis may be more readily accepted by judges, such as Judge Posner who are critical of one sided analyses.
  • An impartial arbitrator/mediator would hear and rule on the damages issues and facts.

This alternative also suffers from the weaknesses of early case assessments in general as identified and discussed below, but seems less complex and more streamlined than the EEV ADR process. However, the ENV process relies much more heavily on the arbitrator/mediator to select a damages expert and accept, reject or adjust the damages calculations.

E. Improving Single Party Early Case Damages Assessments Through Inclusion in an ADR Process

Many damages experts, litigators and litigants are at least somewhat familiar with early case damages assessments that are prepared unilaterally by one of the parties to a litigation. These early case assessments, performed outside of an ADR context, are more common than early case damages assessment as part of an ADR process, but are still relatively rare. When performed, these single party early case assessments have typically been created as a privileged analysis in a litigation matter.

Single party 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 analyses and calculations, as will a final damages determination.

However, despite these limitations, single party-initiated early case assessments9 can provide a number of important benefits. The results of an early case assessment are often surprisingly close to the final damages amounts presented by the damages expert. The early case assessment also provides counsel and their client important additional 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. As a further advantage, the damages expert is often able to suggest appropriate steps to mitigate some or all of the weaknesses found in the initial or early damages determinations.

Another significant advantage of early case assessments of damages is cost savings. Because fully developed damages testimony at trial is carefully scrutinized by opposing counsel and their clients, opposing 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 analyzed along with substantial outside research that 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 5-15% 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.

Incorporating early case damages assessment into an ADR process is not unprecedented; however, despite its merits, it 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.

The goal of ADR procedures incorporating early case assessments is to assist in quickly and equitably settling the litigation. However, an underlying goal of incorporating early case damages assessments into an ADR process is to capture, or ideally even enhance, the benefits of a single party early case assessment while mitigating some of the traditional challenges. The improved ADR process is designed to provide relatively inexpensive, reliable information to facilitate a fair and equitable settlement that is superior to what either party could expect from a traditional single party early case assessment process.

For instance, one of the primary shortcomings of a single party early case damages 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).

In addition, in a single party’s early case assessment, the damages expert’s client may inadvertently supply the expert with inaccurate, incomplete, or otherwise inadequate information. Such short-comings are typically identified and rectified before trial through extensive study of documents and other information produced and reconciliation of data from various sources before expert reports or testimony are provided. However, for a single party’s early case assessment, this valuable cross-check may not be available, reflecting the fact that discovery has not been completed (the one-sided availability of information) and important, relevant sources of data are often not available. However, here again, both of the ADR alternatives suggested in this article attempt to avoid or mitigate this problem through an ADR process where each party is incentivized to quickly and fully support its damage position with appropriate data and other information, and by providing the opportunity for both parties to critique the early case analysis supported by the other.

Still another challenge of a single party early case assessment is that the give and take between damages experts and opposing counsel is nonexistent. In contrast, in typical trial preparation, counsel is fully informed on damages issues through completed discovery and the work of their own damages experts. As such, counsel can submit opposing damages experts to substantial cross-examination designed to highlight weakness in the important points of their testimony. The ADR alternatives represent something of a middle ground between counsel’s nearly unfettered challenge of the opposing expert’s testimony associated with a trial situation and a substantially unchallenged early case assessment done for a single party. In the ADR alternatives discussed in this article, the opinions of the expert(s) are challenged by opposing counsel, but counsel is more time-constrained than they would be in a deposition and trial scenario and neither the attorney nor the expert has the full depth of information provided by completed discovery and comprehensive analysis to rely upon. Therefore, although somewhat constrained, challenges from opposing counsel are available to inform the arbitrator/mediator.

Finally, an early case assessment is almost always performed before the Markman hearing. Consequently, the damages estimated before the Markman hearing may no longer be accurate given the court’s claim construction determination. In addition, as exemplified by the Judge Posner example, judges can play an important gatekeeper role in vetting damages analyses. This important Markman determination is typically missing from single party early case assessments10 and may or may not be part of an ADR process utilizing early case damages assessments depending on the assigned role and powers of the arbitrator/mediator in the ADR process being employed. In practice, the challenge of uncertain claims interpretation is usually addressed through damages sensitivity analysis designed to show alternative damages amounts given two or more possible claims interpretations.

F. What if the ADR Process Fails to Resolve the Dispute?

Sometimes ADR processes are not successful in resolving the conflict between the parties. Figure 2 depicts the results of an analysis of lawsuits where the federal government is a litigant comparing cases where ADR is used and litigation cases where no ADR is used. In those circumstances, ADR cases result in settlement of 65% of the time. This article specifically introduced an adversarial early case ADR process (EEV) and a facilitated, neutral ADR process related to early case assessment (ENV). As a result of these two or similar approaches, even if the parties chose not to be bound by the findings of these ADR proceedings, considerable benefits accrue to the parties simply by participating in the process. Under either approach, damages document production is substantially completed (or at least can be limited and highly focused), damages issues have been identified, and preliminary damages amounts have been established. In sum, both parties, as a result of the process, now understand the likely range of damages and the sensitivity of the results to key variables and findings (e.g., does the entire market value rule apply and, if so, what is its effect on damages?).

Also under either the EEV or ENV approach, prior agreements between the parties will determine the extent to which the settlement analyses by the damages experts will become part of the trial record. For instance, under the adversarial EEV approach, it could be agreed that the early analyses of the experts for both parties is not part of the record. As a result, the parties could proceed with updating and finalizing their damages analyses, providing reports and depositions and trial testimony, all, reflecting earlier agreements, without disclosure of, or inquiry about, the protected intermediate work product.11 Similarly, under the facilitated, ENV approach, the results of the independent damages assessments could be excluded from consideration by the court or jury if the litigation proceeded to trial.

G. 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-discriminatory (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.12 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.”13 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 foreclose 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.”14

H. Conclusion

The accuracy and cost effectiveness of early case damages assessment has been proven over many years through application of pre-case and early case damages 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.”15 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.


Also contributing to this article:

David L. Newman


1 Chief Judge Randall R. Rader remarks Eastern District of Texas Judicial Conference, September 27, 2011 (“Rader Remarks”), p. 16.
2 Opinion and Order of June 22, 2012, Apple Inc. v. Motorola Inc., case no. 1:11-cv-08540, at 8 (June 22, 2012).
3 Opinion and Order of May 22, 2012, Apple Inc. v. Motorola Inc., case no. 1:11-cv-08540, at 2 (May 22, 2012).
4 June 22, 2012 Opinion and Order, Apple Inc. v. Motorola, supra note 1 at 4.
5 Rader Remarks, p. 15
6 Remarks of Judge Posner at 7th Circuit Bar Association May 31, 2012.
7 For example, American Export v. J&J Distributing Company, 452 F.Supp.1160 (Dist. N.J. 1978).
8 Alternatively each respective damages expert could disclose their findings and support only to their client and the arbitrator/mediator who could attempt to facilitate a successful settlement negotiation. This may be an alternative ADR format.
9 Or even pre-case assessments.
10 Of course, done late enough in the litigation process, the early case assessment (late case assessment?) may benefit from both the Markman hearing results and judicial guidance.
11 Federal Rule of Evidence 408 may also protect the ADR damages information as being disclosed for settlement purposes only. But see, In re MSTG, Inc. 675 F.3d 1337 (Fed Cir 2012). (Denying mandamus petition and upholding district court ruling to require production of settlement negotiation documents in view of expert report reliance on such negotiations.)
12 Bruce Sewell, Apple counsel, letter to Hon. P. Leahy and Hon. C. Grassley, Committee on Judiciary, July 18, 2012 (“Sewell Letter”), p. 3, 7.
13 Kent Walker, Google Counsel, Letter to Hon. P. Leahy and Hon. C. Grassley, Committee on Judiciary, July 10, 2012, p. 8-9.
14 Sewell Letter, supra. 15 Rader Remarks, p. 16.