The opinion in recent MLC Intellectual Property, LLC v. Micron Technology case highlights the importance of engaging damages or industry experts for fact discovery.
In its August 26, 2021 opinion in MLC Intellectual Property, LLC v. Micron Technology (“MLC”), the Court of Appeals for the Federal Circuit affirmed the order of a district court (United States District Court for the Northern District of California in No. 3:14-cv-03657-SI, Senior Judge Susan Y. Illston) striking portions of the report by plaintiff MLC’s damages expert under Rule 37(c)(1) of the Federal Rules of the Civil Procedure because MLC had failed to identify information during fact discovery—in response to particular requests for such information—that MLC later claimed via its damages expert to be evidence relating to damages. This evidence included:
- MLC’s view of what was an appropriate royalty rate
- MLC’s view that certain lump-sum licenses reflected a specific reasonable royalty rate
- Documents related to prior negotiations for licenses to the patent-in-suit
The district court found that in response to certain interrogatories, MLC disclosed at least some of the documents related to prior negotiations for licenses to the patent-in-suit that were ultimately relied upon by MLC’s damages expert. However, the Federal Circuit concluded that the district court was within its discretion to foreclose MLC’s damages expert from relying on those documents because MLC did not cite those documents in its responses to Micron’s interrogatories that were specifically directed to damages.
The Federal Circuit also found that the district court was within its discretion to foreclose MLC’s damages expert from relying on MLC’s views of an appropriate royalty rate and on its views that certain lump-sum licenses reflected a specific reasonable royalty rate because those views were not adequately disclosed during fact discovery. The lower court held that MLC’s damages expert could not rely on this information because (1) MLC’s 30(b)(6) corporate designee had testified that MLC had no understanding of what royalty rate was in the lump-sum agreements, and (2) MLC had failed to identify certain license agreements in response to Micron’s interrogatories that were specifically directed to MLC’s opinions of applicable royalty rates.
On appeal, MLC argued that it had not been required to disclose these specific facts and documents supporting its damages theory during fact discovery because it had ultimately disclosed them during expert discovery. MLC reasoned that it had provided adequate responses to Micron’s interrogatories and that anything more would have required it to disclose material designated for expert discovery. MLC also argued that some of the information that the district court ruled that MLC had failed to disclose during deposition was protected by attorney-client privilege.
The Federal Circuit was not persuaded by any of these arguments, noting:
- “When reviewing damages in patent cases, we apply regional circuit law to procedural issues and Federal Circuit law to substantive and procedural issues pertaining to patent law.” The Ninth Circuit reviews “a district court’s evidentiary rulings, such as its decisions to exclude expert testimony and to impose discovery sanctions, for an abuse of discretion.” “[A]buse of discretion is the proper standard of review of a district court’s evidentiary rulings.”
- The Ninth Circuit affords district courts particularly wide latitude in applying Rule 37(c)(1) to exclude information that a party has failed to provide under Rule 26.
- Rule 26(a)(1)(A)(iii) requires parties seeking damages to provide in their initial disclosures “a computation of each category of damages” as well as “the documents or other evidentiary material, unless privileged or protected from disclosure, on which each computation is based.”
- The evidence was produced by MLC and in its possession from the outset of the case, largely obviating any concerns that timing and fairness must make it untenable for MLC to know its contentions about a reasonable royalty until after close of fact discovery.
- “District courts have the discretion to encourage parties to provide discovery of damages theories prior to expert discovery.” And: “Doing so promotes judicial efficiency, informs settlement discussions, and helps parties determine the resources that will be devoted to a case based on its potential value.”
- Attorney-client privilege “only protects disclosure of communications; it does not protect disclosure of the underlying facts” of those communications.
By failing to identify and disclose documents and testimony that are critical to its damages case during fact discovery, as happened in MLC, a party can put its entire damages case at risk. As demonstrated by the Federal Circuit’s opinion, this risk is particularly acute when one is litigating in jurisdictions like the Ninth Circuit that have established rules concerning the early disclosure of certain types of damages.
The Federal Circuit’s opinion in MLC also highlights the risk of waiting to disclose certain information until the damages expert chooses to rely on it. In MLC, the Federal Circuit rejected MLC’s argument that “it was not required to disclose these specific facts and documents supporting its damages theory during fact discovery because it ultimately disclosed them during expert discovery.”
Parties that engage experts with relevant experience to assist with fact discovery (or even earlier, to help parties comply with the requirements of particular jurisdictions for early disclosure of damages) reduce the risk of losing their ability to rely on information that is critical to supporting or rebutting damages arguments. If experts with relevant experience are engaged to assist with fact discovery, they can help counsel to craft targeted and potentially valuable discovery requests and responses by helping counsel to (1) anticipate how accounting requirements in the relevant industry would be reflected in the parties’ records, (2) understand which key performance indicators are relevant to the industry at issue, (3) interpret financial and business documents to develop further fact discovery requests, (4) identify relevant subject areas and relevant data leading to better identification of appropriate fact witnesses, and (5) weigh the risks and benefits of requesting certain types of information and information from certain time periods.
- Rule 37(c)(1) of the Federal Rules of the Civil Procedure states: “If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless.”
- MLC v. Micron Technology Inc. Fed. Circuit Opinion, p. 17.
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