Recently, the District Court for the Northern District of California updated is Local Patent Rules.  Early disclosure of financial information regarding damages is one change that has attracted some attention.  Below, I outline the new rules and briefly explore their potential impact.

Initial damages estimate and damages contentions added to the rules

During the initial scheduling conference required under the Federal Rules of Civil Procedure, parties are now required to “provide the court with a non-binding, good-faith estimate of the damages range expected for the case along with an explanation for the estimates. If either party is unable to provide such information, that party shall explain why it cannot and what specific information is needed before it can do so. Such party shall also state the time by which it should be in a position to provide that estimate and explanation.”  N.D. Cal LR 2-1(b)(5).

The court now also requires “Damages Contentions” not later than 50 days after service of invalidity contentions, followed by “Responsive Damages Contentions” 30 days later. Id. at 3-8 and 3-9.The damages contentions require each party asserting infringement to:

(a) Identify each of the category(-ies) of damages it is seeking for the asserted infringement, as well as its theories of recovery, factual support for those theories, and computations of damages within each category, including:

1. lost profits;
2. price erosion;
3. convoyed or collateral sales;
4. reasonable royalty; and
5. any other form of damages.

(b) To the extent a party contends it is unable to provide a fulsome response to the disclosures required by this rule, it shall identify the information it requires.

Id. at 3-8. While the responsive damages contentions require “each party denying infringement shall identify specifically how and why it disagrees with those contentions. This should include the party’s affirmative position on each issue. To the extent a party contends it is unable to provide a fulsome response to the disclosures required by this rule, it shall identify the information it requires.” Id. at 3‑9.

Avoiding the Northern District, rule-engulfing exceptions, and early expert reports?

The goal of these rules appears to be to identify the potential damages for a case early in litigation, so parties – and the Court – can allocate a proportional amount of resources. This is certainly a worthy goal, and one suggested in the past by former Chief Judge of the Federal Circuit Randall Rader, but the question is: will these rules achieve it? Parties often are reluctant to disclose detailed financial information during litigation, particularly early in a case. Naturally, time will tell if these rules are able to overcome this reluctance, but a few initial reactions are outlined below.

First, will patent owners just avoid the Northern District of California when asserting patents?  While a patentee is not always able to choose, under the current Federal Circuit case law, it is not that difficult to bring most patent suits outside of this district. Of course, this very issue is currently before the Supreme Court in the TC Heartland case (see our earlier post). Should the Court disagree with the Federal Circuit, which is not a rare occurrence, then patentees might have less choice when it comes to choosing a venue in which to sue.

Will the exceptions swallow up the rule?  Each disclosure requirement allows a party to respond that it cannot provide a full response, if it can identify the information it lacks. There does not appear to be any penalty for this response. In the situation in which one party provides sufficient financial information, these rules (combined with the remaining discovery rules) could certainly be used to pressure the reluctant party to make a commensurate disclosure. But, when both parties  closely guard their financial information, will either complain? If not, will these rules provide teeth for the court to pressure the parties?

Will these rules result in early damages expert reports? With language like “theories of recovery, factual support for those theories, and computations of damages within each category,” one could read the rules as requiring a disclosure similar to an expert report.  Indeed, it may be difficult to provide this information without an expert’s assistance. Thus, the new rules may require hiring a damages expert earlier in litigation. That said, the rules may be interpreted much like invalidity or non-infringement contentions, in which it is common to work with an expert behind the scenes without actually providing a full expert report. This seems within the spirit of the new rules: to provide an estimate of damages, without necessarily requiring the full expense and early disclosure of expert evidence and detailed theories of financial recovery. After all, damages can be estimated accurately, thereby fulfilling the assumed goal of the new rules, without this detailed information.

An area to watch

In all, it will be interesting to watch the impact of these new rules on financial discovery, working with damages experts, and ultimately the management and merits of patent litigation in Northern California.