November–December, 2016 Vol. 106 No. 6

MONETARY RELIEF ISSUE

The Award of Attorneys’ Fees in Exceptional Cases Under 15 U.S.C. § 1117(a) of the Lanham Act Bryan Wheelock, Kara Fussner, and Daisy Manning

Intention: Is It Truly Irrelevant to the Awarding of Damages or Profits in Canada and Abroad? Tony Bortolin

Making the Best Use of Experts to Evaluate Damages in Intellectual Property Disputes Bruce Abramson

Commentary: Glee—Unpicking the Reality of U.K. Monetary Awards Ian Lowe

Commentary: Monetary Remedies in Trademark Matters in Canada Nancy A. Miller

Book Review: Economic Approaches to Intellectual Property. Nicola Searle and Martin Brassell Alfred C. Frawley

Book Review: The Liability of Internet Intermediaries. Jaani Riordan Sheldon Burshtein

INTERNATIONAL TRADEMARK ASSOCIATION Powerful Network Powerful Brands

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The Trademark Reporter Committee

EDITORIAL BOARD EDITOR-IN-CHIEF, CHAIR STAFF EDITOR-IN-CHIEF KATHLEEN E. MCCARTHY WILLARD KNOX

Senior Editors NEIL WILKOF

JESSICA ELLIOTT CARDON RUTH CORBIN GLENN MITCHELL ELISABETH KASZNAR FEKETE RAFFI V. ZEROUNIAN FABRIZIO MIAZZETTO PAMELA CHESTEK CHIKAKO MORI

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Editors TSAN ABRAHAMSON MARIA BARATTA MARTIN J. BERAN DANIEL R. BERESKIN STEFANIA BERGIA LANNING BRYER SHELDON BURSHTEIN IRENE CALBOLI ROBERT CAMERON JANE F. COLLEN THEODORE H. DAVIS JR. ANNE DESMOUSSEAUX MEGHAN DILLON THOMAS F. DUNN SCOT DUVALL CLAUS M. ECKHARTT SHEJA EHTESHAM KAREN L. ELBURG MATTHEW EZELL NEMESIO FERNANDEZ-PACHECO SALVADOR FERRANDIS ALFRED FRAWLEY ALEX GARENS ALEXANDRA GEORGE DANIEL GLAZER ANDREW J. GRAY IV LESLEY MCCALL GROSSBERG ANN LAMPORT HAMMITTE

GUY HEATH ANNE HIARING HOCKING JANET L. HOFFMAN GANG HU DOMINIC HUI AHMAD HUSSEIN BRUCE ISAACSON AGLIKA IVANOVA E. DEBORAH JAY FENGTAO JIANG HE JING MARIA JOSE JIRON SIEGRUN D. KANE SUSAN J. KERI MIKE KEYES ROLAND KUNZE JOI MICHELLE LAKES SCOTT LEBSON NELS LIPPERT MARCUS LUEPKE VINCENT MARTELL J. THOMAS MCCARTHY NANCY A. MILLER GEORGE W. MOXON JOHN M. MURPHY PAUL MUSSELL SADAF NAKHAEI

SAURABH NANDREKAR AMANDA NYE JENIFER DEWOLF PAINE JEREMY B. PENNANT NEAL PLATT MICHIEL RIJSDIJK RACHEL RUDENSKY JEREMY SCHACHTER MATTHEW R. SCHANTZ MARTIN SCHWIMMER JENNIFER SICKLER AARON SILVERSTEIN ALEX SIMONSON GIULIO ENRICO SIRONI DEBBIE SKLAR WENDI E. SLOANE JERRE B. SWANN, JR. SCOTT THOMPSON CHINASA UWANNA ANJALI VALSANGKAR EDWARD E. VASSALLO MARTIN VIEFHUES CHARLES WEBSTER JORDAN WEINSTEIN JOHN L. WELCH JOSEPH WELCH BRYAN K. WHEELOCK JOSEPH YANG

Advisory Board MILES J. ALEXANDER WILLIAM M. BORCHARD CLIFFORD W. BROWNING LANNING G. BRYER SANDRA EDELMAN ANTHONY L. FLETCHER ARTHUR J. GREENBAUM

ROBERT M. KUNSTADT THEODORE C. MAX JONATHAN MOSKIN VINCENT N. PALLADINO JOHN B. PEGRAM ALLAN S. PILSON

ROBERT L. RASKOPF PASQUALE A. RAZZANO SUSAN REISS PIER LUIGI RONCAGLIA HOWARD J. SHIRE JERRE B. SWANN, SR. STEVEN M. WEINBERG

The views expressed in The Trademark Reporter are those of the individual authors and do not necessarily reflect those of INTA. The Trademark Reporter (ISSN 0041-056X) is published electronically six times a year by the International Trademark Association, 655 Third Avenue, New York, NY 10017-5646 USA. INTA, the INTA logo, INTERNATIONAL TRADEMARK ASSOCIATION, POWERFUL NETWORK POWERFUL BRANDS, THE TRADEMARK REPORTER, and inta.org are trademarks, service marks, and/or registered trademarks of the International Trademark Association in the United States and certain other jurisdictions.

1094 Vol. 106 TMR

MAKING THE BEST USE OF EXPERTS TO EVALUATE DAMAGES IN INTELLECTUAL

PROPERTY DISPUTES

By Bruce Abramson∗

I. INTRODUCTION Expert witnesses have become ubiquitous in litigation. At

some point in any litigator’s career, he or she will need to find, interview, select, prepare, and deploy an expert witness. The available literature and accessibility to training necessary to excel at these tasks, however, is scant—particularly compared to the literature addressing other areas of the law, lawyering, and the legal profession.

I have written this article as a practitioner’s note, from the atypical perspective of a lawyer who worked his way through law school as an expert witness in computing and economics, and in whose own practice expert testimony has always played a prevalent role. My focus in this article is on selected strategic questions governing the use of damages experts in intellectual property cases, though many of the issues I raise are equally applicable to other types of experts and/or to other types of disputes.

I hope to demonstrate why and how service as a litigation expert (or a non-testifying litigation consultant) is a unique professional skill. While high-quality litigation expert work entails possessing specialized knowledge of at least one discipline relevant to addressing the question posed, it also requires the research training necessary to conduct the relevant analyses and the pedagogical skills necessary to explain results to a lay audience. However, even these skills are insufficient to perform as a litigation expert; the expert must also possess some skills far more common among attorneys than among researchers or academics: a good litigation expert must know how to work with lawyers and how to counsel litigants; be familiar with the litigation environment and litigation strategy; and maintain a grounding in ∗ Current President, Informationism, Inc. Formerly Partner, Rimon, P.C. and Law Clerk, Hon. Arthur Gajarsa, U.S. Court of Appeals for the Federal Circuit. Mr. Abramson is a computer scientist with a law degree, who has experience as a consulting economist, specialized intellectual property knowledge, and has twenty-plus years of experience working as an expert in litigation and/or regulatory settings. He has served as a technical expert in infringement disputes, as a technology industry custom-and-practice expert in licensing disputes, and as a damages expert in a wide range of disputes, testifying in federal and state courts, as well as ADR environments. He may be reached at his website: www.bdabramson.com.

Vol. 106 TMR 1095 the relationship between applicable laws and available facts. Of perhaps most direct relevance to this article, I have come to appreciate that the establishment of expert credentials at the beginning of an expert report is a critical element in convincing anyone weighing decisions in a dispute, whether a jury or a judge, that they should care about the expert’s opinion.

II. EXPERTS The official job of an expert witness is to deploy “scientific,

technical, or other specialized knowledge that will help the trier of fact to understand the evidence or to determine a fact in issue.”1 Like all other witnesses—and unlike counsel—the duty of an expert witness is to the court, as much as, if not more than to a client. Unlike most other witnesses, whose testimony relates relevant facts of which they have personal knowledge, expert witnesses often proffer opinions derived by applying “reliable principles and methods” to case specific “facts or data” in a reliable manner.2 Taken together, an expert’s written, deposition, and trial testimony must be honest, accurate, and reliable.

Although experts are retained and offered to support a client’s legal position, the duty of zealous advocacy that binds counsel to client does not apply in the same manner to witnesses. The discovery rules governing expert communications, deliberations, and notes differ from those applicable to attorneys. More significantly, unlike counsel, expert witnesses must sit for depositions and cross-examinations that opposing counsel can pack with landmines. A witness—expert or otherwise—must provide honest answers to questions about potential weaknesses in the case of the litigant who called him. Counsel often attempt to solicit testimony from the opposing side’s liability and damages experts about the components of the case with which they are less familiar, hoping to get them to contradict each other. Testimonial experience is necessary for the witness to know how to avoid such traps without compromising his or her candor, objectivity, reliability, credibility, or reputation.

As a result, the expert’s duty to the court may, at times, be lost on a jury. It is hardly uncommon for each side in a dispute to call trial experts boasting comparable credentials, applying the same or similar methodologies to the same supersets of facts and data, and presenting wildly different conclusions. Not surprisingly, in nearly all such cases, each party calls an expert witness whose opinion bolsters the case that counsel—employing zealous advocacy—is trying to present. When the opinions of opposing

1. Fed. R. Evid. 702. 2. Id.

1096 Vol. 106 TMR experts merely contradict one another, it may feed a stereotype of expert witnesses as little more than hired guns.3 Like most stereotypes, this one combines a basis in fact with a fundamental unfairness when applied broadly; only some expert witnesses are hired guns.

What may explain this apparent anomaly? One explanation begins with the lawyer’s duty of zealous advocacy. Lawyers are not required to retain the first potential expert they interview; those whose initial perspectives seem unhelpful to the client’s case are unlikely to make the cut.4 Once retained, however, the expert becomes part of the client’s advisory team. By adding a skill set to the team, the expert may contribute to shaping the theory of the client’s case, and can be particularly helpful in forming discovery requests and responses—thereby heightening the appearance that the expert is offering advocacy rather than objective testimony.5

The expert’s skill at digesting, analyzing, and explaining complicated facts and data can be used for far more than assisting the trier of fact during a trial. A good expert should help both counsel and client better appreciate which legal theories the facts can sustain, and provide a realistic assessment of the evidence on both sides of the dispute. When the facts cannot sustain the claims the client would like to make, the legal theories counsel might have planned to assert, or the remedies that the client seeks, the expert’s advice can inform and guide settlement discussions, motion practice, and the overall contours of the case that actually reaches trial. A damages expert in particular can provide information critical in guiding settlement negotiations—or justifying the expenditure necessary to head to trial. The synergy between an advocate’s case and an objective witness’s support is thus never coincidental, but it is not necessarily indicative of impropriety.

Although the focus of this article is damages experts, it is worth noting that liability experts raise many of the same issues. Such experts are particularly important in cases involving intangible assets like intellectual property, where educational expertise that lies beyond training and experience of most trial lawyers is required. The use of liability experts well versed in the technology underlying a patent (and the development history of that technology) dates back at least as far as the Telephone Cases of the late nineteenth century.6 Contemporary copyright cases, 3. See, e.g., Mark R. Patterson, Conflicts of Interest in Scientific Expert Testimony, 40 Wm. & Mary L. Rev. 1313, 1327-36 (1999). 4. Id. 5. See, e.g., Cecil Kuhne, A Litigator’s Guide to Expert Witnesses 4 (American Bar Assoc., 2006). 6. Dolbear v. Am. Bell Tel., Molecular Tel. Co. v. Same, Am. Bell Tel. v. Molecular Tel., Clay Commercial Tel. Co. v. Am. Bell Tel., People Tel. v. Same, Overland Tel. Co. v.

Vol. 106 TMR 1097 which implicate computer, software, Internet, and communications technologies with increasing frequency, can require similar expert explication.7 For decades, trademark disputes have benefited from the testimony of expert witnesses who are able to explain the ways that consumers would perceive the mark, raising issues rooted in psychology, marketing, and survey design.8 Trade secrets can implicate any combination of these issues, along with cybersecurity concerns and forensic computing.9 Licensing disputes can hinge on an appreciation of relevant industry terms and practice, their evolution over time and possibly the relevant policy objectives.10

These areas of expertise all tend to interplay with applicable laws and legal theories to form critical parts of a liability case. To complicate matters even further for counsel, and as noted above, liability expertise and damages expertise can (but do not always) interact in potentially limiting ways. In such cases, counsel may find it beneficial to secure a damages expert possessing at least some familiarity with the underlying technology and a liability expert who understands the damages case.

III. DAMAGES EXPERTS A. The Skill Gap

Fluidity with liability issues is precisely where most lawyers focus their legal training and build their practices. By way of contrast, a quick perusal of law school course offerings and CLE programs shows them to be light on remedies and even lighter on

Same, 126 U.S. 1, 883 (1888) (discussing the testimony of an expert witness named Mr. Park Benjamin). 7. See, e.g., Richard H. Chused, Rewrite Copyright: Protecting Creativity and Social Utility in the Digital Age, 38 Isr. L. Rev. 80 (2005), http://digitalcommons.nyls.edu/cgi/viewcontent.cgi?article=1282&context=fac_articles_chapters; Bruce Abramson, Digital Phoenix: Why the Digital Economy Collapsed and How It Will Rise Again (MIT Press, 2005). 8. See, e.g., Donald L. Thompson, Survey Data as Evidence in Trademark Infringement Cases, 2 J. Mktg. Research 1 (Feb., 1965); Eugene E. Levitt, The Psychologist: A Neglected Legal Resource, 45 Ind. L.J. 82 (1969-70); Jacob Jacoby, Amy H. Handlin, and Alex Simonson, Survey Evidence in Deceptive Advertising Cases under the Lanham Act: An Historical Review of Comments from the Bench, 84 TMR 541 (1994). 9. See, e.g., Bruce A. Olson, Helping an Attorney Prove an Employee Theft/Theft of Trade Secrets Case with Computer Forensic Evidence: Part 1, Forensic Magazine, May 28, 2010, http://www.forensicmag.com/article/2010/05/helping-attorney-prove-employee-thefttheft-trade-secrets-case-computer-forensic; Jim Vaughn, The Use of Digital Forensics in Trade Secret Matters (Part 2 of 3), Trading Secrets, May 23, 2012, http://www.tradesecretslaw.com/ 2012/05/articles/trade-secrets/the-use-of-digital-forensics-in-trade-secret-matters-part-2-of-3/; Editorial Board, Orrick Launches New Cybersecurity Blog, Trade Secrets Watch, Oct. 1, 2015, http://blogs.orrick.com/trade-secretswatch/2015/10/01/orrick-launches-new-cybersecurity-blog/. 10. See, e.g., Bruce Abramson, Preventing and Predicting Software License Disputes, S.R.R.J., Spring 2011, 107.

1098 Vol. 106 TMR damages.11 In many ways, little has changed since 1941, when a book reviewer considering damages casebooks was able to write: “For some time a controversy has existed (one can hardly say that it has raged) as to whether the law of damages has any place in a law school course. These two latest casebooks on the subject do not exactly advance the cause of those favoring its inclusion.”12

The typical resolution of this still-existent controversy is to shoehorn some discussion of remedies into selected substantive courses, typically at the discretion of the professor. Young lawyers can thus be excused if they believe that these topics will play an inconsequential role in shaping their practices. Clients, particularly clients in civil disputes such as those involving intellectual property, often take a different view. To many clients, pursuit of an intellectual property suit, whether as plaintiff or defendant, is a business decision: the minimization of payments (whether as legal fees or damages) or maximization of collections (as damages minus legal fees) is often far more important than the vindication of any underlying rights. This mismatch between legal training and client needs leaves an obvious gap in many legal teams. Once again, an expert is necessary to fill the gap, and as this article showcases, that expert is often a damages expert.

B. Selecting a Damages Expert Perhaps the first critical question with which counsel must

grapple is the identification of the appropriate skill set for a given case. Witnesses may qualify as experts if their “knowledge, skill, experience, training, or education”13 has prepared them to provide helpful opinion testimony. In assessing potential experts, it is common for counsel to look first toward education, placing a primacy on degrees, institutional affiliations, fields of study, certificates, and credentials. This emphasis, though understandable, is frequently misplaced. Skills and experiences amassed outside of academic environments often dwarf in importance those obtained through formal academic credentialing.14

While impressive credentials can certainly play an important role in providing a witness with the gravitas necessary to impress juries (and possibly judges), few if any academic environments

11. See, e.g., F. Andrew Hessick, The Challenge of Remedies, 57 St. Louis Univ. L.J. 739, 739 (2013). 12. J.C. Stedman, Review of Cases on the Law of Damages by Ralph S. Bauer, 8 U. Chi. L. Rev. 810 (1941). Available at: http://chicagounbound.uchicago.edu/uclrev/vol8/iss4/25. 13. Fed. R. Evid. 702. 14. By way of full and fair disclosure, my own academic degrees include a B.A., an M.S., and a Ph.D. in Computer Science from Columbia and a J.D. from Georgetown. I proffer no opinion about their ability to impress.

Vol. 106 TMR 1099 prepare students to navigate the various advisory, testimonial, and preparation roles necessary to serve as an effective witness—much less to operate in an environment constrained by real-world data availability and real-world requirements, rather than by research-oriented laboratory conditions. As a result, “knowledge, skill, and experience” can be far more important than “training or education.” In much the same way that a recent law school graduate requires a good deal of practical experience to become an effective lawyer, impressive educational credentials simply constitute the most common entry point to an appropriate experiential career path. They are neither necessary nor sufficient to be an effective litigation expert.

Still, many lawyers enjoy emphasizing potential mismatches that they detect between the degrees that a witness may have obtained decades earlier and the testimony presented in the case at hand. Many also enjoy emphasizing portions of a witness’s career unrelated to the expertise relevant to the testimony at hand, or defining expertise so narrowly that no person would qualify—in an apparent attempt to downplay the experience and/or training that actually qualifies an opposing expert to testify. They devote significant deposition time to reviewing the witness’s curriculum vitae—drastically reducing the time available to consider substantive testimony. They then reiterate the emphasis in preparing a Daubert motion15—a request that the Court exclude the testimony of the opposing side’s expert witness that has become de rigueur in contemporary litigation.

Daubert motions have become ubiquitous parts of litigation because they can play an important strategic role even when they are baseless. Challenges improperly focused on credentials rather than on methodology and application exemplify the strategy: A trial judge’s decision to grant a Daubert motion is reviewable, subject to an abuse of discretion standard, and even then it is only reviewable if the matter makes its way through a trial without the excluded witness and becomes the subject of an appeal.16 The exclusion of one or more witnesses—particularly damages witnesses—often motivates litigants to settle cases that were headed to trial on terms suddenly unfavorable to the party whose witness was excluded. Thus, any time a judge has expressed exasperation with the litigiousness of the parties or counsel, or surprise that the case had not yet settled, it behooves counsel to provide a mechanism capable of helping the judge further motivate settlement—on newly favorable terms, of course.

Because the courts are supposed to look beyond credentials to overall experiential preparation and even more importantly to the 15. See Daubert v. Merrell Dow Pharms., 509 U.S. 579 (1993). 16. See Gen. Elec. Co. v. Joiner, 522 U.S. 136 (1997).

1100 Vol. 106 TMR substance of the testimony, i.e., the acceptability of the expert’s methodology and reasonableness of its application, motions granted excluding a witness on credentialing grounds usually suggest a motivation outside the substance of the expert’s testimony. The ability to deal calmly with attacks—even slanderous attacks—is at least as important a quality in an expert witness as it is in an attorney.

With the importance of experience over credentials in mind, the selection of an appropriate damages expert often comes down to choosing between accounting and economics. Though these fields are closely related (hence the difficulty of the choice), they embody different analytic approaches (hence the need to choose). Perhaps the simplest way to understand the distinction is that “accounting is based on a set of principles, while economics operates on certain assumptions to simplify complex situations.”17 Accounting principles typically specify the model, and look to the accounting expert to fit the data into it. Economic experts, on the other hand, must start with a set of assumptions to build a model appropriate to the question they are addressing and the context in which they are addressing it.

One useful way to think about damages is as a combination of compensable legal harm and economic measurement. This characterization highlights the two tasks central to every good damages report: the modeling of the world as it would have existed “but for” the defendant’s allegedly improper act (discussed in greater detail below), and the measurement of the difference between the plaintiff’s economic position in that but-for world and the world “as is” (or in the less common case of an unjust enrichment claim, the difference between the defendant’s position in those two worlds).

The best experts are thus well versed in both the measurement of damages and the law of damages—a requirement that is heightened in specific legal arenas, like IP law, where the applicable legal standards can be both idiosyncratic and subtle. Economic modeling and accounting analyses both focus on measurement, and in some cases might yield identical results. The specific legal questions at hand, and the availability of relevant data, however, can render one type of approach far more appropriate than the other to a given case.

As a general rule, the closer the facts of a dispute are to a well-understood textbook analysis of profits or cash flows, the stronger the case for an accountant. Similarly, disputes whose resolution hinge upon or require compliance with specific regulatory

17. Investopedia, “What is the difference between accounting and economics?” Investopedia, http://www.investopedia.com/ask/answers/032315/what-difference-between-accounting-and-economics.asp#ixzz4Qkzx7sFH.

Vol. 106 TMR 1101 principles also favor accounting expertise. The further the specifics move from those settings, however, the stronger the case for economic expertise becomes. In particular, damages relating to underdeveloped intangible assets—such as IP—tend to favor the use of economic models. Thus, the more clearly the environment calls for strict adherence to a fixed rule set, and the more the problem at hand meets the assumptions and constraints underlying accounting rules, the greater the propriety of retaining an accountant. The more complicated and atypical the analysis, the greater propriety of retaining an economist. Though the accounting profession has attempted to extend the rules first developed for tangible assets and past performance to the complexity of an intangible asset whose full development was allegedly stunted by a defendant’s act, those extensions nevertheless often fall short.18 In many IP disputes, economic modeling can integrate a far richer set of concerns, more closely aligned to applicable law and case-specific evidence, than can an accounting model.

C. Expert as Advisor Like most aspects of litigation, damages can run the gamut

from extremely straightforward to extremely complex. Depending on the facts of a case and the availability of data, damage calculations can involve little more than the simple manipulation of a few numbers using four-function math, or they can require advanced statistical analyses. As noted, however, a good damages expert should bring more to the table than number-crunching skills, particularly in the sort of complex disputes that typically arise in IP cases.

A damages expert with a solid grounding in the law can benefit counsel and client in several ways. From a substantive perspective, the damages analysis is often critical to a showing of causality, connecting the theory of liability to the measured harm. From a pre-trial settlement perspective, a compelling presentation in either a written report or a deposition can prove invaluable in guiding negotiated resolutions. From a strategic perspective, a damages analysis conducted early (something done far too infrequently) can help ground litigation strategy in a realistic assessment of the amounts truly at stake.

A hard focus on numbers can also help counsel convince a client to take a serious, realistic look at his or her case, providing a bit of objectivity separate from emotion. It is hardly uncommon—in IP disputes or elsewhere—for a plaintiff client to engage an attorney confident that the defendant’s bad act has caused some 18. See, e.g., Michael Pellegrino, BVR’s Guide to Intellectual Property Valuation (Business Valuation Resources, 2nd ed. 2012).

1102 Vol. 106 TMR harm, but unable to articulate (much less to prove) an amount. Nor is it uncommon for clients to arrive unaware: that not all forms of harm are compensable; that speculative damages are unrecoverable; that it is impermissible to assume that the world would have unfolded in some best-case scenario but-for the defendant’s behavior; or that insurance coverage, legal fees, and enhanced damages are available under some but not all legal theories—even given an identical set of facts. From a defense perspective, clients confident that they have done nothing wrong—and that if they did, it was inconsequential—can be resistant to learning how much they may stand to lose. This resistance can be particularly strong in IP infringement cases in which the defendant was completely unaware of the plaintiff’s IP (or even the plaintiff) until receiving word of the suit—a situation hardly uncommon in the patent and trademark worlds.

In short, the best damages experts become invaluable integrated parts of the legal team. Their input can help ground the client in reality, guide discovery and legal strategy, promote realistic settlement, and weave together the strands of the client’s story necessary to play well to judge or jury. It is thus important to review the basic contours and strategic uses of a damages assessment.

1. Damage Modeling Perhaps the sine qua non of all damages work is the

construction of the aforementioned but-for world—whether done implicitly (as might occur in a simple matter) or explicitly (as is common in more complicated cases).19 The contours of this but-for world capture the plaintiff’s contentions about what should have happened, “but for” the defendant’s commission of some allegedly wrongful act. The modeling exercise thus incorporates critical elements of the causal case, linking the specific legal duty for whose breach the defendant is allegedly liable for the harm that the plaintiff suffered.

This but-for world stands in contrast to the “as-is” world, or the world that unfolded given the defendant’s allegedly inappropriate actions. Damages measure the difference between the plaintiff’s financial state in the as-is and the but-for worlds (or in the case of the plaintiff’s pursuing an unjust enrichment claim, the difference between the defendant’s financial state in the two worlds). In an IP infringement case, such damage assessments typically combine differences in the profit pictures derived in the two worlds and considerations of royalties that the defendant

19. See, e.g., Robert E. Hall and Victoria A. Lazear, Reference Guide on Estimation of Economic Losses in Damages Awards, 477-523 (Applied Economics Partners, 1994).

Vol. 106 TMR 1103 should have paid to the rights holder. These measures are known respectively as “lost profits” and “reasonable royalties.”

Because the burden of proof for damages falls on the plaintiff, every plaintiff must forward proof of the amount of damages. In all but fairly simple cases, the vehicle for summarizing and presenting such evidence is the expert’s report. In the face of such a proffer of evidence, defendants have a strategic choice: they can retain experts to build their own damage models; they can retain experts to rebut the plaintiff’s models; they can rely on cross-examination to discredit the plaintiff’s expert; or they can count on winning their liability case and ignore damages altogether. These last two routes can be particularly risky.

In 1985, in what was at the time the largest damages award in history, a jury assessed $7.53 billion in compensatory damages against Texaco for its tortious interference with Pennzoil’s planned acquisition of Getty.20 Pennzoil put forward two damages experts. Texaco, insisting that even if it were liable it caused zero damages, presented no witnesses to refute Pennzoil’s experts and relied entirely on cross-examination to discredit Pennzoil’s witnesses. At trial, that cross-examination failed to convince either the court or the jury that Pennzoil’s models were either methodologically flawed or overstated damages by a significant amount. On appeal, the court found the methodology acceptable, and noted that the jury was within its rights to believe Pennzoil’s witnesses.21

Multi-billion dollar rulings tend to focus attention—in this case, the attention of the defense bar. In the roughly thirty years since Texaco lost that ruling (which drove it to reorganize under the bankruptcy laws), standard practice has changed. Whereas many defense lawyers—and defendant clients—once believed that commissioning a damages report might be seen as a tacit admission of liability, few see it that way today. It is almost unimaginable that the defendant in a contemporary billion-dollar case would fail to call its own damages expert. Without admitting liability then, a damages report submitted on behalf of the defendant typically reiterates the defendant’s contentions vis-à-vis liability, lays out the plaintiff’s allegations, presumes for the sake of the report that the plaintiff will prevail, and then proceeds from that assumption.

2. Defense Strategy Given that defendant damages reports are now standard in

lawsuits of any complexity—and certainly in IP cases—the question is whether defense counsel should commission an expert

20. Texaco v. Pennzoil, 729 S.W.2d 768, 862 (Tex. App. 1987). 21. See id.

1104 Vol. 106 TMR to build a damages model from the ground up or await the report from the plaintiff and retain the services of a rebuttal expert. Each approach has its own merits, and each may be appropriate under different sets of circumstances.

A good expert witness, like a good debater, should know the strongest arguments available to both litigants. Because a defendant forwarding a ground-up model might alert the plaintiff to new arguments, any expert building or evaluating a but-for world on behalf of a defendant should approach the matter cautiously. A plaintiff’s expert who adopts a defendant’s model and methodology, tweaks a couple of assumptions or quibbles with a data source, and derives a much larger number, can create unnecessary headaches for the defendant and defense counsel. Moreover, discovery schedules often compress the timing available between the plaintiff’s and the defendant’s reports (in some cases, even requiring a simultaneous exchange of reports), which may effectively preclude a sufficiently thoughtful rebuttal and necessitate a ground-up report on behalf of the defendant. And discovery schedules can vary widely, depending upon the nature of the case, local rules, specific rules that a trial or magistrate judge has adopted, or agreement of counsel.

When timing permits, the rebuttal-only strategy can have much to commend it, depending on the specifics of the case. Unlike a ground-up report, a rebuttal report minimizes the number of unnecessary disagreements. It is hardly uncommon for a defense expert to accept the data sources and basic methodology that the plaintiff’s expert forwarded as the basis for conversation and debate, even when he or she might have preferred a different approach. While some might disagree, I consider an expert’s primary job to be the provision of information necessary and useful to resolve a dispute—not to increase the range of disputed points. Even those who take a more belligerent approach, however, would likely concede that methodological disputes and/or debates over data sources are unlikely to keep a jury riveted—and can thus detract from the presentation of the witness discussing them.

Of perhaps even greater significance, a but-for world is a model of a reality that does not, by definition, exist. There is no way to construct such a model—whether in litigation or elsewhere—without making a number of assumptions, then tracing through the likely consequences of altered actions (in litigation, a replacement of the defendant’s allegedly bad act with actions the plaintiff deems appropriate) to their logical consequences. Assumptions and consequential logic, however, are rarely if ever unassailable. Any good modeler understands that there is typically a collection or range of assumptions available, some more reasonable than others. The set chosen must be reasonable and defensible. A good rebuttal expert will usually be

Vol. 106 TMR 1105 able to suggest alternatives to any specific set of assumptions that an opposing expert might make.

Given enough time to prepare, a defendant’s rebuttal-only report can thus often seem to give the defendant an unfair advantage—or perhaps more accurately, an advantage borne of the burden of proof of damages falling on the plaintiff. That apparent advantage, however, can reverse itself when discovery and motion practice give way to a trial—particularly a jury trial. Because damages are relevant only if the defendant is liable, and damages experts are often the last witnesses to testify, jurors (and judges) frequently have a good idea about liability before the damages expert even takes the stand (a point that is particularly true in the case of the defense expert, who is often the last witness in the entire trial). For jurors leaning toward the defendant’s liability case, damages are irrelevant. For jurors leaning toward the plaintiff’s liability case, on the other hand, the plaintiff’s expert is helping an aggrieved party seek justice, while the defendant’s damages expert appears to be adding insult to injury. A defendant’s expert restricted to rebutting the plaintiff’s proffered damages model can strengthen that perception—essentially nickel-and-diming the injured party by harping on what might seem like minor omissions, or by insisting upon the less favorable of two assumptions that may sound equally plausible to the jury.

Setting aside the substantive merits and presentation skills of the two experts—which obviously favor neither plaintiffs nor defendants as a matter of abstract theory—the atmospherics at trial tend to favor plaintiffs’ damages experts over defendant’s damages experts much as the mechanics prior to trial favor the defendant’s expert. Rebuttal-only reports can heighten both phenomena. Much as it may benefit the defendant to focus the judge, pre-trial, on the shortcomings of the plaintiff’s damage models (and thus to avoid raising an entirely distinct set of issues in a defense damages model built from the ground up), a jury already inclined to favor the plaintiff over the defendant after hearing the liability case may be more likely to tilt back toward the defendant on damages when given the choice between two distinct models built from the ground up than when forced to choose between the victim’s benefactor and an attacker who does nothing but find fault.

IV. IP DAMAGES A. Types of IP Damages

The rich complexity of a but-for world assessing an intangible asset’s unmet economic potential—without veering into impermissible speculation or a plaintiff’s dreams of fulfilling his or her wildest expectations—attests even more strongly to the need

1106 Vol. 106 TMR for an expert well versed in both the law of damages and in IP law. As noted, few attorneys are remedies specialists and few litigants appreciate the lines drawn between compensable harm that they may have suffered and categories of harm—potentially just as real—for which the law will not provide recompense. Nor, for that matter, are they often aware of the lines between permissible projections based upon reliable assumptions and speculation derived through economically unreliable assumptions that may strike the untrained eye as equally plausible. Finally, while many attorneys are indeed specialists in patent, copyright, trademark, trade secret, and licensing law, the many excellent litigators (and even litigation firms) lacking such specialization can benefit greatly from adding a knowledgeable expert to their team.

The need for a true remedies specialist, always present to some extent, reaches its apex in areas like IP where damages law is both unique and in flux. Precisely because of the complexity inherent in IP-related but-for worlds, courts have developed a preference (if not a requirement) for particular analytic models. The prevailing standard for the admissibility of expert testimony, in fact, amplifies the importance of such legally blessed models and methods. The emphasis on “accepted methodologies” as a guiding determinant of admissibility suggests that wherever the courts have accepted a methodology, continued reliance on that methodology reflects the safest possible course—unless and until, that is, the courts begin to change their minds.

A comfortable majority of IP damages models fall into one of three broad categories: statutory, lost profits, or reasonable royalties. Claims for statutory damages are often relatively straightforward. The key IP statutes all contain provisions dealing explicitly with damages. The Patent Act calls explicitly for “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”22 The Copyright Act calls for “the copyright owner’s actual damages and any additional profits of the infringer . . . or statutory damages.”23 The Lanham Act calls for recovery of “defendant’s profits, any damages sustained by the plaintiff, and the costs of the action,” or, in selected cases and at the plaintiff’s election, statutory damages.24 All three statutes also contain provisions for enhanced damages.

In copyright and trademark cases, the statutes provide two accommodations to the challenges inherent in constructing a non-speculative but-for world: they split the burden of proving the infringer’s profits, requiring the plaintiff to prove only sales 22. 35 U.S.C. § 284. 23. 17 U.S.C. § 504. 24. 15 U.S.C. § 1117.

Vol. 106 TMR 1107 revenues, with the defendant required to prove costs; and they incorporate statutory damages whose simplified calculation obviates the need for a sophisticated but-for model.25 Other than that nonstandard allocation of the burden of proof, however, models useful in assessing lost profits implicate the same range of issues in IP cases as they do elsewhere. At their core, they require reasonable data concerning the plaintiff’s profits in the as-is world and a but-for model that aligns with applicable legal standards and an accepted modeling methodology. Familiarity with the legal standards in play is crucial, but the assessment of lost profits in many IP cases is often not all that different from the assessment of lost profits in non-IP cases.

B. Reasonable Royalties Reasonable royalties, on the other hand, are an artifact of the

IP world. Outside of litigation, there are relatively few ways to make money from intellectual property—whether patents, copyrights, or trademarks. Stated simply, a rights holder seeking to monetize IP can build an exclusive business around the IP, sell some or all of the IP rights, or license the IP on exclusive or non-exclusive royalty-bearing terms. An IP infringement damages analysis falling into the reasonable royalty category thus attempts to determine what sorts of licensing terms the parties would have negotiated in the but-for world, then apply those terms to the defendant’s sales of allegedly infringing products.26

By far the most common approach to reasonable royalties—in any area of IP law—derives from a 1970 district court patent case from the Southern District of New York, Georgia Pacific v. U.S. Plywood.27 Contrary to a common misconception, Georgia-Pacific does not specify a formal methodology. Instead, it enumerates fifteen nonexhaustive “factors” that might be relevant to the construction of a but-for world in which the rights holder and the defendant (or their respective predecessors in interest) had engaged in a successful hypothetical licensing negotiation shortly before the date of first alleged infringement.

Perhaps the most easily understood (and possibly the most common) methodology employing the Georgia-Pacific framework designates an existing license as a baseline, then uses various factors to argue that the hypothetical license under construction

25. See 17 U.S.C. § 504; 15 U.S.C. § 1117. 26. As a technical matter, a reasonable royalty analysis is merely one approach to assessing lost profits—under the assumption that that IP owner would have profited by licensing but for the defendant’s decision to infringe rather than to take a license. Nevertheless, the unique analytic methodologies employed in the assessment of reasonable royalties are sufficient to warrant a distinct categorical label. 27. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970).

1108 Vol. 106 TMR would bump selected terms in favor of either the plaintiff or the defendant. The resultant construction of a but-for license is structurally similar to the baseline, with specific rates that may be either higher or lower than the baseline rates.

The Georgia-Pacific court explicitly disclaimed the idea that its analysis constitutes a specific analytic methodology, and certainly did not require its widespread replication:

A comprehensive list of evidentiary facts relevant, in general, to the determination of the amount of a reasonable royalty for a patent license may be drawn from a conspectus of the leading cases. The following are some of the factors mutatis mutandis seemingly more pertinent to the issue herein. . . . Both sides agree that this Court has a broad range of judgment in evaluating the relevant factors . . . [b]ut there is no formula by which these factors can be rated precisely in the order of their relative importance or by which their economic significance can be automatically transduced into their pecuniary equivalent.28

Subsequent courts, however, may not have been quite so meticulous. The Second Circuit, which heard the case’s appeal, blessed the fifteen factor framework as an appropriate approach to assessing reasonable royalty damages in patent cases in 1971.29 The Federal Circuit did the same in 1983,30 less than a year after it was founded for the explicit (though not the sole) purpose of unifying patent law.31 The Seventh Circuit condoned the application of the Georgia-Pacific framework (with suitable modifications) to damage assessments for violations of the Lanham Act in 199432—a route toward assessing trademark damages that has since grown increasingly common.33 In copyright law, the Georgia-Pacific factors remain controversial; most courts considering their applicability to copyrighted products (primarily

28. Id. at 1120-21. 29. Georgia-Pacific Corp. v. U.S. Plywood Corp., 446 F.2d 295 (2d Cir. 1971). 30. Deere & Co. v. International Harvester Co., 710 F.2d 1551 (Fed. Cir., 1983). 31. See, e.g., Bruce Abramson, The Secret Circuit: The Little-Known Court Where the Rules of the Information Age Unfold (Rowman & Littlefield, 2007) at ch.1. 32. Sands, Taylor & Wood v. Quaker Oats Co., 34 F.3d 1340 (7th Cir. 1994). 33. See, e.g., R. Charles Henn, Jr., Sabina A. Vayner, and Katharine M. Sullivan, Monetary Recovery in Trademark Litigation, IP Litigator, Nov/Dec. 2010 at 4, http://www.kilpatricktownsend.com/~/media/Files/articles/2010/IPLIT_111210_Henn.ashx; David Drews, Determining an Appropriate Royalty Rate for Reasonable Royalty Trademark Damages a Modified Georgia-Pacific Framework, les Nouvelles, Jan. 2015, http://www.lesi.org/les-nouvelles/les-nouvelles-article-of-the-month/les-nouvelles-article-of-the-month-archives/les-nouvelles-article-of-the-month-january-2015.

Vol. 106 TMR 1109 software), have rejected them because of the way that the experts implemented the analysis, rather than as a matter of principle.34

Taken together, Georgia-Pacific’s fifteen factors are both comprehensive and overly broad. It is hard to imagine (and I have never encountered) an issue that an expert might consider relevant to a hypothetical negotiation that cannot fit into at least one of the factors. Yet it is rare to encounter a case in which more than a handful of the factors inform the analysis in a meaningful way. Nevertheless, experts and counsel are loath to deviate in any way from a widely accepted approach; it is quite common for an expert report to devote numerous pages and calculations to a specific factor, only to conclude that it has no bearing on the but-for license. While such overkill heading into a dead end is hardly a productive use of client resources or expert time, many lawyers and experts consider it insurance against a report being ruled incomplete, or conforming to something other than the accepted methodology, and thus excluded under Daubert.

As I noted in my discussion of Daubert motions above, exclusion of an expert’s testimony due to a failure to mention or discuss irrelevant Georgia-Pacific factors is unjustifiable—both as a matter of law and as a substantive assessment of the analysis. Nevertheless, as I also noted above, judges have broad discretion to exclude expert testimony, and they are unlikely to face appeals when they rest their exclusion on tenuous bases. An incomplete or deficient application of an accepted methodology certainly sounds like valid grounds for exclusion, whether the omitted factors were relevant or not. As a result, lawyers and experts tend to err on the side of overinclusiveness.

Still, and notwithstanding its excellent pedigree, Georgia-Pacific analysis is not a static methodology. Over the past decade, the Federal Circuit has rejected as unsound several “rules of thumb” guiding reasonable royalty assessments that the lower courts (and the Federal Circuit itself) had long accepted, and revisited issues related to apportionment—the allocation of revenues arriving upon the sale of a product that incorporated the allegedly infringed IP as but one of several components or features.35 Other courts have raised similar concerns, and more seem likely to follow.

34. See, e.g., Kevin Bendix, Copyright Damages: Incorporating Reasonable Royalty from Patent Law, 27 Berkeley Tech. L.J. (2012), http://scholarship.law.berkeley.edu/btlj/vol27/ iss4/13. 35. See, e.g., Lucent Tech., Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009); Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1319 (Fed. Cir. 2011); LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F. 3d 51, 69 (Fed. Cir. 2012). I discuss these cases, and their net effect on reasonable royalty calculations, in detail in Bruce Abramson, Trolling Around the Patent-Antitrust Interface: The Roots of the NPE Challenge and the Role of Antitrust in Patent Reform, 59 The Antitrust Bull. 2 (2014) at 221-279.

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For the most part, these recent changes have improved the economic logic embodied in court-approved patent damage calculations. Even improvements, however, create a quandary for experts, counsel, and client: How should they approach methodologies that courts have accepted in the past, but whose economic validity (particularly as applied) is questionable? Should they apply the accepted methodology and risk a court—trial or appellate—following the current gestalt to exclude it as economically dubious? Or should they forward an analysis embodying sound economics that no court has previously accepted? While no heuristic can guarantee a successful resolution of this query, an experienced witness who understands the quandary provides the strongest possible chances of surviving a challenge issued on such grounds. After all, no one said that every strategic question was amenable to an easy answer.

C. Damages and Injunctions Monetary damages, of course, are only one of the two forms of

relief available for infringement. The other is injunctive relief. No discussion of IP damages can be complete without at least some consideration given to the interplay between these two critical forms of IP remedies. A comparison of some realities shaping contemporary patent and trademark litigation provides an excellent mechanism for that discussion.

A patent protects an invention that, if valuable, is inherently valuable. The issuance of a patent often requires little more than an idea and the investment of a few thousand dollars; a robust secondary market in patents means that many patent owners have invested only modest capital in their acquisitions. Infringers, on the other hand, typically do build businesses around their ideas and inventions, often unaware that they are infringing. Any infringing “make, use, or sale” of the patented invention confers value on the infringer. Because the patentee was entitled to at least some of that value, past patent infringement always implicates monetary damages, even when an injunction prevents future infringement. Furthermore, the balance between injunctive relief and damages differs across the different areas of IP litigation. Though injunctions are available—at least in theory—to any plaintiff prevailing on a claim of infringement, the realities of IP litigation suggest that plaintiffs with different profiles will express different preferences for different remedies.

Trademarks, by way of contrast, rarely if ever possess intrinsic value upon issuance. They become valuable only after the trademark holder has made a significant investment in associating them with a popular product or service—or branding. Consequently, though neither lack of knowledge nor a good faith belief in noninfringement of either a patent or a trademark is

Vol. 106 TMR 1111 relevant to infringement claims (though they are relevant to the question of willfulness), many patentees can bring infringement suits without having invested in a business; relatively few trademark holders can do the same.

Taken together (and at the risk of overgeneralization), patent litigation tends to provide a richer consideration of damages analysis, while trademark litigation provides deeper insights into injunctive relief. A sizable swath—in recent years at least, a sizable majority—of all patent suits filed pit a small inventor or a non-practicing entity (NPE, often unaffectionately known as a “patent troll”) against a large company. During the first half of 2015, for example, roughly 68% of all patent cases, and a full 90% of high-tech patent cases, involved NPE plaintiffs.36

The plaintiff’s purpose in filing almost all such suits is to collect damages. Injunctions in such cases, when available, are more commonly used as bargaining chips that raise the price of forward-looking licenses rather than as measures designed to shut down the defendant’s product or business. As a result, the Supreme Court moved a decade ago to reduce the number of injunctions granted in such disputes—emphasizing the importance of damages even further.37

Of course, not all patent disputes fit this profile. Many of the most bitterly contested, and highest-profile patent disputes, pit two large companies against each other. In such cases, injunctions designed to reduce competition, damages, and cross-licensing settlements all come into play. The precipitous rise in interest in patent suits over the past decade or two, however, has been powered precisely by the small-inventor or NPE suit against a deep-pocketed big company—and those suits are powered almost entirely by the desire for monetary damages.

By way of contrast, the stereotypical contemporary trademark plaintiff is a large corporation that has invested heavily, typically over the course of many years, in building value into a brand. The typical defendant is perhaps intentionally attempting to free ride on the plaintiff’s accumulated good will, or perhaps inadvertently working to build a brand using marketing that that the plaintiff considers confusingly similar. Though there may be some damages at stake, the primary goal of a trademark plaintiff thus situated is an injunction. 36. Joe Mullin, Patent troll lawsuits head toward all-time high, ArsTechnica, Jul. 10, 2015, http://arstechnica.com/tech-policy/2015/07/patent-troll-lawsuits-head-towards-all-time-high/. See also, FTC, Patent Assertion Entity Activity, Federal Trade Commission, Oct. 2016, https://www.ftc.gov/reports/patent-assertion-entity-activity-ftc-study; Bruce Abramson, Trolling Around the Patent/Antitrust Interface: The Roots of the NPE Challenge and the Role of Antitrust in Patent Reform, The Antitrust Bull. 59:2, Summer 2014. 37. See eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

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V. CONCLUSION The discussions that I have presented in this paper merely

scratched the surface of the complexity inherent in conducting a damages analysis in an IP case—any type of IP case—or the professionalism necessary to confer maximum benefit upon the client. Counsel approaching the selection of an appropriate IP damages expert—particularly lawyers approaching this task for the first time—should bear in mind the various considerations that I have raised. As I noted at the outset, I have seen each of these issues arise, in important ways, more than once. A good objective expert, well versed in the applicable area of IP law, the law of damages, and the applicable methodology necessary to measure economic value, can be an invaluable asset to a litigation team. Knowledge of a dispassionate, objective, assessment—coming from an analyst with a duty of candor to the court—should guide the lawyer’s zealous advocacy of the client.