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Posner Opinion Provides Worthwhile Damage Guidance

By: David Nolte
Originally Published in Financial Complexity Made Clear, October 2012
Tel: (213) 787-4100
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In re: Apple vs. Motorola, the parties sued each other for patent infringement involving smartphones. Seventh Circuit Judge Richard Posner, sitting by designation, threw out all damage witnesses for both parties on Daubert motions. Then, since both parties lacked damages testimony, he dismissed both cases with prejudice. Interestingly, Judge Posner did not allow either party an opportunity to amend or supplement their expert reports.

The principles that got the experts in trouble are not unique to patent cases, and are actually quite common. The case provides three worthwhile damages lessons for anyone litigating a commercial damages issue.

The advisability of using a non-litigation process

Citing the landmark case, Kumho Tire vs. Carmichael, 526 U.S. 137, 152 (1999), Judge Posner states:

    "An important test for deciding whether a problem with proposed expert testimony is disabling, or merely a weakness, is whether the expert "employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field."

Applying this test, the Court repeatedly posed a hypothetical engagement outside of litigation in which the expert was employed to answer the economic issue at hand. If the expert failed to perform the same level of scrutiny in this damage report as what would be necessary in the hypothetical assignment, then the expert opinion was excluded.

In the case of Apple's damages expert, the failure to consider non-infringing alternatives caused that witness to provide massive (and wrong) damages estimates. As with any proper reasonable royalty analysis, the existence of acceptable non-infringing alternatives places a lid on the amount that could be reasonably negotiated by the litigating parties. The fact that the patented feature may be valued by the market will not allow large damages if there is a non-infringing way of economically addressing the same functionality. The expert would obviously consider this in a real assignment, but failed to do so in his litigation conclusion.

Impermissible use of hearsay

Motorola's expert was thrown out based on the same test of what would occur with a real assignment outside litigation. In this case, the expert asked a client employee what something would cost, performed no analysis, and reported the amount as the conclusion. I regularly get this same type of request for testimony, covering practically every type of commercial damages case. In most circumstances, the prospective employing attorney wants to use an expert's ability to rely on hearsay as a convenient and efficient means of getting information before the jury. The Court in Apple vs. Motorola, found such testimony is impermissible because the expert is not using his expertise in the same manner as what would occur in the ordinary course of the conducting his profession. Judge Posner explains this as follows:

    "Wagner's [the Motorola expert] proposed testimony that the infringing notification window cost Motorola $67,000 to develop is not expert testimony but fact testimony. The special limitations that Rule 26(a)(2) places on expert testimony are not intended for a witness who merely testifies that his company spent $x to make something. It also is not the best evidence of that fact, if it is a fact; and while an expert witness is permitted to base an opinion on hearsay evidence, he isn't permitted to use that privilege merely to shield the source of the evidence from cross-examination....

    As for Wagner's report of his conversation with Cooper, it is, like the $67,000 figure, a mere echo of another witness-another interested witness-and it thus violates the principle that a testifying expert must use the same approach (if it is feasible for him to do so) that he would use outside the litigation context. So imagine that Motorola had not been sued, but had approached Wagner and told him "we're concerned that we may be accused of infringing Apple's patent '002; we'd like you to advise us how much it would cost us to invent around the patented invention." Wagner would not ask an engineer at Motorola; Motorola would ask an engineer at Motorola....

    He would not have asked a Motorola engineer, because Motorola doesn't have to hire an outside consultant who is not an engineer to ask an engineering question of a Motorola engineer."

Failing to perform what is practical in the circumstances

Before accepting an expert assignment, the nature of the available evidence should be discussed with the prospective employing attorney. In throwing out one of the expert witnesses, Judge Posner addressed this common subject as follows:

    "I am mindful that a degree of speculation is permitted in calculating damages, especially but not only in cases in which the defendant's wrongful conduct has made the calculation of damages difficult. That doesn't seem to be a factor in this case, but nevertheless when the plaintiff has done his best to prove damages, his inability to dispel uncertainty concerning the accuracy of his claim is not fatal. But if an expert witness fails to conduct a responsible inquiry that would have been feasible to conduct, his failure cannot be excused by reference to the principle that speculation is permitted in the calculation of damages; that permission presupposes the exhaustion of feasible means of dispelling uncertainty." [Citations omitted]

Stated simply, if practical additional analysis is available and cost effective, it should be performed.

Judge Posner is one of the foremost legal scholars in the United States, particularly on economic matters. He has written numerous influential opinions, written almost forty books on law and economics, teaches at the University of Chicago Law School, and is widely respected in the legal community. In an article published in The Atlantic, Judge Posner acknowledges that his opinion will certainly be appealed. This is true because of both the potentially large amounts involved, and the harshness of Judge Posner's act of throwing both side's case out. With the appellate opinion, the case will provide guidance no matter which way the case turns out.

David Nolte is a principal at Fulcrum Financial Inquiry LLP with over 30 years experience performing forensic accounting, auditing, business appraisals, and related financial consulting. He regularly serves as an expert witness.

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