New Rules in the Northern District of California Aim to Encourage Patent Case Settlements

New rules for patent cases in the Northern District of California will significantly affect litigation and settlement of cases in Silicon Valley’s backyard.  Lawyers litigating cases in the district after the January 17, 2017 change should be wary of the new requirements that set the Northern District of California apart.  These changes fall into three main categories.

The first change affects the initial Case Management Conference under Federal Rules of Civil Procedure 26.  In the Case Management Statement, parties now must provide non-binding, good-faith estimates of the damages expected in the case, as well as an explanation for the estimates.  Patent L.R. 2-1(b)(5). If a party cannot provide this information they must explain why, state what information they would need to do so, and state when the party believes they would be in a position to provide the estimate and explanation.

Second, several changes affect which documents  must now be disclosed no later than 14 days after the Case Management Conference.   The Disclosure of Asserted Claims and Infringement Contentions must now identify the date of first infringement, the start of claimed damages and the end of claimed damages.  Patent L.R. 3-1(h).  Accompanying this Disclosure, the party claiming infringement must now also include: (1) any agreements transferring an interest in any of the asserted patents, (2) agreements the party contends are comparable to a license that would result from a hypothetical reasonable royalty negotiation, (3) agreements that otherwise may be used to support the damages case, (4) if the party identifies instrumentalities pursuant to Patent L.R. 3-1(g), documents sufficient to show marking of such embodying accused instrumentalities and if it wants to preserve the right to recover lost profits based on such products, sales, revenues, costs and profits of such embodying accused instrumentalities, and (5) documents comprising a F/RAND commitment with respect to the asserted patents.  Patent L.R. 3-2(f)-(j).  In addition, the parties opposing the claim of patent infringement must now produce with their Invalidity Contentions: (1) agreements that are comparable to a license that would result from a hypothetical reasonable royalty negotiation, (2) documents sufficient to show the sales, revenue, cost, and profits for the accused instrumentalities identified pursuant to Patent L.R. 3-1(b) for any period of alleged infringement, and (3) all agreements that may be used to support the party’s damages case.  Patent L.R. 3-4(c)-(e).

Finally, the new rules require Damage Contentions to be served by the party asserting infringement no later than 50 days after the service of Invalidity Contentions.  Patent L.R. 3-8.  The Damage Contentions should identify the categories of damages it is seeking, as well as the theories of recovery, factual support for those theories and computations of damages in each category including: lost profits, price erosion, convoyed of collateral sales, reasonable royalty and any other form of damages.  Patent L.R. 3-8(a).  Within 30 days of the service of Damage Contentions, each party denying infringement must serve Responsive Damage Contentions identifying how and why it disagrees with those contentions.   Patent L.R.3-9.  If any party cannot provide this response, they must identify the information they require.  Patent L.R. 3-8(b), 3-9.

The practical impact of the January 17, 2017 modifications to the patent local rules of the Northern District of California is to front load damages assessments and potentially facilitate settlement negotiations between the parties. Over the past nine years, 1,885 patent infringement cases were filed in the Northern District of California, and more than half of which appear to have settled within less than nine months of filing. More than 40% of the cases filed in the past nine years were tried to at least one substantive ruling. If the parties have a clear understanding of the amount and basis for the damages assertions, potentially, fewer cases would be tried to a substantive ruling, thereby reducing the district’s current caseload.

Whether these new rules will facilitate expedited resolutions remains to be seen. Frequently, parties will exchange the basis for damages assertions during settlement negotiations, which are governed by Federal Rule of Evidence 408.  Rule 408, provides in relevant part that evidence of “conduct or a statement made during compromise negotiations about” a claim is not admissible “to prove or disprove the validity or amount of a disputed claim.” See also Am. Gen. Life Ins. Co. v. James, 2015 U.S. Dist. LEXIS 20768 (N.D. Cal. Feb. 19, 2015). As the parties are expected to provide the court with the damages assessments and the basis for those conclusions in the Case Management Statement as well as in the Damages Contentions and Responses now required under the Patent Local Rules, arguably some of the relevant information the parties may have exchanged would be inadmissible under Rule 408.

The Northern District of California also provides the Alternative Dispute Resolution (ADR) Multi-Option Program which provides for “early, cost-effective and fair resolution of civil cases” through Early Neutral Evaluation, Mediation, or Settlement Conference with the Magistrate.  ADR L.R.  1-2.  The ADR Rules impose confidentiality obligations on each of the available ADR processes that prohibit the disclosure of the information exchanged to the assigned judge. However, each confidentiality obligation contains an exception for disclosures that are “otherwise required by law.” ADR L.R.  5-12, 6-12, and 7-4.  Whether the parties will be permitted to utilize information provided during the course of the ADR process under this limited exception to fulfill the obligations of the damages disclosures and contentions remains to be seen.

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