*1 This matter is before the court on defendant Lawler Manufacturing Co., Inc.’s motion to compel plaintiff Bradley Corporation to produce “damages accounting records.” Lawler seeks (1) Bradley's entire financial database documenting all sales information related to all of its products from January 1, 2009 forward, (2) information about the queries to the database used to create royalty summary spreadsheets, (3) royalty summary spreadsheets created quarterly by Bradley from information in its database from January 1, 2009 through December 31, 2015,[1] and (4) all invoices for all Bradley thermostatic mixing valve products from January 1, 2009 forward. The court first provides context to the discovery disputes by summarizing the claims in this litigation and the processes used by Bradley to create the summary spreadsheets, and, ultimately, the quarterly Royalty Reports that Bradley provides to Lawler under the parties’ License Agreement. Next, the court sets forth the legal principles that guide its resolution of the discovery disputes and, finally, rules on the disputes.

This background is taken from various filings made by the parties. It does not constitute findings of fact binding in this litigation but gives context to the discovery matters at issue.

Plaintiff Bradley and Lawler are direct competitors with respect to some products. They both make and sell some thermostatic mixing valves (“TMV”)—which are relevant to the claims in this case—and other products, such as emergency fixtures, eyewashes, and drench showers—which Bradley states (and Lawler does not contest) are not relevant to this case. Bradley sells other products related to the construction of commercial plumbing facilities (e.g., school bathrooms, locker rooms, science labs), such as lockers, towel bars, and cabinets, that do not compete with Lawler products.

TMVs, used in plumbing fixtures to control appropriate mixing of hot and cold water, are the subject of this case. The companies are parties to a License Agreement entered in 2001 as part of a settlement of previous litigation. Bradley's complaint seeks a declaratory judgment that it no longer owes Lawler royalties under the License Agreement. Bradley asserts that the TMVs it manufactures and sells do not use any claims or designs covered by any extant patent rights owned by Lawler, and therefore its obligation to pay royalties or mark mixing valves with Lawler patent numbers expired after February 26, 2019, the date of expiration of the last patent Bradley contends is embodied in its TMVs.[2] Lawler, on the other hand, contends that royalties are due until August 2, 2031, the expiration date of its design patent 762,818 (“the '818 patent”), even if the claims of that patent are not embodied in TMVs Bradley has made and sold since February 26, 2019. Royalties remain due, according to Lawler, because its Trade Secrets (as defined in the License Agreement) continue to be embodied in Bradley's TMVs or because Bradley engaged in “design-around” activity to exclude design protected by the '818 patent, and that activity is allegedly forbidden by the License Agreement.[3]

*2 Lawler has brought a counterclaim, alleging that Bradley has underpaid royalties over the years, and it seeks to establish underpayments going back 10 years, consistent with a 10-year breach of contract statute of limitations.[4] Bradley owes royalties of 10% of the Selling Price of Licensed Units or Repair Parts, all terms defined in the License Agreement. The court addresses below Lawler's contentions regarding the ways Bradley may have underpaid royalties.

Bradley has described its procedure for calculating royalties owed under the License Agreement generally as follows.[5] First, Bradley uses a database that documents every transaction involving the sale of its products. At the close of a quarter, it “queries its sales databases for its sales records for every single transaction in the quarter” for products in three classes: Emergency Thermostatic Valves (“VE”), High-Low and Standard Values (“VS”), and Emergency Safety Showers (“ES”). The data from these queries are collected into a spreadsheet by “order type” and then by specific part number. The part number has a field indicating whether Bradley pays royalties for the product.[6] The resulting spreadsheet has several tabs, generally corresponding to an order type. Apparently the most common order type is “sales invoice,” and invoice information is included within the spreadsheet's “Sales” tab based on the specific part number indicated in an invoice and the part category (such as “Valve Sold Alone,” “Valve Invoiced with Cabinets,” “Valve Invoiced with Piped Assembly,” or “Valve Box & Piping,” the latter category for a sales invoice in which cabinets and/or piped assemblies were sold without a valve). Once all sales invoices are accounted for, the royalty for valve products is calculated. A similar process is used to account for, record, and calculate royalties owed for parts and repair kits.

The total royalties paid for a given quarter might then be adjusted based on various factors. If pricing adjustments or corrections were made after a sale was invoiced, the adjustments are documented and recorded on the summary royalty spreadsheet's Price Adjustments tab. If merchandise was returned to Bradley, those returns are accounted for on the summary royalty spreadsheet's Returns tab, and where a royalty credit is appropriate because the merchandise was returned within one year from the original invoice, that credit is shown.[7] In addition to “straight” sales of products, Bradley also may transfer a product to customers to replace a defective product (a warranty shipment) or as a sample. Bradley calculates and pays a royalty on samples, and those “sales” are accounted for in the summary royalty spreadsheet's “Sample Valves” tab. For warranty “sales,” if the warranty product was sent within one year of the original invoice, no royalty is paid, but if the product was sent more than one year from the original invoice, a royalty is calculated and paid.

*3 When all orders have been accounted for on the royalty summary spreadsheet, then a “full sales reconciliation to the general ledger” is done to ensure that sales, returns, and price adjustments have been accounted for in the royalty calculations. The sales in the three valve product classes (Emergency Thermostatic Valves, High-Low and Standard Valves, and Emergency Safety Showers) are grouped by royalty and non-royalty categories, and an analysis of the non-royalty category is conducted to check that the products in that category were properly categorized as such. Bradley then conducts an inventory analysis, confirming that the sales and returns activities reflected in the royalty calculations reconcile with the current product inventory on hand for the quarter.

After the summary spreadsheets are finalized and, based on the data in the spreadsheets, Bradley generates a Royalty Report documenting the parts on which royalties are being paid, and the Royalty Report is sent to Lawler with payment on a quarterly basis.

The License Agreement permits Lawler to conduct audits, and a forensic accounting firm last conducted an audit on Lawler's behalf in 2016, auditing the years 2013, 2014, and 2015.

With this understanding of the parties’ claims, the royalty calculation process and documentation, the court now turns to the discovery issues.

I. The court is guided by proportionality principles.

Rule 26 of the Federal Rules of Civil Procedure permits the discovery of nonprivileged matter “that is relevant” to a party's claim or defense and “proportional” to the needs of a case. Thus, mere relevance is not enough; proportionality is key, requiring the consideration and balancing of the importance of the issues at stake, the importance of the discovery in resolving those issues, the amount in controversy, and the weighing of burdens and benefits. See Fed. R. Civ. P. 26(b)(1). In addition, as the Committee Notes to Rule 26 emphasize, the parties and the court “have a collective responsibility to consider the proportionality of all discovery and consider it in resolving discovery disputes.”

The court has wide discretion with respect to discovery matters, including in settling discovery disputes, determining the scope of discovery, and otherwise controlling the manner of discovery. See Thermal Design, Inc. v. Am. Soc'y of Heating, Refrigerating & Air-Conditioning Eng'rs., Inc., 755 F.3d 832, 839 (7th Cir. 2014) (citations and quotations omitted) (“District judges enjoy broad discretion in settling discovery disputes and in delimiting the scope of discovery in a given case.”); GCIU-Employer Retirement Fund v. Goldfarb Corp., 565 F.3d 1018, 1026 (7th Cir. 2009) (stating decisions on discovery matters are within the district court's discretion).

The court now addresses the categories of information at issue and evaluates certain factual and legal theories Lawler contends support its broad requests for accounting information.

II. Lawler seeks to compel production of “damages accounting records.”

Lawler's motion to compel seeks four categories of information, and it contends it needs this information to determine whether, and the extent to which, royalties were miscalculated or not properly paid beginning in 2009.

A. Lawler's counterclaim alleges Bradley miscalculated or did not properly pay royalties owed under the License Agreement.

*4 Lawler's counterclaim alleges, on information and belief, that Bradley has miscalculated or not properly paid royalties in the following ways: (a) For samples, Bradley has either not paid the highest actual selling price, as required under the License Agreement,[9] or it has not paid the “minimum” royalty amount required by the contract;[10] (b) For returned product, Bradley has either taken an improper credit when the return was made more than one year after shipment/invoice or, even if a credit was appropriate, it has taken a credit in an amount greater than the royalty originally paid;[11] (c) Generally, Bradley has not properly used the highest actual selling price when calculating royalties;[12] (d) Bradley has not paid royalties for some items for which royalties are owed, specifically certain water skid systems, Enclosed Safety Showers, and S65 kits;[13] (e) Bradley has taken credit for warranty shipments outside the 365-credit period;[14] and (f) Bradley has treated repair part transactions as returned items and taken a credit if the return was within 365 days, instead of as royalty-generating transactions.[15]

In its motion to compel, Lawler asserts that there may be another way Bradley made incorrect royalty calculations. Though not mentioned in the counterclaim, Lawler states that because Bradley's business involves bidding/quotinq large plumbing projects for which royalty-owing valves are one part, Bradley (or its salespeople) have had an incentive to low-ball the price of valves and “transfer” that “cost” to other parts of the plumbing project. But other than positing that Bradley could engage in this so-called transfer pricing (which Bradley, as explained in its supporting affidavits, denies), Lawler does not point the court to anything on which it bases a belief that Bradley somehow has been systematically engaged in this so-called transfer pricing. The parties have operated under the License Agreement since 2001, Lawler has brought suit before alleging royalty underpayments (and presumably engaged in discovery during that suit), has exercised audit rights under the Agreement, and an audit was conducted as recently as 2016, covering the years 2012-2015. Lawler also knows how much in royalties it has been paid for various parts in various product categories since 2001, has had access in this lawsuit to cost information, and sells its own TMVs. In addition, Bradley has explained that transfer pricing for TMVs by its sales personnel in bidding/quoting a project would not be in its salespersons’ financial interest. If there were a good reason to think that Bradley has routinely been engaging in transfer pricing to undercut royalties, the court would expect Lawler to have pointed to documents or information—some evidence—from which an inference about the existence of systematic transfer pricing is reasonable.[16] It simply has not done so, and at this point, the court is persuaded for purposes of resolving the discovery dispute that the possibility of transfer pricing is insufficiently grounded to make the broad discovery Lawler seeks proportional for this case.

*5 Lawler also assets that its quantum meruit theory for recovery supports its requests for financial information. As the court understands it, Lawler contends that if Bradley is right that under the “patent misuse” holding of Brulotte v. Thys Co., 379 U.S. 29 (1964) (that a patent holder cannot charge royalties for the use of its invention after the patent expires),[17] it does not owe any royalties post-February 26, 2019, when all patents expired except the ’818 design patent (and if Bradley is right that its post-February 26, 2019 TMVs do not embody any design within the '818 patent and it did not otherwise engage in any prohibited design-around behavior), that means the License Agreement is deemed rescinded and void ab initio. And, then, according to Lawler, it would be entitled to damages under a quantum meruit theory for having conferred on Bradley the ability to use its patented technology, designs, and trade secrets over the years. Lawler takes this theory from the Seventh Circuit's decision in Schreiber v. Dolby Labs., Inc., 293 F.3d 1014 (7th Cir. 2002).

But Lawler does not suggest that the contracting history between the parties and the economic theories discussed by Judge Posner in Schreiber—which led the court both to urge the Supreme Court to revisit and overrule Brulotte and to address the possibility that inventor Scheiber could have pursued (but did not) a quantum meruit theory against Dolby—are analogous to the contracting history between Lawler and Bradley. Even if Lawler's quantum meruit theory has strong legs,[18] the court is not persuaded that it provides a good ground for all of the broad discovery Lawler seeks to compel. At minimum, the court finds that a party's entire financial database is not proportional discovery for the calculation of a quantum meruit theory of recovery, especially here where the License Agreement provides at least a baseline for pricing.

B. The amount in controversy is not clear to the court.

Though the court does not doubt, as Lawler asserts, that millions of dollars are at stake in this litigation (for one thing, Bradley seeks a declaration it owes no royalties at all beginning in February 2019; Lawler contends royalties are owed until 2031; and Lawler has been paid at least $1 million in royalties per year), it is not at all clear how much may be at stake with respect to the underpayment/miscalculation of royalties issues, which are the issues for which Lawler contends it needs the “damages accounting records.” The lack of more specific information—some rationally-based estimation of underpayments/miscalculations—is a hole in the proportionality balance.

The court will now address Lawler's requests in light of the importance of the discovery it seeks to resolve its liability and damages issues and the weighing of burden and expense in providing that information.

C. Production of Bradley's database is not proportional discovery.

With respect to Bradley's financial database, the court first rejects Lawler's contention that, because the database contains information relevant to sales and royalty calculations and it is easy, physically, for Bradley to copy a database and produce it, there are no proportionality concerns for production of the database. But a litigant's request for an opposing party's financial database is an extraordinary and intrusive one, whether or not the opposing party is a multinational corporation or a smaller business like Bradley. It is, as Bradley describes, akin to asking a party to completely open its doors and its files and allow another to rummage around at will. The only case cited by Lawler, Brown v. Tax Ease Lien Servicing, Inc., 2016 WL 10788070 (W.D. Ky. Oct. 11, 2016), is not persuasive. There, the court ordered the production of a database in a putative class action alleging a long-standing fraudulent RICO enterprise involving the charging of bogus fees hidden through a series of strawman transactions. The court stated that because the contents of the database were relevant, the database must be produced and the defendant's objection that the database was “proprietary” was solved by a protective order. Id. at *12 (“Other courts in this District have ordered the production of computerized data bases when their contents proved relevant to issues in dispute.... We shall do the same [subject to the protective order in the case].”)

*6 In this court's view, proportionality concerns counsel against requiring a company or individual to give access to its entire financial data (especially to a competitor) without a strong showing that access to the database is reasonably necessary to a fair prosecution of one's claims. Lawler has not made that showing. Despite Lawler's apparent distrust of Bradley, there's no indication that Bradley has been operating some years-long fraudulent accounting system (which likely would be self-sabotaging to Bradley, frustrating management's knowledge about the company's business) and hidden it away from Lawler since 2001, even while Lawler conducted audits under the License Agreement.

Lawler has not persuasively explained why Bradley's information about the processes it has used to determine royalties (information that Lawler can explore further in depositions to ensure it understands how the process has worked), the detail in the royalty summary spreadsheets, its access to some invoices, and its knowledge about costs are insufficient for it fairly to identify information about (a) the “highest” selling price, (b) whether royalties for returns, samples, repairs, and warranties were properly accounted for, and (c) whether Bradley paid royalties on certain products it contends should be included in royalty calculations, such as the water skid systems, Enclosed Safety Showers, and S65 kits.[19] In summary, the court rejects as disproportionate discovery Lawler's access to Bradley's database; it is simply not convinced that Lawler's flyspecking of Bradley's database is a reasonable and proportional avenue for Lawler to calculate damages.

D. Production of quarterly royalty summary spreadsheets is proportional discovery.

Bradley's objection to producing its quarterly royalty summary spreadsheets for any quarter before January 2016 is based on contract and estoppel theories, but not on litigation discovery principles. Bradley seeks a determination, in the context of discovery, that because Lawler has conducted audits three times over the life of the License Agreement (including the latest one in 2016) and allegedly was silent about various underpayments/royalty miscalculation theories it is raising now, it has either waived or is estopped to raise certain breach theories now, at least for any period before 2016. The court rejects this argument as a reason to deny discovery of all pre-2016 information. The estoppel theory is not even currently before the court on summary judgment, and it is not so compelling to counterbalance the relevance and proportionality for production of the pre-2016 quarterly royalty summary spreadsheets. Bradley cannot assert that that production is unreasonably intrusive—it already, apparently easily, produced the spreadsheets for the post-2016 period. And Bradley's opposition to the motion to compel repeatedly references information contained in summary spreadsheets (and the processes by which they are created) as important evidence from which Lawler can determine whether or not underpayments/miscalculations were made and calculate underpayments if its theories ultimately are accepted by the court.

The court GRANTS Lawler's motion for production of the quarterly royalty summary spreadsheets for the pre-2016 period.

E. Production of every invoice since 2009 is not proportional discovery.

Lawler also wants every invoice since January 1, 2009, for any and all Licensed Product, Repair Parts, and Other Disputed Products. It contends that Bradley already agreed to this production as part of the case management plan. While the case management plan does include a sentence tying the date by which Lawler must serve a settlement demand to the later of August 2019, when Bradley produces a spreadsheet of sales and returns, or when Bradley produces all invoices from 2008 for Licensed Product or Repair Parts, the court rejects the argument that the case management plan reflected an agreement about proportional discovery. Moreover, the plan says nothing about Other Disputed Products. The court uses applicable discovery principles to resolve the dispute about invoices.

*7 Bradley contends this discovery is disproportional to the needs of the case because (1) the royalty summary spreadsheets detail, and duplicate, information about every invoice, (2) it would be extraordinarily time consuming to cull these invoices, and (3) information pre-2016 should not be subject to discovery. The court has already rejected the latter argument, but the first two present good reasons why the production of every invoice is not proportional discovery. First, Bradley has made at least a presumptive showing that pertinent information from invoices is reflected on the summary spreadsheets. Second, Bradley has explained, with supporting affidavit testimony, that it is burdensome (in terms of effort and time required) for it to gather the requested invoices. According to Bradley, for 2018 alone, it issued 108,650 total invoices. Of those, there are approximately 8,400 total invoices for TMV products for which royalties were paid (about 6,100 of that total) and royalties were not paid (the remaining 2,300), and these 8,400 invoices presumably are within the scope of Lawler's request for all invoices for Licensed Product, Repair Parts, and Other Disputed Products. According to Bradley, the only method for gathering the 8,400 invoices is to either (a) batch print all 108,650 invoices in 2018, and then review each one to determine whether it falls within the 8,400 or (b) selectively download each invoice from the computer system.

Bradley also states that it will produce “specific invoices of interest” if Lawler requests them, as it did in producing invoices and shipping records dating back to 2016 for Returned Items.

The court finds here that an invoice sampling procedure is appropriate, to provide a means of evaluating the reliability of Bradley's summary spreadsheets and methodology for creating those spreadsheets. The focus of the sampling should be overall reliability and not an audit of all transactions. The court does not envision that Lawler reasonably needs invoices in every year for every type of product and every underpayment/miscalculation theory. Nor does it envision the production of tens of thousands of invoices. The court directs the parties to confer in good faith about an appropriate sampling method and one that carefully evaluates the Rule 26 proportionality factors, including amount in controversy for particular types of products, Lawler's theories regarding their underpayment or miscalculation, and the manner in which invoices may or may not reasonably be necessary in a liability or damages analysis. The court is relying on the parties’ good faith and expects them to act reasonably.

For the foregoing reasons, the court GRANTS IN PART AND DENIES IN PART Lawler's motion to compel (Dkt. 112). Bradley must produce within 14 days of the entry of this order its quarterly summary spreadsheets from 2009 to 2015. The parties are directed promptly to confer and reach agreement about a sampling method for invoices as described in this order.

So ORDERED.