Arconic Inc. v. Novelis Inc.
Arconic Inc. v. Novelis Inc.
2021 WL 9038293 (W.D. Pa. 2021)
August 17, 2021
Hochberg, Faith S., United States District Judge
Summary
The Special Master recommended that the Court grant Novelis' motion for a protective order and deny Novelis' motion for a further supplementation of Arconic's interrogatory responses. The Special Master found that any ESI was not relevant to the case, as the USPTO would decide who owns the invention described in the information stated in the patent application.
Additional Decisions
ARCONIC INC., Plaintiff,
v.
NOVELIS INC. and NOVELIS CORP, Defendants
v.
NOVELIS INC. and NOVELIS CORP, Defendants
CIVIL ACTION NO. 17-1434
United States District Court, W.D. Pennsylvania
Signed August 17, 2021
Counsel
Charles Kelly, Michael J. Joyce, Saul Ewing LLP, Pittsburgh, PA, Holly A. Ovington, Pro Hac Vice, Marissa A. Lalli, Pro Hac Vice, Mark A. Ford, Mark G. Matuschak, Pro Hac Vice, Tyler L. Shearer, Pro Hac Vice, William F. Lee, Kate M. Saxton, Pro Hac Vice, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, Mindy Sooter, Pro Hac Vice, Samantha Picans, Pro Hac Vice, Wilmer Cutler Pickering Hale and Dorr LLP, Denver, CO, Mitchell G. Stockwell, Pro Hac Vice, Jeffrey H. Fisher, Pro Hac Vice, Vaibhav P. Kadaba, Pro Hac Vice, Kilpatrick Townsend & Stockton LLP, Atlanta, GA, Heather Petruzzi, Pro Hac Vice, Leon Bradford Greenfield, Pro Hac Vice, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, DC, for Defendants.Hochberg, Faith S., United States District Judge
SPECIAL MASTER REPORT & RECOMMENDATION #40: NOVELIS MOTION FOR PROTECTIVE ORDER REGARDING ARCONIC DAMAGES THEORY
*1 Before the Special Master is Novelis’ motion for a protective order pursuant to Rule 26, foreclosing discovery into the Georgia-Pacific factors. Arconic disclosed this “reasonable royalty” damages theory as part of its February 12, 2021 Supplemental Damages Proffer. Novelis argues that the theory is untimely, prejudicial and not legally cognizable. Arconic disputes each of these arguments and asserts that arguments about the legal cognizability of its damages theory are premature.
Additionally, Novelis moves for Arconic to supplement its interrogatory responses where Arconic was asked to state the factual basis for its alternative damages theories regarding lost profits and revenue.
I. Analysis
a. Reasonable Royalty Damages Theory
As this Court is aware, the “reasonable royalty” damages theory originates in patent infringement cases, where the fact finder is given evidence from which to deduce what royalty the infringer would have paid in a hypothetical licensing negotiation. That hypothetical negotiation is intended to be a surrogate for the licensing negotiations that would have occurred if the infringing party had licensed the technology rather than using it in an infringing device without permission. In Georgia-Pacific, the Southern District of New York consolidated a list of factors utilized to determine an appropriate royalty. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).
This theory has been extended by a few courts in cases involving allegations of breach of a confidentiality agreement. In those cases, the defendant employed confidential information learned pursuant to a non-disclosure agreement to develop a product sold on the market. As the Federal Circuit explained in Celeritas Technologies, the defendant in this scenario had two choices:
it could have used the technology and entered into a licensing agreement ... or it could have refrained from using the technology. It chose instead to use the technology without compensating [plaintiff]. To compensate [plaintiff] for the breach, the jury properly determined the license fee [defendant] would have paid had it not breached the agreement.
Celeritas Techs., Ltd. v. Rockwell Intern. Corp., 150 F.3d 1354, 1359 (Fed. Cir. 1998). Thus, the rationale in the patent infringement context was extended to the breach of confidentiality agreement context. In both instances, the party sold and profited from a device employing technology that was not their own. In both instances, a reasonable royalty that the party would have paid could be deduced based on various market factors in evidence.
This case involves a claim by Arconic that its confidential information was allegedly disclosed by Novelis in a patent application filed with the USPTO. There is no claim of unauthorized use of Arconic's information in the manufacture of a product. Arconic argues that the rationale of Celeritas should nonetheless be applied in the context of this case. Arconic argues that “Novelis was contractually obligated to keep Arconic's information confidential and breached the agreement by using the information in its patent application and thereby making the information public.” (April 27, 2021 Arconic Ltr. at 3-4.) Therefore, according to Arconic, it is entitled to pursue a theory of damages hypothesizing what Novelis would have paid for the right to put Arconic's information into the public domain by stating it in a Novelis patent application.
*2 The Special Master requested supplemental briefing from the parties to discuss the legal support for the theory advanced by Arconic. Novelis submitted a reply letter brief, and Arconic submitted a sur-reply. The parties’ dispute comes down to whether Novelis’ alleged disclosure of Arconic's allegedly confidential information in a patent application constitutes a “use” within the meaning of Celeritas and its progeny. Novelis argues that in each of the cases where the reasonable royalty theory has been extended to the breach of contract context, the confidential information was “used” in a product sold on the market. (June 10, 2021 Novelis Ltr. at 1-2.) Arconic responds that disclosure in a patent application is a “use,” and that there is no authority to limit the reasonable royalty theory only to products sold on the market. (June 17, 2021 Arconic Ltr. at 1-2.)
b. Rule 26 Analysis
As a threshold matter, the Special Master must address Arconic's objection to deciding this question at this time. Arconic argues that there is no discovery request in dispute that necessitates the protective order sought by Novelis. (Apr. 27, 2021 Arconic Ltr. at 2.) Instead, Arconic asserts the question of legal cognizability should be decided either during summary judgment, or as part of a Daubert motion. (Id.)
The question at issue here is whether the reasonable royalty theory, premised upon a hypothetical negotiation of a “right to disclose confidential information in a patent application”, where there is no product development or sale claim, is a relevant, alternative damages theory. To be clear, Arconic has available to it the classic theory of damages in a breach of confidentiality agreement case. The hypothetical negotiation for the right to publicize confidential information is a second proffered theory of damages; Arconic wants to prove both theories, as alternatives.
If a damages theory does not have a logical and recognized legal grounding, and if there is at the same time a traditionally recognized means for proving damages for breach of a duty of confidentiality, fact discovery into this purported “negotiation” would not be relevant and proportional to the needs of the case. As a question of relevance and proportionality under Rule 26, this issue can be decided at this time. As a practical matter, it also needs to be decided in the context of fact discovery, so that the many fact witnesses to be deposed know the general scope of questions that they can be expected to answer.
Arconic argues that there is no pending Arconic discovery request to which Novelis must respond related to this theory. In order to probe this a bit more deeply, the Special Master asked Arconic to provide examples of deposition questions, described by topic, that it would ask of Novelis witnesses about this purported hypothetical negotiation. The examples provided were so general as to be unhelpful in resolving the procedural question as to whether this is the proper time to resolve this dispute. Arconic says that it would be asking the same questions “even in the absence of its reasonable royalty theory.” (July 13, 2021 Arconic Ltr. at 7.)
Arconic has also disclosed (also at the Special Master's request) that it “intends to retain a testifying damages expert to render an opinion utilizing the Georgia-Pacific factors and applying a reasonable royalty damages theory.” (Id. at 9.) Arconic's damages proffer invoked the Georgia-Pacific factors as well as various “approaches to calculating a reasonable royalty.” (Feb. 21, 2021 Arconic's Supp. Damages Proffer at 2.) These “approaches” include “an income approach” and a “market approach,” which each involve factual questions, such as “the incremental benefits” of the “confidential information” and “market information (including for example comparable licenses).” (Id.)
The concept of a hypothetical negotiation between employees of two competing businesses for a license to use of certain information in a patent application is, frankly, hard to hypothecate. It has no caselaw in this context to guide what each company's employees would say to the other, especially when no patent has yet issued, and the Patent Office is fully aware of the dispute between these companies because it must decide a derivation proceeding that is currently pending about this very issue. What is the market for an unissued patent application whose derivation has yet to decided by the USPTO? If the USPTO decides derivation proceeding in favor of Arconic, then there is no patent to be issued to Novelis. If the USPTO decides the derivation proceeding in favor of Novelis, then it has decided the question of who owns the information in the application.
*3 This civil case may well go to trial before the USPTO decides the derivation proceeding. And the counterclaim alleging an improperly instituted derivation proceeding has been withdrawn by Novelis. Even if one could imagine such an unprecedented (and quite odd) negotiation, it would be a totally different negotiation depending on how the USPTO comes out in the derivation proceeding.[1] Indeed, the USPTO ruling will likely decide the question entirely; at a minimum, it would dramatically affect what rights this hypothetical negotiation could even cover.
With this background, the Special Master believes that it should now decide this question of whether, in the context of this dispute, there is a relevant and legally cognizable hypothetical negotiation about what the patent filer would pay to the company that claims to own some of the alleged confidential information in a patent application. Deciding this now, as to fact witness depositions, is in the interest of the expeditious completion of fact discovery.
c. Analysis of Reasonable Royalty Theory in Breach of Contract Cases
As discussed above, some courts have allowed a reasonable royalty damages theory to be applied to a breach of confidentiality agreement where the confidential information was embedded into a product or product development. The question before the Special Master is whether this theory can be applied in the context of a disclosure of confidential information in a patent application, rather than the incorporation of such information into a product sold in the market.
The patent itself is not the product here; who owns the rights claimed in the patent itself will be decided by the USPTO in its ultimate ruling on Arconic's derivation petition. Here, it is solely a question of the public disclosure of the information in the patent application. Clearly, if Arconic prevails on its claims that Novelis wrongfully disclosed its confidential information, it gets to prove to a jury how much it has been damaged by Novelis’ alleged failure to adhere to the confidentiality provisions of the parties’ agreements. That is a classic damages scenario for breach of confidential information. See Fort Washington Res. Inc. v. Tannen, 901 F. Supp. 932, 943 (E.D. Pa. 1995) (“Under Pennsylvania law, courts generally award damages to the non-breaching party so as to place it in the economic position it would have occupied had the contract been performed.”) (citing Bellefonte Area School Dist. v. Lipner, 81 Pa. Cmwlth. 334, 473 A.2d 741, 744 (1984)).
The question here is whether a second and alternative damages scenario—based upon the proffered hypothetical Georgia-Pacific license negotiation—would also be proportional in the context of publication of information in a patent application. To answer that question, it is useful to examine the rationale used by the Federal Circuit in Celeritas. The rationale for applying a reasonable royalty damages theory in confidential information breach cases involving a product sold on the market is commercial in nature. One can apply objective factors to determine what a commercially sophisticated party would have negotiated to pay. As the Federal Circuit explained, the results from this analysis are “far from speculative” because the expert in Celeritas considered licenses that were “common in the industry”; “past licensing practices of” the plaintiff, defendant and “others in the modem business”; and the defendant's projected sales. Celeritas, 150 F.3d at 1360.
*4 In this case, where the USPTO will actually decide whether there is a valid patent, and who owns the invention, there are so many unknown and speculative potential outcomes that it is disproportional to the needs of this case to even attempt to ask factual questions in search of the type of evidence that was “common in the industry” in the Celeritas case. What precedential licenses would be considered for the right to publish another party's confidential information in a public patent application? What other participants in the same business could be factored in? How would the negotiation differ, depending on the outcome of the derivation proceeding?
To be clear, if Arconic's sales are affected, a traditional damages expert can opine about Arconic's potential losses in the traditional damages approach. But the Special Master can find no non-speculative economic basis for the second and alternative theory of damages that Arconic advances. There are no comparable licensing transactions to consider. Tellingly, there is no legal precedent offered by Arconic for applying the reasonable royalty theory in the context presented here.[2]
*5 Further, the hypothetical negotiation breaks down when the aftermath is considered. In the typical reasonable royalty scenario, the plaintiff is “made whole” because it is paid an approximation of what it would have been paid in a license. But in the facts of this case, Novelis would be deemed to have licensed Arconic's confidential information for the right to publish its information in a patent application. Is such a license, if negotiated, enforceable and compatible with the rules requiring patents to name the inventor of the claims disclosed in it? What, then, would happen when the patent issued? Who would own the patent—Arconic, who claims ownership over the information, or Novelis, who filed the application? The answer, of course, is that when there is a dispute about ownership over a patent, that conflict is resolved in derivation proceedings—precisely what is occurring in the separate USPTO derivation dispute between Arconic and Novelis right now proceeding in that administrative agency, expert in this area. To make Arconic “whole,” the USPTO will be determining whose information is reflected in Novelis’ patent application. If Arconic is deemed to be the owner of the information in the patent application, Arconic will prevail in the derivation proceeding, and it will obtain whatever rights derive therefrom.
If Arconic proves in this case that the patent application disclosed its confidential information to the public, Arconic can get classic damages for the harm done to it from this disclosure. For example, if Novelis can be shown to have used Arconic's alleged confidential information to win customers away, there are economic damages to redress that wrong. However, if the USPTO were to decide that Arconic is the rightful owner of the information in the patent, and Arconic secures those rights from the USPTO against Novelis, while also receiving a royalty in this case for Novelis’ purported license to publish Arconic's information therein, this would present issues of double recovery. See Bellefonte Area Sch. Dist. v. Lipner, 81 Pa. Cmwlth. 334, 473 A.2d 741, 744 (1984) (“damages are awarded in order to place the aggrieved party in the same economic position he would have been in had the contract been performed ..., not to provide him with a windfall.”).
And if Novelis wins the USPTO proceeding, what would Arconic be getting a royalty for in this case? Novelis would not be in need of this hypothetical license if that occurs. What this discussion makes clear is that any royalty scenario is unprecedented in this context for good reason—it is speculative; potentially duplicative of the rights sought by Arconic in the USPTO derivation proceeding; and lacks any analogous case found in a thorough search of the relevant caselaw.
As stated above, this damages theory is proposed as a second and alternative theory of damages, in addition to the clearly applicable damages proofs that are well recognized for this type of alleged breach. Rather than this unprecedented, confusing, and legally questionable pathway to damages, if Arconic proves that its confidential information was disclosed to the public by Novelis, Arconic can be made whole by being compensated for the harm it suffered as a result of the publication of its alleged confidential information in the form of lost profits or any other competitive damages it suffered due to Novelis’ actions. This can be tried to a jury, regardless of the timing of the USPTO decision. But the hypothetical Georgia-Pacific negotiation theory is so confusing and speculative that it is not relevant and proportional to the needs of the case. It would likely require trying a case within a case, by delving into the issues already in the case sub judice at the USPTO. It is also disproportionate to the needs of this case to strain to find a way to take discovery from fact witnesses on what this highly unusual hypothetical licensing negotiation would encompass. Arconic has a tried-and-true pathway to damages if its claim of breach of confidential information is proven. That is sufficient here, without the alternative, highly speculative theory.
d. Sufficiency of Arconic's Interrogatory Responses
Novelis separately argues that Arconic's interrogatory responses regarding its preexisting damages theories are insufficient. Novelis argues that Arconic has not provided facts supporting its claimed lost profit and lost royalty revenue damages theories. (Apr. 13, 2021 Novelis Ltr. at 5.) Novelis argues that “Arconic has never identified a single lost customer sale, or any loss in royalties from Chemetall,” nor any “factual basis to claim any cognizable injury.” (Id.)
*6 The Special Master notes that Arconic has provided multiple updates to its interrogatories throughout this case, including as recently as April of this year. (See Apr. 30, 2021 Novelis Ltr., Ex. B.) These responses refer to specific documents by production number, where responsive information can be located. The Special Master is confident that Arconic has provided as much information as it is able to do at this time. Arconic has disclosed its intention to retain a damages expert, at which time Novelis will be able to understand and challenge Arconic's damages calculations as it intends to present them at trial. The Special Master does not believe that a further supplementation of written interrogatory responses would be add to the expeditious resolution of this matter and therefore recommends that Novelis’ motion be denied.
II. Conclusion
For the reasons stated above, the Special Master recommends that the Court:
2. Deny Novelis’ motion for a further supplementation of Arconic's interrogatory responses related to its lost profits and lost revenue damages theories.
Footnotes
Moreover, there are strict regulations stating who can be named as an inventor of the patent. Depending on what information, if any, is found to be confidential information owned by Arconic, it may or may not be considered to be the “inventor”. A party cannot license the right to be named the inventor, nor to own the information in the patent claims. If inventorship is wrongly stated, the patent may be invalid. Given the myriad USPTO regulations, what rights in this context can be negotiated for disclosure of information in a patent application?
Arconic relies on Oakwood Labs. LLC v. Dr. Bagavathikanun Thanoo, et al., 999 F.3d 892 (3d Cir. 2021) to support a more expansive definition of the word “use.” There, the Third Circuit explained that “the term ‘use’ has been broadly defined as any exploitation of the trade secret that is likely to result in injury to the trade secret owner or enrichment to the defendant[.] ... Thus, marketing goods that embody the trade secret, employing the trade secret in manufacturing or production, relying on the trade secret to assist or accelerate research or development, or soliciting customers through the use of information that is a trade secret ... all constitute ‘use.’ ” 999 F.3d at 909 (quoting Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 450-51 (5th Cir. 2007)). Each of these uses under this expansive definition relate to commercialization and could conceivably apply if Novelis were to develop, produce, and sell a product using Arconic's confidential information, but that is not the evidence that Arconic has sought. If Arconic sought to take discovery of Novelis’ development of a product through use of Arconic's confidential information, it has been free to do so, and no dispute of that nature is presented here. Similarly, if Arconic wants to take discovery as to whether Novelis is soliciting customers using Arconic's alleged confidential information, that discovery would not be foreclosed by this ruling. That discovery, and the evidence uncovered, would be part of standard damages for breach of confidential information.
Arconic argues that Oakwood favorably cites a Tenth Circuit case, where that Circuit noted that “the line between use and disclosure is hardly ... crisp.” Storagecraft Tech. Corp. v. Kirby, 744 F.3d 1183, 1186 (10th Cir. 2014). There, the Utah trade secret statute expressly permitted the reasonable royalty theory for the use or disclosure of a trade secret, which the Tenth Circuit found could be appropriate in the context of a “defendant disclos[ing] a trade secret to a rival company in a fit of retaliatory pique.” Id. There is simply no proffer of comparable or analogous facts here.
And, in the unique context of this case, there is another administrative agency—the USPTO—that will decide who owns the invention described in the information stated in the patent application. The battle here about any rights flowing from that patent ownership is precisely what this jury will not be deciding. As the Tenth Circuit noted in Storagecraft, the reasonable royalty measure of damages may not always be “the most sensible remedy.” Id. at 1187. That observation sums up the situation here.