Monday, May 3, 2021

Chiang on "The Information-Forcing Dilemma in Damages Law"

Tun-Jen Chiang's article The Information-Forcing Dilemma in Damages Law, 59 Wm. & Mary L. Rev. 81 (2017), is (as the parenthesized date indicates) not a new paper, but rather one that I missed when it came out.  I just read it the other day, in preparation for a project I hope to work on this summer tentatively titled Nominal Damages for IP Infringement (for my previous musings on the topic, see here, here, and here).  Here is a link to the paper, and here is the abstract:

Courts assessing compensatory damages awards often lack adequate information to determine the value of a victim’s loss. A central reason for this problem, which the literature has thus far overlooked, is that courts face a dilemma when applying their standard information-forcing tools to the context of damages. Specifically, the standard method by which courts obtain information is through a burden of proof. In the context of damages, this means a rule requiring plaintiffs to prove the value of a loss. But courts will often face a situation where a plaintiff can clearly prove the existence of a loss, yet cannot prove the value of the loss with any precision. A court that strictly enforces the burden of proof would award zero damages in such a case, producing a harsh result. But a court that avoids this result by instead awarding its best guess at the correct amount—effectively forgiving the inadequacy of plaintiff’s proof—then undermines future incentives for plaintiffs to produce rigorous evidence.


The result of this dilemma is that courts oscillate between strict and forgiving approaches, causing much confusion. Explaining the dilemma helps alleviate the confusion and points to a solution. In principle, courts should require a party to produce more rigorous damages evidence if, and only if, the party is the lower-cost provider of that evidence, and the benefit of having the evidence (in facilitating a more accurate damages award) outweighs the cost of collecting it. The messy legal standards for calculating damages in various fields can be understood as clumsy attempts by courts to arrive at this unifying principle. Interpreting the messy doctrine in light of this “cheaper cost-effective producer” principle thus helps make damages law more coherent.

It's an interesting paper, and I certainly need to give it some more thought.  The obvious criticism, as Professor Chiang recognizes, is that courts lack the information necessary to carry out his proposal.  In this regard, however, he argues toward the end of the paper that:

           one response to this objection is that I am not envisioning anything more than rough guesses on the costs and benefits, imperfectly and intuitively applied. A second response, however, is that the cheaper cost-effective producer principle is capable of more simple application than one might think. Specifically, courts can implement the principle by using the following methodology: (1) At the close of evidence, a court determines whether either party has been negligent in producing evidence; if no party is negligent then the court proceeds to the merits determination. (2) If the court believes one party has been negligent, it penalizes the negligent party (by reducing damages if the negligent party is the plaintiff, or increasing them if the defendant is the negligent party). (3) If the court believes both parties have been negligent, it penalizes the more negligent party (p.141).

And if even this seems like too much to ask of courts, Professor Chiang suggests that Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604 (1912)--a case litigated back in the days when U.S. utility patent owners could seek the disgorgement of the defendant's profits--might provide some guidance.  In that decision, the Supreme Court, as described by Professor Chiang

            held that, if a patentee "has exhausted all available means of apportionment" but still cannot prove a reasonably precise number, then the patentee is entitled to the entire profit unless the defendant can prove the correct apportionment. As the Court acknowledged, "[T]his is but another way of saying that the burden of proof is on the defendant." But the Court emphasized that the burden is not shifted until "after the plaintiff has proved the existence of profits attributable to his invention and demonstrated that they are impossible of accurate or approximate apportionment." Viewed from the cheaper cost-effective producer principle, this burden-shifting framework reflects the two criteria I have described. The plaintiff bears the initial burden of proof, and must satisfy this burden of proof by producing all cost-effective evidence, that is, "exhaust[] all available means of apportionment. Once this is done, then the burden shifts, until the court has the best evidence that can be cost effectively obtained. At that point the work of an information-forcing mechanism (that is, a burden of proof) is done (pp. 143-44).

Professor Chiang acknowledges, however, that the result in Westinghouse differs from his proposal in that "the Court in Westinghouse would still penalize the defendant by awarding the plaintiff with the entire profit even if the defendant produces all cost-effective evidence (as long as the evidence does not suffice to determine the correct apportionment), whereas my proposal would have a court take its best guess. The difference is largely immaterial from the perspective of economic incentives. See Douglas G. Baird et al., Game Theory and the Law 18 (6th prtg. 2003)" (p.144 n.265).  Perhaps another relevant concern, at least in cases in which the substantive law permits awards of the infringer's profits, should be whether the defendant was a willful infringer, since otherwise the defendant may be saddled with a wildly disproportionate penalty?  See also the discussion of Westinghouse in Pamela Samuelson, John M. Golden & Mark P. Gergen, Recalibrating the Disgorgement Remedy in Intellectual Property Cases, 100 B.U. L. Rev. 1999, 2070 (2020) (stating that "[i]n less than a generation, this arrangement was deemed to over-enforce patent rights," as reflected in Learned Hand's decision in Cincinnati Car Co. v. New York Rapid Transit Corp., 66 F.2d 592 (2d Cir. 1933), which expressed a preference for an award of reasonable royalties "as a device in aid of justice").  Professor Chiang notes Cincinnati Car at pp. 118-19; for my previous discussion of this immensely insightful opinion, see here.

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