GE Transportation Services Global Signaling, L.L.C. vs. Westinghouse Air Brake Technologies Corporation
Economic Advice in Litigation
The Situation
In November 2000, GE Transportation Services Global Signaling, L.L.C. ("GETS") and NERA's client Westinghouse Air Brake Technologies Corporation ("Wabtec") signed a license agreement and consent order settling patent litigation related to "distributed power" systems for locomotives. In 2001, Wabtec sold four distributed power systems to FreightCorp, an Australian railroad. In July 2002, Wabtec and Queensland Rail ("QR") signed an agreement under which Wabtec was to supply integrated electronics upgrade packages for 68 locomotives. In a lawsuit filed in U.S. District Court in Delaware in late 2002, GETS contended that Wabtec had violated the license agreement and consent order and sought damages of approximately $12.7 million.
NERA's Role
Dr. Stewart calculated that Wabtec's profit on the FreightCorp sale, discounted to its present value on 1 May 2003 (the date of NERA's analysis), was $103,062, or $25,675.50 per unit. The parties agreed that if the FreightCorp sale was found to have violated the license agreement or consent order, then the appropriate damages award would be $103,062, but they disagreed about the appropriate award if the QR sale was found to have been in violation. GETS sought $12.6 million in lost-profits damages, based on its contention that it would have sold distributed-power systems to QR if Wabtec had not violated the agreement.
Wabtec introduced evidence that GETS' proposal would never have been accepted by QR. Dr. Stewart testified that, as a consequence, awarding lost-profits damages to GETS would violate the make-whole standard and confer on GETS a litigation windfall. He testified that damages awards that lead to litigation windfalls are economically inefficient, since they lead to a wasteful expenditure of resources in the search for such windfalls, and suggested that the court award as damages Wabtec's expected profit on the QR sale, which he calculated to be approximately $1.1 million, plus the $103,062 expected profit on the FreightCorp sale.
The Result
In an 18 August 2004 ruling, the court agreed that "GETS has failed to prove under any standard that it suffered $12,668,261 in lost profits" but also concluded that "the RF distributed power system had several technical advantages over wireline systems," that "Wabtec might have negotiated for an extended license with GETS" and that "it is conceivable that the breaching conduct caused GETS to suffer lost profits from license royalties it may have otherwise obtained from Wabtec. . ." Reasoning that "the parties themselves provide guidance on what the value of this hypothetical license would be," Judge Sleet concluded that, since the parties agreed that $25,675.50 per unit was an appropriate damages award for the FreightCorp sale, the same amount per unit would be an appropriate award to compensate for the QR sale. He ordered that Wabtec pay $1,848,636 (= $25,675.50 x 72) in damages now, pay an additional $25,675.50 per unit if and when QR exercises its options to buy additional units, and pay GETS' reasonable attorneys' fees.
