Polaris Industries Inc. v. Arctic Cat Inc.

Background

Polaris Industries Inc. brought related patent-infringement actions against Arctic Cat Inc. and Arctic Cat Sales Inc. Polaris intends to seek lost-profits damages. Polaris, the patent owner, sells products through Polaris Sales Inc. (PSI), its wholly owned subsidiary, and contends that PSI’s profits flow inexorably to Polaris.

Arctic Cat served a document request in March 2016 seeking documents concerning lost profits that Polaris claimed from the alleged infringement. Arctic Cat defined “Polaris” broadly to include subsidiaries and other related entities. Polaris objected to that definition and said it would interpret “Polaris” to mean only the plaintiff, Polaris Industries Inc. During discovery, Polaris produced a Marketing and Distribution Agreement between Polaris and PSI and hundreds of documents related to PSI.

In April 2018, Arctic Cat moved to compel additional documents concerning Polaris’s financial relationship with PSI. Arctic Cat said it had only recently learned that Polaris would rely on the inexorable-flow theory. The magistrate judge denied the motion to compel, concluding under Federal Rule of Civil Procedure 26(b)(2)(C)(ii) that Arctic Cat had ample opportunity to obtain the information during discovery. The magistrate judge also found that the lost-profits theory was not undisclosed and that Arctic Cat was not prejudiced.

District Court Review

The district court reviewed the magistrate judge’s nondispositive pretrial order under a highly deferential standard. Reversal was appropriate only if the order was clearly erroneous or contrary to law. The court explained that a finding is clearly erroneous only when the reviewing court has a definite and firm conviction that a mistake occurred.

The court held that the magistrate judge did not clearly err. Polaris had disclosed that it was seeking lost profits, had produced documents showing a relationship between Polaris and PSI, and had given Arctic Cat an opportunity to pursue the issue during discovery. The court recognized that reasonable people could disagree about whether Polaris was required to disclose the precise inexorable-flow theory and whether Polaris had failed to do so. That disagreement did not leave the court with a definite and firm conviction that the magistrate judge made a mistake.

The court also rejected Arctic Cat’s argument that the limited amount of additional discovery it sought required reversal. Under Rule 26(b)(2)(C)(ii), the relevant question was whether Arctic Cat had an ample opportunity to obtain the information, not how broad the requested discovery was.

Inexorable-Flow Theory

The court stated that Polaris could not prove that PSI’s profits flowed inexorably to Polaris merely through evidence of ownership, control, or PSI’s tax status. Referring to the standard discussed in prior cases, the court said Polaris needed contractual, structural, or historical evidence. Any expert opinion on the issue also had to rest on more than Polaris’s ownership and control of PSI and had to be supported by sufficient facts or data under Federal Rule of Evidence 702(b).

Polaris had agreed that it would rely at trial only on documents produced during discovery and that its damages expert would likewise rely only on produced documents. The court therefore expected Polaris to present sufficient evidence for a jury to find an inexorable flow of profits under the stated standard, without relying on unproduced documents.

Order

Judge Tunheim’s order denied the defendants’ appeals and affirmed the magistrate judge’s orders denying the defendants’ motions to compel. The opinion did not decide whether Polaris proved patent infringement or whether Polaris would ultimately recover lost-profits damages.