Eko Brands, LLC, v. Adrian Riviera Maynez Enterprises, Inc. et al. (Order Awarding Prejudgment Interest, June 14, 2018)

Let’s briefly discuss bonds… so that we can then discuss sovereign debt issued by Argentina*, so that we can turn our ultimate attention to the Western District of Washington.

In exchange for immediate access to cash, a bond-issuer typically promises to return that cash amount at some future specified date, and agrees to provide some additional stream of cash to compensate the lender for the loan.

The date when the borrowed cash is returned is called the bond’s “maturity.”

The stream of cash that forms compensation informs a bond’s “yield.”

For example, if I lend an old college roommate $100 for 10 years, and the ex-roommate agrees to pay me $6 each year on the anniversary of our agreement, the bond is said to have a 10-year maturity and is said to “yield 6%” (i.e., $6/$100 = 6%).

Bonds can be bought & sold on the open market. Using our prior example, let’s say that upon making my $100 loan for 10 years, I immediately turn around and sell the obligation to you for $105. Now, you have paid $105 for the annual $6 anniversary payment from my ex-roommate, and you can be understood to have purchased a bond yielding $6/$105 = 5.7142857%.

This example demonstrates the seesaw relationship between bond prices & yield, and the oft-encountered maxim, “Rising bond prices = lower yields.”

(The counter is also true: “Falling bond prices = higher yields.”)

Presumably, those who would lend money to a borrower will take care to demand a rate of interest/return commensurate with the associated risk. To continue with our example, if I lent my ex-roommate $100 at 6% 20 years ago when we were college roommates, and said-roommate never paid me back, when said-roommate comes to me again looking for another $100 loan, I will reasonably include prior experience with failure-to-pay in assessment of risk of any further loan.

Perhaps now I will insist on $15 per year, for an effective yield of 15%.

This is the relationship between assessed risk and rate of interest/return/yield: the higher the former, so commensurately high should be the latter.

Countries also issue (sovereign) debt. For example, the U.S. Treasury as of June 28, 2018 has issued $21,149,679,487,479.03… or “just over” $21 trillion (to the extent that $149 billion is worthy of rounding…).

Other countries issue debt, too: for example, Argentina!

Argentina is an interesting case, because successive governments there have issued debt, but then failed periodically to pay it back (like our college roommate example above). The history is complicated, and we will not belabor you with details beyond observing that Argentina has defaulted on its external debt (and its internal debt) multiple times throughout its 200 year history, including in 2001, when it defaulted on +$100 billion in what was then the largest sovereign default in history.

Which made it all the more surprising 1 year ago when Argentina successfully issued $2.75 billion in bonds with a maturity of 100 years (a.k.a., “century bonds”). Which is to say that if you participated in that issuance, you were extremely unlikely ever personally to receive back upon maturity the sum of money you originally lent. Because you’ll likely have been dead for decades – so sorry – when the debt matures.

What was the yield demanded by lenders of this 100-year bond issuance from a party that has demonstrated periodic incapacity/unwillingness to make good on its debt obligations? About 7.9%. So, while you are not likely to be around when the debt comes due, at least as a participant you enjoy the promise of a stream of payments worth 7.9%, and that ain’t nothin’.

But alas now (exactly one year later today!), Argentina’s economy is in trouble… again.

And the prospects of timely payment are being drawn into question… again.

And the price of those 100 year bonds is falling in the open market, because investors familiar with the country’s credit history observe its immediate prospects.

And as the price for those bonds falls in the open market, the seesaw of their effective yield is on the rise… approaching 10%.

If you are comfortable with the certainty that Argentina, despite its history of relatively recent (and spectacularly large) default, will pay you back in (now) 99 years, you can enjoy a yield of over 9%!

And that might seem attractive, perhaps especially so in a low-rate world where the 30-year Treasury bond from Uncle Sam yields a paltry ~3.0%.

But you need to ask yourself, “Is the yield commensurate with the risk?”

Which brings A2C back to its park bench with the pigeons….

A recent order from the Western District of Washington caught our attention. Why?

Because….

“12 percent?!”

Let’s quickly verify the math…

12% Annual Rate X $66,087.76 = $7,930.53 for an entire year.

132 days/365 days = ~36.1643836% of the year.

$7,930.53 X 36.161643836% = $2,868.027 = $2,868.03.

$2,868.03 + $66,087.76 = $68,955.79.

The math is impeccable! Kudos!

Here’s the thing….

In a world where the effective yield on a serial sovereign defaulter’s 99-year bond remains under 10%, we are hard-pressed to defend on an economic or financial basis 12% statutory rates for prejudgment interest.

* Had Argentina failed to advance to the Round of 16 at the World Cup, A2C would not have piled on needlessly. Instead, we could have used the corporate bonds from some struggling retail chains, such as 99 Cents Store yielding ~11.8% (CUSIP: 65440KAB2), or JC Penny yielding ~11.9% (CUSIP: 708130AC3). Some small distressed energy concerns also have corporate bonds out there with effective yields approaching 12%.

WesternGeco LLC v. Ion Geophysical Corp. (Supreme Court Decision – June 22, 2018)

Our previous post concerning this matter only touched upon the extraterritorial application of patent damages because we expected that issue would be dealt with more fully in the future. That future is now our present!

The Supreme Court ruled that WesternGeco could receive lost profits based upon extraterritorial infringement of a U.S. patent.

WesternGeco represents itself to be a company which, “collaborates with you at every stage of the E&P life cycle to accelerate your discoveries in basins spanning the globe. From derisking prospects to optimizing reservoir monitoring, we have the expertise, digital capabilities, and seismic data to help you get to first oil faster and maximize your recoveries.” In plain English, the company makes big equipment used to find and recover oil and offers services towards those ends. Ion Geophysical appears to do the same thing.

The Supreme Court summarized the dispute between the two competitors as follows:

The Supreme Court pointed to a two-factor test. The first factor is “whether the presumption against extraterritoriality has been rebutted.” In this matter, however, the Court sidestepped the first factor, observing, “While ‘it will usually be preferable’ to begin with step one, courts have the discretion to begin at step two ‘in appropriate cases.'”

The second factor is “the [284] statute’s focus,” concerning which the majority concludes:

What fascinates A2C about this case is the dissenting opinion written by Justice Gorsuch and joined by Justice Breyer. In that dissent, Justice Gorsuch argues that the ruling on lost profits may prove to have reverberations throughout the global patent system and may result in other countries attempting to assert foreign patents in the United States. Justice Gorsuch writes, “Permitting damages of this sort would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy.”

Justice Gorsuch’s primary basis for dissent is the notion that U.S patent infringement outside of the United States does not exist. Products assembled abroad and put to use in a manner in line with claims of a United States patent does not constitute infringement because, by definition, infringement cannot occur outside of the United States:

Citing General Motors Corp. v. Devex Corp., Justice Gorsuch argues that the majority opinion on this matter would put “the patent owner in a better position than it was before by allowing it to demand monopoly rents outside the United States as well as within.” Justice Thomas rebutted this view for the majority by stating that the dissent, “wrongly conflates legal injury with the damages arising from that injury.” Citing to General Motors again, he wrote:

Howmedica Osteonics Corp., v. Zimmer, Inc., Centerpulse Orthopedics, Inc. (Opinion May 23, 2018)

If you set aside a park bench for all those people on planet Earth who are utterly fascinated by the topic of prejudgment interest, the authors of A2C – together & alone – would share a quiet lunch, discussing PJI while tossing crumbs to the pigeons.

In that spirit, we report that Senior District Judge Walls from the District of New Jersey recently offered an opinion granting attorneys’ fees & costs, but no prejudgment interest, in a case of alleged infringement brought way back in 2005. In support of the decision, Judge Walls observes:

Judge Walls notes that the attorneys’ fees were reasonable except for those “hours billed due to inexperience, hours billed for tasks that should have been performed by more cost-effective actors, and hours and tasks that took an excessive amount of time to complete.” Included in the opinion, but not replicated here, are details regarding hourly billing.*

As for prejudgment interest, however, Judge Walls provided the following justification for not granting the request:

We sit on our bench feeding pigeons, while struggling mightily to understand the economic logic of this decision. Specifically, Judge Walls finds that there was deceit by the plaintiff over the course of a decade; and that attorneys’ fees are correspondingly justified… but there is no basis for affording the defendant the benefit of any compensation related to the time-value of its money?

Within the confines of the courtroom, this may make sense.

From the purview of our park bench, it is incoherent to us (and the pigeons).

From the opinion, it appears that prejudgment interest is just one in the line of many additional ways to exact money. What appears to have been lost is that if the money was rightfully remitted by the losing party, then the time value of that money should also be considered. If Judge Walls is operating with some conceptual economic cap to compensation (and below we provide evidence to suggest the possibility of such conceptual caps), the attorneys’ fees should arguably have been reduced, and then been adjusted for the time value of money to arrive at roughly the same monetary compensation.

* An interesting side-item from Judge Walls: despite what we would have assumed to be a relatively efficient market for legal services, an economic cap evidently exists on the professional value available from attorneys of $900/hour.