In re Paragon Trade Brands, Inc., Case No. 98-60390 Chapter 11, U.S. Bankruptcy Court for the Northern District of Georgia
Nathan was retained by the litigation counsel for Paragon Trade Brands bankruptcy estate, Andrews & Kurth of Houston, Texas, to calculate the economic damages suffered by Paragon as a consequence of inadequate patent rights and to provide support for the rebuttal of defendant Weyerhaeuser Corporation’s economic expert.
In 1993, Weyerhauser spun off private label diaper manufacturer, Paragon Trade Brands, to avoid looming liability for selling diapers that infringed the patents of Proctor & Gamble’s and Kimberly-Clark’s popular disposable diapers.
The spin-off yielded more than $200 million to Weyerhaeuser. Soon after, a federal judge in Delaware found Paragon guilty of infringing P&G’s patents and ordered it to pay $178 million in damages. Paragon, with annual earnings of only $45 million at the time, immediately filed for bankruptcy protection.
By agreeing to pay $163 million to P&G and $115 million to K-C for past infringement, and royalties of 4.5% of sales going forward, Paragon emerged from bankruptcy in 2000. But the equity of former shareholders was eliminated. The bankruptcy estate of Paragon filed suit against Weyerhaeuser, who had warranted at the time of the spin-off that Paragon had sufficient assets, including patent rights, to continue operating its disposable diaper business.
Nathan’s Dr. John Beyer and Douglas Young estimated economic damages using several methodologies:
- Cost to cure patent deficiencies,
- Difference in business value with and without adequate patents, and
- Destruction of Paragon’s value as a consequence of its patent liabilities and subsequent bankruptcy.
Dr. Beyer testified at trial concerning the range of damages estimates derived by these methods. He also testified that Weyerhaeuser’s expert’s theory of damages, which was predicated on Paragon’s purported ability to properly license the patents and to raise its prices following the spin-off, was flawed in theory and in fact.
In April 2005, U.S. Bankruptcy Judge Margaret Murphy decided that Weyerhaeuser owed nearly $460 million to the bankruptcy estate of Paragon Trade Brands. The award was based almost entirely on the damages calculations presented by Nathan at trial. Judge Murphy largely accepted Nathan’s cost to cure measure of damages, and used the difference in value and business destruction measures as corroborating evidence.