Insights Featured Articles Federal Circuit Court of Appeals Reverses Damage Verdict — Improper Analysis

       

Federal Circuit Court of Appeals Reverses Damage Verdict — Improper Analysis

In Lucent Technologies, Inc. v. Gateway, Inc., Dell, Inc. and Microsoft Inc., 580 F3d 1301, the U.S. Court of Appeals for the Federal Circuit (CAFC) stated its position with regard to proper reasonable royalty calculations. The CAFC reaffirmed this ruling more recently in the matter of ResQNet.com, Inc. v. Lansa, Inc., Nos. 08–1365, –1366, 2009–1030.

In both cases, the CAFC upheld the liability ruling, but vacated the damage awards. The trial court must now re–determine the damages. Poorly constructed damage conclusions as put forth by the plaintiffs’ experts are to blame for the reversal of the lower courts’ decisions. It has become clear that an expert witness must perform a proper and complete analysis when performing a reasonable royalty calculation for federal court.

How is reasonable royalty to be determined?

A reasonable royalty is usually determined by considering a hypothetical negotiation between the patentee and the infringing party, which attempts to arrive at a royalty upon which the parties would have agreed had they successfully completed a negotiation prior to the infringement. Guidance related to this hypothetical reasonable royalty negotiation is found in the landmark case Georgia–Pacific Corp v. U.S. Plywood Corp., 318 F. Supp. 1116. The decision stated 15 factors to consider. As evidenced by the recent court decisions noted above, these factors remain vitally important today. Click here to download a list of these factors.

What went wrong with these cases?

Lucent’s expert witness did not successfully demonstrate the comparability of the license agreements he used for the patent in the suit, which resulted in an avoidable criticism by the court, as noted below.

• “The license agreements for other groups of patents, invoked by Lucent, were created from events far different from a license negotiation to avoid infringement of the patent here.”
   
• “Lucent submitted no evidence upon which a jury could reasonably conclude that Microsoft and Lucent would have estimated, at the time of negotiation, that the patented date–picker feature would have been so frequently used or valued as to command a lump sum payment that amounts to approximately 8% of the sale price of Outlook.”
   
• “Lucent had the burden to prove that the licenses were sufficiently comparable to support the lump–sum damages award. The Law does not require an expert to convey all his knowledge to the jury about each license agreement in evidence, but a lump–sum damages award cannot stand solely on evidence which amounts to little more that a recitation of royalty numbers, one of which is arguably in the ballpark of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.”

Lucent’s expert witness also did not properly analyze the profitability of Outlook and consider the contribution of the infringing feature. This was an avoidable, significant mistake. The CAFC had this to say about the plaintiff’s expert opinion with regard to this issue:

• “In short, Outlook is an enormously complex software program comprising hundreds, if not thousands or even more, features. We find it inconceivable to conclude, based on the present record, that the use of one small feature, the date–picker, constitutes a substantial portion of the value of Outlook.”
   
• “Although the weighing of Factor 13 cannot be reduced to a mere counting of lines of code, the glaring imbalance between infringing and non–infringing features must impact the analysis of how much profit can properly be attributed to the use of the date–picker compared to non–patented elements and other features of Outlook. Here numerous features other than the date–picker appear to account for the overwhelming majority of the consumer demand and therefore significant profit.”

The CAFC also noted that the expert witnesses failed to properly address additional Georgia–Pacific factors. The $350 million judgment in the Lucent case indicates that the jury erroneously considered the Entire Market Value Rule when deciding the damage award. In its ruling, the CAFC indicated that Lucent’s expert witness failed to provide sufficient evidence for the application of the rule in this case.

Had ResQNet’s expert properly considered the royalties received by the patentee for the licensing of the patent in suit, he would have had a drastically different reasonable royalty conclusion. In particular, the CAFC highlighted this failure of ResQNet’s expert witness.

“Yet [the expert] used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double–digit levels. [The expert] based his damages on seven ResQNet licenses, five of which had no relation to the claimed invention…Notably, none of these [five] licenses even mentioned the patents in suit or showed any other discernable link to the claimed technology.”

The CAFC was also concerned about the weight given the two most comparable ResQNet licenses and therefore stated:

“Those two “straight” licenses arose out of litigation over the patents in suit. One of them was a lump–sum payment of stock which [the expert] was unable to analogize to a running rate. The other was an ongoing rate averaging substantially less than 12.5% of revenues.”

Had the expert given these directly comparable licenses proper consideration, the royalty rate conclusion would have been significantly lower than 12.5% of revenues.

The expert did consider a few of the other Georgia–Pacific factors, but dismissed them because, “for the most part, the other factors have no real impact here.” The idea that the other fourteen Georgia–Pacific factors were not applicable is highly doubtful.

What can we learn from these cases, and what can be done to avoid these pitfalls?

Reasonable royalty analysis should consider all of the Georgia–Pacific factors. The CAFC criticism of the cases discussed above could have been avoided had all of the factors been properly considered. A qualified expert witness able to perform valuation, economic and accounting analysis can and should address these factors.

Avoid the temptation to rely solely on royalties that the patentee collects from non–comparable licenses. A robust analysis of all comparable licenses that the patentee receives and other comparable patent owners receive is preferable. Qualified valuation and economic experts that utilize professional judgment supported by data typically perform this analysis.

Finally, neither of the defendants in these cases put on damage expert testimony at the trial court level. The CAFC indicated that the lack of rebuttal testimony was influential. While the plaintiff has the burden of proof, having to win a reversal with the CAFC is a risky and expensive proposition, especially when a qualified rebuttal expert could have identified and highlighted the problems with the plaintiffs’ experts’ arguments at trial.

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