Specialist Chapter: New Challenges in Proving Patent Infringement Damages in the United States
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In summary
Over the past decade, the degree of scrutiny under which courts in the United States evaluate a party’s damages calculations, and particularly the methodology employed by the damages expert in determining reasonable royalties, has changed. Parties file complex pre-trial Daubert motions attacking the admissibility of damages experts’ testimony. The cases over the past year suggest that US courts now exercise more flexibility in what they find to be admissible.
Discussion points
- Tying facts of the case to the damages analysis
- Comparability of licences
- Temporal considerations
- Apportionment
Referenced in this article
- Daubert
Over the past decade, the degree of scrutiny under which courts in the United States evaluate a party’s damages calculations, and particularly the methodology employed by the damages expert in determining reasonable royalties, has changed. Parties file complex pre-trial Daubert[1] motions attacking the admissibility of damages experts’ testimony.[2] For challenges addressing reasonable royalty damages, US courts apply a discerning eye to three main items:
- Has the expert tied the specific facts of the case to the methodology used to reach its opinion?
- Has the expert relied on sufficiently comparable licence agreements?
- Has the expert sufficiently apportioned the value of the patented technology from the unpatented aspects of the accused product?
Under Daubert, US judges do not hesitate to exclude damages opinions that fail to meet the demanding reliability requirements for admissibility.[3] The escalation in excluding patent damages opinions under Daubert began in earnest about 10 years ago, with the courts initially being rigid in application of admissibility standards.[4] The cases over the past year, however, suggest that US courts now exercise more flexibility in what they find to be admissible.
Tying facts of the case to the damages analysis
While US courts recognise that ‘estimating a reasonable royalty is not an exact science’,[5] conclusory expert testimony on damages will not suffice in today’s environment. An expert may not simply recite comments regarding the 15 Georgia-Pacific factors, and then pronounce that the patented invention deserves a certain royalty rate. Instead, the ‘damages experts must not only analyze the applicable factors, but also carefully tie those factors to the proposed royalty rate.’[6] This generally requires concrete reasons for how and why the patented invention or accused product meets or fails to meet a particular factor.[7]
Additionally, the expert must ‘carefully tie proof of damages to the claimed invention’s footprint in the marketplace’. While sometimes overlapping with considerations of apportionment, this factor requires showing that any value that the accused product attained from infringing, which the expert relies on to support a royalty rate, must be attributed to the patented features and not to other unpatented features.[8]
Damages opinions that a court likely would have excluded a few years ago can survive an admissibility challenge if the expert’s opinion is grounded in material relevant facts. For example, a district court recently allowed a reasonable royalty opinion that resulted in damages equalling 120 per cent of the accused infringer’s total sales revenues.[9] The court found that the expert sufficiently tied his opinions to the facts of the case by presenting an analysis of public information showing that the likely sales price of the accused product was four times higher than the accused infringer contended.
Comparability of licences
Before an expert relies on a licence agreement as evidence of a proper reasonable royalty, the expert must show that the licence agreement addresses technologically similar subject matter under economic circumstances comparable to what the parties would face in the hypothetical negotiation (ie, the date the accused infringer first infringed).[10]
Perfect comparability between a patent licence agreement and the hypothetical negotiation rarely exists. An agreement may provide for a lump sum payment while the expert seeks a running royalty. The agreement may address a portfolio of patents where the infringement only addresses one or two patents from that portfolio. Agreements may address variations in the technical subject matter. Experts failing to acknowledge these differences, or conclusory opining the differences do not matter, may see their opinions struck. Recent cases, however, show that experts that provide non-conclusory plausible explanations, tied to the facts of the case, for how the relevant differing aspect of the licence agreement can be adjusted to fit within the parameters of the case’s hypothetical negotiation often survive a Daubert challenge as they have established a ‘baseline comparability’.[11]
Temporal considerations
For infringement cases litigated 20 years ago, the law appeared to implicitly assume that a licence agreement reached far away in time from the date of the hypothetical negotiation could not be comparable.[12] That view no longer prevails. Recent cases show that:
damages experts are permitted to rely on license agreements entered years after [or before] the hypothetical negotiation date so long as the expert details the facts and circumstances that led the expert to conclude that the license agreement is technically and economically comparable to the hypothetical license in th[e] case.[13]
Apportionment
Unless the patented feature in the accused product drives its sale, US law requires that ‘the ultimate reasonable royalty award must be based [only] on the incremental value that the patented invention adds to the end product.’[14] This requirement, referred to as apportionment, plays an important role in determining damages where the accused product has multiple components or features. Many damages opinions fall in a Daubert challenge for a failure to sufficiently apportion.
A few years ago, as one apportionment methodology, US courts began requiring that a patentee limit the royalty base to the smallest salable patent-practising unit (SSPU).[15] However, it soon became evident that the SSPU methodology was not easy or proper to apply in many instances. In some cases, the patented feature was merely one component of the SSPU, and thus an apportionment beyond the SSPU was needed.[16] In other instances, available licence agreements were directed only to the overall end product.
In the first steps of bringing some flexibility to apportionment, courts recognised that an economist can apportion:
in various ways—by careful selection of the royalty base to reflect the value added by the patented feature, where that differentiation is possible; by adjustment of the royalty rate so as to discount the value of a product’s non-patented features; or by a combination thereof.[17]
For example, where an expert can provide non-conclusory testimony showing that a licence agreement is comparable to the patented invention and that the agreement has built-in apportionment relevant to the patented technology, the expert does not necessarily have to supply a quantitative apportionment.[18] Parties may also rely on other products, even later developed products, as a ‘benchmark’ when determining a reasonable royalty where those benchmark products are shown to be technologically comparable to the asserted patents.[19]
Conclusion
The foregoing shows that, while the law may now allow for greater variety of ways to support a patent-damages opinion, many pitfalls lurk in the background that can thwart the effort to successfully prove damages. Wise litigants will retain and involve a competent damages expert from the outset of the matter and work closely with that expert to make the opinion as strong as possible to withstand the inevitable Daubert challenge.
Footnotes
[1] Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
[2] U.S. law requires that any expert witness who will provide opinion testimony at trial must submit, prior to trial, a detailed expert report that provides, inter alia, “a complete statement of all opinions the witness will express and the basis and reasons for them” and “the facts or data considered by the witness in forming them.” FED. R. CIV. P 26(a)(2) (2016). The Daubert motion challenges the opinions expressed in the report. See generally Robert A. Matthews, Jr., ANNOTATED PATENT DIGEST [hereinafter “APD”] § 44:41 F.R.E. 702 and Daubert Factors.
[3] See e.g., APD § 44:80.50 Cases Excluding Patentee’s Damages Expert’s Opinions (collecting cases) and § 44:81.50 Cases Excluding Accused Infringer’s Damages Expert’s Opinions (collecting cases).
[4] See e.g., VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326-29 (Fed. Cir. 2014); LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 80-81 (Fed. Cir. 2012); ePlus, Inc. v. Lawson Software, Inc., 700 F.3d 509, 522-23 (Fed. Cir. 2012); WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10, 27-33 (Fed. Cir. 2012); Lucent Tech., Inc. v. Gateway, Inc., 580 F.3d 1301, 1338 (Fed. Cir. 2009).
[5] Apple Inc. v. Motorola, Inc., 757 F.3d 1286, 1315 (Fed. Cir. 2014).
[6] Exmark Mfg. Co., Inc. v. Briggs and Stratton Power Products Gp., LLC, 879 F.3d 1332, 1350 (Fed. Cir. 2018) (patentee’s damages expert’s opinion should have been excluded because the expert failed to tie her analysis of the factors with her opinion that a 5% royalty rate should apply, but rather the rate appeared to be “plucked out of thin air”).
[7] In doing so, damages expert can, and often must, rely on relevant admissible testimony from technical experts. See e.g., Arctic Cat Inc. v. Bombardier Recreational Prods., Inc., 876 F.3d 1350, 1369-70 (Fed. Cir. 2017) (proper for patentee’s damages expert to rely on technical expert’s opinion that certain products were comparable in technological and safety value); see generally, APD § 44:46.75 Expert May Rely on Admissible Testimony From Other Experts, and § 44:81.150 Cases Admitting Technical Expert Testimony to Support Foundation for Damage Expert’s Opinions.
[8] E.g. Sound View Innovations, LLC v. Hulu, LLC, 33 F.4th 1326, 1337-39 (Fed. Cir. 2022) (excluding a patentee’s damages opinion where the expert relied on a study allegedly showing how customer desired a technical feature in the accused product but the expert “did not have an adequate basis for treating the results of the study as sufficiently tied to the invention as claimed); Apple Inc. v. Wi-Lan Inc., 25 F.4th 960, 975-76 (Fed. Cir. 2022) (expert improperly used an unpatented feature of the accused product as the starting point to determine the benefits of the patented invention where the inventors of the patented technology admitted they had not invented that feature).
[9] Varta Microbattery GmbH v. Audio P’ship. LLC, No. 2:21-CV-00400-JRG-RSP, 2023 WL 5434854, *3-*4 (E.D. Tex. Aug. 23, 2023). Generally, a royalty rate should leave the accused infringer with some profit. See APD § 30:93 —Royalty Rate Normally Should Leave Infringer with Some Profit.
[10] See generally, APD § 30:78 Continuity of Economic Factors; § 30:79 Must be Based on Comparable Technology or Comparable Use of the Invention; and § 30:86 Time Period for Assessing Circumstances Relevant to Setting the Royalty Rate.
[11] Bio-Rad Labs., Inc. v. 10X Genomics, Inc., 967 F.3d 1353, 1373-76 (Fed. Cir. 2020) (district court properly found that the expert “had met a showing of ‘baseline comparability’” and that the “degree of comparability is a factual issue best addressed through cross examination”). See also Chrimar Holding Co., LLC v. ALE USA Inc., 732 Fed.Appx. 876, 887 (Fed. Cir. May 8, 2018) (nonprecedential) (“This court has approved reliance on licenses, which often will not be in identical circumstances, as long as reasonable adjustments for differences in contexts are made.”). See e.g., Viatech Techs., Inc. v. Adobe, Inc., No. 20-358-RGA, 2023 WL 5975219, *6-*10 (D. Del. Sep. 14, 2023) (allowing the damages expert to rely on a first agreement, which was not a patent license but a technology agreement that led to the patented technology, because the expert “analyze[d] both technological and economical comparability and ma[de] various adjustments accounting for differences between the DR Agreement and the hypothetical negotiation,” however excluding the expert’s reliance on second agreement, a portfolio patent license, since the expert did “not sufficiently establish comparability … because there is no evidence or analysis of the patents in the portfolio” nor a comparison of the licensed patents to the asserted patent).
[12] See e.g., Odetics, Inc. v. Storage Tech. Corp., 185 F.3d 1259, 1276–77 (Fed.Cir. 1999) (license agreements entered into four years after the date of first infringement were irrelevant in view of “the context of the changing technology and ‘financial landscape’ at issue” made those agreements irrelevant for the hypothetical negotiation analysis).
[13] CAO Lighting, Inc. v. Gen. Elec. Co., No. 20-681-GBW, 2023 WL 1930354, *9 (D. Del. Jan. 30, 2023) (cleaned up) (allowing use of license that posted dated the hypothetical negotiation date by five years). E.g. Willis Elec. Co., Ltd. v. Polygroup Macau Ltd. (BVI), No. 15-cv-3443 (WMW/DTS), 2023 WL 112733, *4-*6 (D. Minn. Jan. 5, 2023) (allowing accused infringer’s expert to rely on a license agreement the accused infringer entered into six years after the date of the hypothetical negotiation since the expert opined there were factual circumstances that showed the conditions at the time of the agreement were similar to the conditions on the date of the hypothetical negotiation); Wonderland Switzerland AG v. Evenflo Co., Inc., No. 1:20-cv-00727-JPM, 2023 WL 5574139, *3-*4 (D. Del. Jan. 5, 2023) (allowing patentee’s damages expert to rely on a license agreement that was negotiated over ten years before the date of the hypothetical negotiation, where the expert “took steps to account for the differences between the Meeker Agreements and the facts of the instant action”).
[14] Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014).
[15] Commonwealth Scientific and Industrial Research Organisation v. Cisco Sys., Inc., 809 F.3d 1295, 1302 (Fed. Cir. 2015) (“the smallest salable patent-practicing unit principle provides that, where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base”).
[16] See generally, APD § 30:61.250 Apportioning the Value of the Patent to the Smallest Saleable Unit and Beyond.
[17] Ericsson, Inc., 773 F.3d at 1226.
[18] Bio-Rad Labs., Inc. v. 10X Genomics, Inc., 967 F.3d 1353, 1376-77 (Fed. Cir. 2020) (affirming a $24 million in reasonable royalty damages based on a 15% royalty rate, and finding that patentee’s damage expert sufficiently apportioned even though the expert did not provide a quantitative apportionment analysis where the expert provided nonconclusory testimony that the comparable license agreements he relied upon had already apportioned in setting the royalty rate at 15%). But cf. Omega Patents, LLC v. CalAmp Corp., 13 F.4th 1361, 1379-82 (Fed. Cir. 2021) (reversing denial of accused infringer’s motion for a new trial on damages since the patentee had failed to properly apportion and finding that the patentee failed to show the alleged comparable licenses it used had built-in apportionment, i.e., that the licenses were “‘sufficiently comparable’ in that ‘principles of apportionment were effectively baked into’ the purportedly comparable license”).
[19] Arctic Cat Inc. v. Bombardier Recreational Prods., Inc., 876 F.3d 1350, 1369-70 (Fed. Cir. 2017) (patentee’s damages expert properly used a later developed product of the accused infringer as a “value benchmark” to the accused product where the two products were of “comparable technological and safety value”). But cf. Sonos, Inc. v. Google LLC, No. C 20-06754 WHA, 2023 WL 3933071, *1-*6 & *10 (N.D. Cal. Jun. 9, 2023) (striking portion of patentee’s damages theory that sought to base the damages calculation on a premium subscription model of an allegedly comparable computer application called IFTTT as a benchmark since there was insufficient evidence that the IFTTT program was “technologically comparable to the claimed invention”).
