Daubert Motion to Strike Expert Testimony Denied Where Lump Sum Royalty Was Not Improperly Based on Total Market Value of Accused Products

by Jeffer Mangels Butler & Mitchell LLP

In this patent infringement action, the patent owner sought a reasonable royalty in the form of a lump sum payment. HTC filed a Daubert motion to exclude the expert's opinion on the ground that the lump sum royalty impermissibly included the entire market value.

The district court began its analysis with a commentary on Daubert motions in patent cases. "Another patent case on the eve of trial, another Daubert motion to strike a patent damages expert's testimony. The undersigned only recently observed that such motions have become a routine affair in patent litigation. And yet, as routine as the motion has become, skilled experts continue to fashion new theories prompting additional lines of attacks. In short, no two motions are quite the same."

The district court then explained that the patent owner's lump sum royalty calculation was based upon a section of a recent Federal Circuit decision. "In the latest installment of this serial, the patentee and its allies seize upon a particularly interesting section of the Federal Circuit's analysis in LaserDynamics, Inc. v. Quanta, Inc. In that section, the Circuit suggests that in certain cases, the record might support a relatively straightforward way to avoid the restrictions of the entire market value rule in a Section 284 reasonable royalty analysis: a lump-sum payment. Consistent with this suggestion, Defendants Technology Properties Limited, Patriot Scientific Corporation, and Alliacense, Limiteds' (collectively "TPL") expert Dr. Stephen Prowse looks to the 100 or so licenses to the patents-in-suit struck by TPL. Dr. Prowse eschews any reliance on the so-called "analytical method."4 Instead, he offers the opinion that in the hypothetical negotiation that would have predated the infringement giving rise to this litigation, Plaintiffs HTC Corporation and HTC America (collectively "HTC"), too, would have agreed to an approximately $10M lump-sum payment."

HTC objected to this approach arguing that in calculating the value the lump sum, Dr. Prowse returned "to the entire revenue of its accused mobile phones for his estimate even as he acknowledges there is no evidence that any of claimed inventions is the basis of demand for the phones. And thus, says HTC, Dr. Prowse's professed reliance on a lump-sum structure is nothing more than a ruse to avoid the entire market value rule ("EMVR") and the Federal Circuit's increasingly demanding standards surrounding it. HTC separately challenges Dr. Prowse's efforts to "tier" the existing TPL licenses to weigh what HTC would have paid here in light of the assumption in any hypothetical negotiation that the patents-in-suit are valid and infringed."

The district court ultimately disagreed that this methodology was so flawed that it has to be excluded. "Here's why. Lump sums are one species of the broader genus of reasonable royalties, running royalties being another. Depending on the certainty of the market opportunity, the cash constraints of the licensee, the licensor's appetite for risk and superior insight into the utility of the patented invention, the parties' competitive posture, and undoubtedly other factors, a lump sum structure might better reflect what the hypothetical negotiation would produce. Especially where, as here and in LaserDynamics, the patentee itself consistently and regularly negotiated lump sum payments with its licensees, there is even more reason to believe that the parties would have agreed to a lump sum to allow the licensee to infringe."

The district court then analyzed how the parties would have figured out the amount of the lump sum royalty and concluded that there was a sufficient basis for the expert to testify before the jury. "According to Dr. Prowse, here TPL and its licensees regularly estimated the anticipated revenue of the entire licensed product in arriving at a bottom line number. Given this record, the court cannot say Dr. Prowse's estimate is so unreliable as to violate the norms of Fed. R. Evid. 702. In Lucent, the Federal Circuit at least suggested that so long as an expert does not openly invite the jury to "speculate" about the future, she may opine on the magnitude of the lump sum payment by "estimating" what the total royalty would be based on a running royalty on the accused product as a whole. The Circuit did not suggest, and has not since suggested, that such as estimate is appropriate only where the demand requirement of the EMVR is satisfied. Two considerations are critical. The first is that there is evidence in the record in this case that this is what TPL and its licensees did over and over again.9 The second is not to use lump sum agreements that bear little resemblance to the hypothetical license in terms of patents licensed and field of use. . . . Here, there is no dispute that while the other agreement did license broader rights, those rights included the very same patents asserted against HTC. The licensor was none other the TPL, the same licensor here. While the other agreements did involve broader geographic rights than just those of the United States, so long as this broader scope is accounted for, the agreements may still be properly considered. Perhaps this explains why HTC's own damages expert agreed that the agreements were comparable."

Finally, the district court concluded that "[w]hether any of this will persuade the jury remains unclear. That is not the issue before the court. What is clear is that the jury should get the opportunity to hear this evidence, look Dr. Prowse in the eye, and give his testimony whatever weight it deems appropriate."

HTC Corporation, et al., v. Technology Properties Limited, Case No. 5:08-cv-00882-PSG (N.D. Cal. Sept. 6, 2013).

Written by:

Jeffer Mangels Butler & Mitchell LLP

Jeffer Mangels Butler & Mitchell LLP on:

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