District Court Excludes Royalty Calculation of Defense Expert Where Expert Used an Incorrect Date for the Hypothetical Negotiation

As Cassidian Communications, Inc.'s ("Cassidian") patent infringement case against Microdata GIS, Inc. ("Microdata") moved toward trial, Cassidian moved to exclude the testimony of defendants' expert. The motion to exclude was based on the argument that the expert report was fatally flawed in that it calculated a reasonable royalty based on an incorrect hypothetical negotiation date.

The district court found that Mr. Gallagher's expert report is fatally flawed, in that it calculates reasonable royalty based on an incorrect hypothetical negotiation date in November 2010 - almost two years after the date infringement began in December 2008. See LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 75 (Fed. Cir. 2012) ("[T]he correct determination of the hypothetical negotiation date is essential for properly assessing damages." "In general, the date of the hypothetical negotiation is the date that the infringement began.").

The defendants did not dispute that Mr. Gallagher's opinion was based on an incorrect hypothetical negotiation date. Instead, the defendants argued that because "the record is completely silent with regard to any market changes between the two hypothetical negotiation dates," using the December 2008 date instead of the November 2010 date would not have affected Mr. Gallagher's analysis.

The district court disagreed. "However, having conceded that Mr. Gallagher used the wrong hypothetical negotiation date, Defendants bear the burden to come forth with evidence justifying Mr. Gallagher's opinion notwithstanding the two-year gap between the two dates. See id. ("[A] reasonable royalty determination for purposes of making a damages evaluation must relate to the time infringement occurred, and not be an after-the-fact assessment.") Simply pointing out that "the record is completely silent with regard to any market changes" between the two dates, without more, fails to persuade the Court that no market changes took place between these two dates and that it should overlook such a material flaw in Mr. Gallagher's opinion."

Accordingly, the district court found that Mr. Gallagher's opinion should be excluded. "While the Court recognizes that its role as gatekeeper under Daubert "is not intended to serve as a replacement for the adversary system," United States v. 14.38 Acres of Land Situated in Leflore County, Mississippi, 80 F.3d 1074, 1078 (5th Cir. 1996), here Mr. Gallagher has employed a fundamentally flawed methodology in calculating reasonable royalty, such that the flaw cannot be cured by "[v]igorious cross-examination, presentation of contrary evidence, [or] careful instruction on the burden of proof." Kumho Tire Co. v. Carmichael, 199 S. Ct. 1167, 1176 (1999); LaserDynamics, 694 F.3d at 76 (remanding the case for a new trial on damages because experts offered testimony based on an incorrect hypothetical negotiation date). Thus, the Court deems it proper to exclude Mr. Gallagher's expert opinion in its entirety."

Cassidian Communications, Inc. v. Microdata GIS, Inc., Case No. 2:12-cv-00162-JRG (E.D. Tex. Dec. 3, 2013)