Federal Circuit to Review Virginia Court's Decision Excluding Expert Report and Testimony Due to Failure to Apportion Royalty Base to Infringing Features


At the behest of Facebook, Inc., a defendant in a patent infringement case, a Virginia court excluded the report and testimony of a damages expert because the expert failed to apportion the revenue to the features causing the alleged infringement. Ordinarily, the patent holder is entitled to damages to compensate them for the infringement, which is in no way less than a reasonable royalty for the infringer’s use of the patented invention. Case law has held that when the accused technology only represented a small improvement to an existing technology, the patent holder is entitled to a royalty based on the incremental value provided by that improvement.

In Rembrandt Social Media, LP v. Facebook, Inc., Civil Action No. 13-158 (E.D. Va.), Rembrandt sued Facebook, Inc., alleging that its website infringed two of Rembrandt’s patents on implementing a web page diary and transferring an annotated universal address. The allegedly infringing act was the addition of BigPipe and Audience Symbol to the Facebook website. BigPipe increases the speed at which a web page was delivered form Facebook’s servers to the user’s web browser by using scripts, and Audience Symbol introduces a small icon displayed next to stories on various webpages on Facebook’s website and signifies the audience allowed to view a particular story.

Rembrandt’s damages expert prepared a reasonable royalty damages analysis for Facebook’s alleged infringement. When calculating the royalty base and rate, however, the expert did not apportion the defendant’s revenue to BigPipe and Audience Symbol – the features causing the alleged infringement. Instead, the expert apportioned revenue based on other Facebook features.  Rembrandt argued that its expert calculated damages down to the smallest “salable patent-practicing unit” as required by case law, and any further apportioning was impractical and unnecessary.

Judge Ellis disagreed, stating the smallest salable unit must be closely tied to the patent and using the entire value of other Facebook features – which could be used independently without infringing – in the damages analysis would overcompensate the plaintiff. The Court also noted that the expert’s incorrect apportionment resulted in the entirety of his damages analysis being unreliable. For these and other reasons, the Court concluded the expert report was inadmissible under Federal Rule 703 and the expert standards set forth in the Supreme Court’s Daubert v. Merrell Dow Pharmaceuticals, Inc. decision. The effect of the decision was to leave Rembrandt without any way to prove damages.

Trial was set to begin on Tuesday, December 10. On Friday, December 6, however, Judge Ellis found that “given the uncertainty in this case regarding plaintiff’s ability to put forward any evidence of damages, it is appropriate to certify this issue to the Court of Appeals for the Federal Circuit for resolution on the question of the admissibility of plaintiff’s expert report and related testimony on damages, and to stay the case pending resolution of that issue.”

This decision is a reminder for parties in patent litigation that the analysis in expert reports must be thorough, rigorous and consistent with law. The Federal Circuit will get to decide that question here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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