Bayer Healthcare LLC, v. Baxalta Inc., et al. (Order January 25, 2019)

It remains unclear what damages theories might remain after Judge Andrews provided his order on Daubert motions. Defendant’s expert was excluded in part and Plaintiff’s expert was excluded in part. The resulting questions: “What remains – what might damages testimony at trial look like?”

The order explains that Bayer sued Baxalta for patent infringement concerning the drug Adynovate. Dr. Rausser, Baxalta’s expert, claimed that the damages were small based upon the perspective that the patent possessed little to no value. Plaintiff’s counsel argued that Dr. Rausser failed to assume infringement, used non-comparable licenses and derived a lump sum from licenses that were, in contrast, running royalty licenses. Judge Andrews struck Dr. Rausser’s opinion based upon Plaintiff’s final complaint, noting:

Dr. Addanki, Bayer’s expert, argued that the patents are valuable and that damages would be derived from a 50/50 split of profits. Evoking the Nash Bargaining Solution (which damages experts should understand now to create Daubert exposure), Dr. Addanki claims that this outcome would be “reasonable as a matter of economics.” Judge Andrews disagreed and struck the 50/50 split analysis and “any subsequent opinions that rely on that mid-point rate.”

It would seem little remained of damages for this matter given the exclusions. We shall return later to see whether and how Baxter might advance opinions regarding damages at trial.

Princeton Digital Image Corp. v. Ubisoft Entertainment SA, et al. (Opinion December 11, 2018)

We have previously written about a damages opinion having been excluded for relying on a jury verdict from an unrelated matter. Another recent effort to use a jury verdict has also been excluded in this opinion from Judge Burke in the District of Delaware.

In the opinion, Judge Burke observes that some may reasonably conclude that courts appear to have established jury-verdict reliance as per se unreliable:

In contrast to this view, however, Judge Burke suggests no such blanket rule should be presupposed to exist:

Judge Burke goes on to describe in a footnote a scenario where a jury verdict might prove relevant for damages:

It appears clear to us that the lesson remains to exercise extreme caution when entertaining use of a jury verdict in damages analysis. While the unique facts of a case may support such reliance, those occasions will likely prove exceedingly rare.

Mark A. Barry v. Medtronic, Inc. (CAFC Decided January 24, 2019)

Medtronic appealed this patent infringement matter in which a jury in the Eastern District of Texas decided that Medtronic induced infringement of two patents owned by Dr. Mark Barry. The Federal Circuit affirmed the jury’s findings and preserved the damages award.

The damages award was based on a survey, the so-called “Neal Survey.” Medtronic argued that the Neal Survey failed to measure infringement by physicians; Plaintiff Barry represented that it did. Notably, the Federal Circuit provided some guidance for what Defendant Medtronic needed to show (but didn’t) to invalidate the Neal Survey:

Because Medtronic failed to show the errors in the survey results, the jury’s award was allowed to stand.

Surveys are a powerful empirical tool that can serve a wide variety of purposes, including damages analysis. At the same time, surveys must be properly formulated and executed, which are no easy tasks. As a result, an uneasy tension exists between the statisticians who are usually called upon to perform a survey, and the economists/accountants/financial analysts who must employ those results for damages analysis, without running afoul of Daubert.

We welcome any and all guidance from courts, like that highlighted above, specifying where the survey guardrails exist. We further expect surveys to prove an increasingly important area of judicial development for damages over the next decade.

Enplas Display Device Corp., et al. v. Seoul Semiconductor (Decided, November 19, 2018)

Although not considered “precedential,” the opinion by the Federal Circuit in this matter merits closer review. Often, damages experts are heard to discuss “freedom to operate” as a consideration at the hypothetical negotiation. The idea of freedom to operate is that one takes a license and then enjoys the freedom to practice any claim in the patent in any existing product and any future product.

The reason this becomes a relevant consideration is because any reasonable licensee would prefer to conduct one negotiation to allow the two companies to walk away and pursue business in any manner the licensee sees fit. This was the analytic approach Defendant’s expert took to damages in this matter, offering an opinion as to the “premium” that might be paid to afford freedom to operate.

The CAFC disagreed. The statutory language specifically states that a royalty rate should be “adequate to compensate for the infringement.” The language is not “adequate to compensate for any use of the patented technology.”

Arguments seeking to link a lump-sum construct to a broader freedom to operate were found unpersuasive, because the estimate relied on non-accused products.

This Enplas opinion is a gentle reminder that the hypothetical negotiation is not a real negotiation, but rather a fake one: one that didn’t happen and one that would never have happened. The CAFC reminded the district court that a damages expert does not enjoy freedom to operate in a manner that includes damages greater than the amount adequate to compensate for infringement.

A2C Year In Review – 2018

A2C has been busy with client matters for several months. As anyone functioning in commercial litigation knows, work can be “dead,” “slow,” “busy” or “insane.”

We’ve been “insane.” As soon as the meter moves back toward “busy” or below, we will become regularly active here again. Promise.

In the meantime, when we started this project, we had no idea what interest others might have in its content. None. Zip. Zero. We would ask ourselves, “Does anyone really care about damages?” The motivation was to make available more broadly commentary that heretofore had been distributed privately through email. The larger goal is to develop an online clearinghouse for damages-related analysis.

What have we learned about interest in our first year? We are going to share the numbers. We posted 42 entries in 2018. The generic data-tracker attached to the website indicates that the blog enjoyed 1,211 visitors, who registered 2,195 views. (To answer a privacy concern, “No, we do not possess any personal information about anyone who visits.”) Does that constitute “a lot” of traffic? For a hyper-niche blog? We will let others decide, but we confess that it is more than we would have guessed back when we launched. So, we are happy with that.

The most surprising thing we’ve learned since launch is the international interest in the blog. We never foresaw interest beyond the United States. But such interest exists, and below is the available information we possess about the location of visitors to the blog.

May your practice (and ours…) prove “busy” in 2019!

Acceleration Bay LLC v. Activision Blizzard, Inc. (Opinion on Motion to Exclude – August 29, 2018)

Delaware District Court Judge Andrews ruled on a very creative damages analysis.  And when we say “creative” we mean really, really outlandishly creative.

Plaintiff’s expert, Dr. Christine Meyer, determined the hypothetical negotiation date for her patent infringement damages analysis and then recalculated a jury verdict award from a separate and unrelated patent infringement matter (namely, Uniloc USA, Inc. v. EA) to use as her anchoring point for her Georgia Pacific analysis.

Yes, you read that correctly, and we represented it faithfully:

It appears from Judge Andrew’s opinion that Dr. Meyer attempted to introduce an unrelated jury verdict award as a “comparable license” analog by relying upon a technical expert’s analysis of both the unrelated verdict-patents and their relative value as compared to the patents in suit.  Such malarkey was unacceptable and the motion to exclude on this issue was granted.

Apart from this unrelated jury verdict “analytic” sideshow, Judge Andrews offered insight into lump sum and running royalty rates.

Dr. Meyer’s lump sum opinion was not excluded for looking into the future and thereby forecasting hypothetical future sales.  But Judge Andrews suggests that such analysis would have been excluded if she had ultimately settled upon a running royalty rate:

Judge Andrews thereby clarifies a subtle, but important (and now specifically-articulated) rule for lump-sum opinions as necessarily distinct from running royalty opinions.

EcoServices, LLC v. Certified Aviation Services, LLC (Order on Motions in Limine, June 19, 2018)

In this matter, Defendant sought to exclude evidence upon which Plaintiff’s damages expert relied for his reasonable royalty analysis.  Specifically, Defendant argued that lost profits should not be considered when conducting a reasonable royalty analysis.

The court, however, disagreed and offered a declarative view.

We have seen this Defendant’s argument floated numerous times over the years, and judges reliably explain that consideration of lost profits is rightfully relevant for the hypothetical negotiation construct.

It is relevant to Georgia Pacific Factor #5 (i.e., whether the licensor and licensee are competitors).

It is relevant to Georgia Pacific Factor #13 (i.e., the portion of the realizable profit that should be credited to the invention).

Last year, the Court of Appeals for the Federal Circuit ruled similarly in Asetek v. CMI:

Some subset of attorneys will likely continue to pursue the “No lost profits consideration!” line of attack.  We expect them to continue to encounter a judicial wall of adverse rulings that make pointless the time & effort.

Power Integrations, Inc. v. Fairchild Semiconductor International, et al. (Federal Circuit Opinion, July 3, 2018)

This recent opinion is a lesson in, “If at first you don’t succeed, try, try again,” and for defendant Fairchild, the third time proved the charm.

You see, when plaintiff’s damages expert, Dr. Putnam, first offered his opinion that the parties at the hypothetical negotiation would anticipate “lost sales, reduction in price due to competition, and lost licensing fees,” A2C doubted Judge Chesney would approve such methodology.  When she did (on two occasions), we figured that the Federal Circuit would finally disapprove of the reduction-in-price analysis.

Alas, the Federal Circuit remanded this matter for a new damages trial… but not on the reduction-in-price analysis issue of interest to us.  Rather, the remand was based on misapplication of the entire market value rule.

This litigation began years ago.  At the first trial, the jury found that all but one patent was infringed and awarded Power Integrations $105 million.  Less than a week after Judge Chesney’s denial of the JMOL on that verdict, the Federal Circuit issued its opinion in VirnetX.  Accordingly, Fairchild requested – and was granted – a new damages trial based on violation of the entire market value rule.  That ensuing trial, as the Federal Circuit observes in this recent opinion, resulted in a verdict of $139.8 million “based on damages testimony that relied solely on the entire market value rule.” An additional question on the verdict form asked whether the patented feature created the basis for consumer demand, to which the jury marked, “Yes.”  After that trial and subsequent denial on JMOL, Fairchild appealed to the Federal Circuit which ruled in favor of Fairchild and remanded for further proceedings.

While much of this Federal Circuit opinion constitutes a summary of past entire market value rule matters, the court did provide the following valuable and pointed guidance for attorneys & damages experts alike:

With regard to the case at hand, Fairchild reaps the reward of determination:

 

Eko Brands, LLC, v. Adrian Riviera Maynez Enterprises, Inc. et al. (Order Awarding Prejudgment Interest, June 14, 2018)

Let’s briefly discuss bonds… so that we can then discuss sovereign debt issued by Argentina*, so that we can turn our ultimate attention to the Western District of Washington.

In exchange for immediate access to cash, a bond-issuer typically promises to return that cash amount at some future specified date, and agrees to provide some additional stream of cash to compensate the lender for the loan.

The date when the borrowed cash is returned is called the bond’s “maturity.”

The stream of cash that forms compensation informs a bond’s “yield.”

For example, if I lend an old college roommate $100 for 10 years, and the ex-roommate agrees to pay me $6 each year on the anniversary of our agreement, the bond is said to have a 10-year maturity and is said to “yield 6%” (i.e., $6/$100 = 6%).

Bonds can be bought & sold on the open market. Using our prior example, let’s say that upon making my $100 loan for 10 years, I immediately turn around and sell the obligation to you for $105.  Now, you have paid $105 for the annual $6 anniversary payment from my ex-roommate, and you can be understood to have purchased a bond yielding $6/$105 = 5.7142857%.

This example demonstrates the seesaw relationship between bond prices & yield, and the oft-encountered maxim, “Rising bond prices = lower yields.”

(The counter is also true: “Falling bond prices = higher yields.”)

Presumably, those who would lend money to a borrower will take care to demand a rate of interest/return commensurate with the associated risk.  To continue with our example, if I lent my ex-roommate $100 at 6% 20 years ago when we were college roommates, and said-roommate never paid me back, when said-roommate comes to me again looking for another $100 loan, I will reasonably include prior experience with failure-to-pay in assessment of risk of any further loan.

Perhaps now I will insist on $15 per year, for an effective yield of 15%.

This is the relationship between assessed risk and rate of interest/return/yield:  the higher the former, so commensurately high should be the latter.

Countries also issue (sovereign) debt.  For example, the U.S. Treasury as of June 28, 2018 has issued $21,149,679,487,479.03… or “just over” $21 trillion (to the extent that $149 billion is worthy of rounding…).

Other countries issue debt, too: for example, Argentina!

Argentina is an interesting case, because successive governments there have issued debt, but then failed periodically to pay it back (like our college roommate example above).  The history is complicated, and we will not belabor you with details beyond observing that Argentina has defaulted on its external debt (and its internal debt) multiple times throughout its 200 year history, including in 2001, when it defaulted on +$100 billion in what was then the largest sovereign default in history.

Which made it all the more surprising 1 year ago when Argentina successfully issued $2.75 billion in bonds with a maturity of 100 years (a.k.a., “century bonds”).  Which is to say that if you participated in that issuance, you were extremely unlikely ever personally to receive back upon maturity the sum of money you originally lent.  Because you’ll likely have been dead for decades – so sorry – when the debt matures.

What was the yield demanded by lenders of this 100-year bond issuance from a party that has demonstrated periodic incapacity/unwillingness to make good on its debt obligations? About 7.9%.  So, while you are not likely to be around when the debt comes due, at least as a participant you enjoy the promise of a stream of payments worth 7.9%, and that ain’t nothin’.

But alas now (exactly one year later today!), Argentina’s economy is in trouble… again.

And the prospects of timely payment are being drawn into question… again.

And the price of those 100 year bonds is falling in the open market, because investors familiar with the country’s credit history observe its immediate prospects.

And as the price for those bonds falls in the open market, the seesaw of their effective yield is on the rise… approaching 10%.

If you are comfortable with the certainty that Argentina, despite its history of relatively recent (and spectacularly large) default, will pay you back in (now) 99 years, you can enjoy a yield of over 9%!

And that might seem attractive, perhaps especially so in a low-rate world where the 30-year Treasury bond from Uncle Sam yields a paltry ~3.0%.

But you need to ask yourself, “Is the yield commensurate with the risk?”

Which brings A2C back to its park bench with the pigeons….

A recent order from the Western District of Washington caught our attention. Why?

Because….

“12 percent?!”

Let’s quickly verify the math…

12% Annual Rate X $66,087.76 = $7,930.53 for an entire year.

132 days/365 days = ~36.1643836% of the year.

$7,930.53 X 36.161643836% = $2,868.027 = $2,868.03.

$2,868.03 + $66,087.76 = $68,955.79.

The math is impeccable! Kudos!

Here’s the thing….

In a world where the effective yield on a serial sovereign defaulter’s 99-year bond remains under 10%, we are hard-pressed to defend on an economic or financial basis 12% statutory rates for prejudgment interest.

* Had Argentina failed to advance to the Round of 16 at the World Cup, A2C would not have piled on needlessly. Instead, we could have used the corporate bonds from some struggling retail chains, such as 99 Cents Store yielding ~11.8% (CUSIP: 65440KAB2), or JC Penny yielding ~11.9% (CUSIP: 708130AC3).  Some small distressed energy concerns also have corporate bonds out there with effective yields approaching 12%.