Apple v. Wi Lan (Federal Circuit, Decided February 4, 2022)

The Federal Circuit offered its view on the perennial topic of comparable licenses. An earlier post provides background on this matter pending in the Southern District of California. To make a short post shorter, Judge Sabraw granted a JMOL on damages after trial, noting that Mr. Kennedy’s damages analysis was based on Dr. Madisetti’s unapportioned technical analysis. The court concluded that, “Dr. Madisetti’s testimony conflated the patented technology with VoLTE generally,” and offered a remittitur on damages of $10 million or a new trial. Wi-Lan chose a second trial. At that second trial, the jury agreed with Mr. Kennedy’s new damages analysis relying on comparable licenses and awarded Wi Lan $85.23 million. Apple’s JMOL was denied and appealed to the Federal Circuit. Which brings us to today.

Mr. David Kennedy, Wi Lan’s damages expert, relied on several licenses to the patents-in-suit for his royalty analysis. Those licenses were to a portfolio of patents, among which were the patents in suit. Mr. Kennedy testified that generally a portfolio license revolves around “key patents,” and that other patents included in a portfolio license tend not to constitute the basis of value, but rather involve a licensor “throwing in the chaff with the wheat.”

Mr. Kennedy also asserted that the patents-in-suit constituted the “key patents” in those comparable portfolio licenses, allowing him to make modest adjustments to the royalty rates found in those licenses. The jury agreed with his approach.

The Federal Circuit, however, disagreed with his approach, finding instead that Mr. Kennedy provided insufficient basis for his opinion that the patents-in-suit constitute the basis of value in his choice of comparable licenses. In doing so, it reversed Mr. Kennedy’s “wheat/chaff” metaphor on its head:

This opinion interests us for several reasons. First, the Federal Circuit appears not to challenge directly Mr. Kennedy’s general observation that portfolio licenses revolve around “key patents”; and that a “wheat/chaff” metaphor captures the economic substance of such agreements. Ultimately, that is an empirical question. From our purview, Mr. Kennedy’s licensing experience – however rich – is anecdotal, necessarily limited, and cannot buttress a sweeping claim. Second, this opinion reemphasizes that empiricism is the bedrock of damages analysis. That is, Mr. Kennedy appears to have approached damages from a presumption both that “key patents” drive portfolio licensing, and that the patents-in-suit constitute “key patents.” It is the latter claim that created analytic vulnerability, because it was not empirically established. While the court reversed the “wheat/chaff” metaphor as a result, we would also suggest that the route Mr. Kennedy derides – namely, “dividing the patents by numbers and multiplying it by, you know, a thousand patents” – may indeed capture “the way portfolio negotiations sometimes work.”

Don’t believe us? Consider this 2011 reporting from The Economist:

Packet Intelligence LLC v. NetScout Systems, Inc. (Federal Circuit Opinion, July 14, 2020)

While this opinion arrived on our desk months ago, we feel it a necessary one to discuss. Defendant NetScout appealed a jury verdict and judgment order from Judge Gilstrap in the Eastern District of Texas. Relevant to our inquiry, the Federal Circuit reversed Judge Gilstrap’s findings on pre-suit damages, and it also clarified an opaque issue regarding method patents and damages.

Judge Gilstrap and the jury found for the plaintiff, Packet Intelligence, awarding pre-suit damages, post-suit damages and enhanced damages. Pre-suit damages hinged on two issues, with the district court agreeing: 1) with plaintiff Packet Intelligence that it was defendant NetScout’s burden to prove lack of marking; and 2) that method claims may be considered infringing for purposes of damages calculations, if the accused product is capable of infringing. The Federal Circuit reversed on both these issues.

Regarding the first issue, Packet Intelligence had licensed the patent-in-suit to several companies, including Exar, which sold a MeterFlow product that arguably practiced. This was important for damages analysis: if the MeterFlow product practiced the asserted patent, but Exar did not mark, then the damages period could not predate filing of the complaint or “notice.” Packet Intelligence successfully argued to the district court that it should be NetScout’s burden to prove the MeterFlow product practiced the patent and was not marked. NetScout argued that it was Packet Intelligence’s burden to show that the product did not practice, or was a marked and practicing product.

The Federal Circuit explained which party bore the burden of marking of licensed products:

The Federal Circuit found that the district court’s jury instruction was in “tension” with this guidance. The Federal Circuit explained that the alleged infringer bore the initial burden of identifying unmarked products and the patent holder and licensor bore the burden of demonstrating that the products identified did not practice the asserted patent:

Regarding the second issue, Packet Intelligence argued that it should be awarded pre-suit damages, if not on the marking issue, then on the fact that a patent holder may pursue damages up to six years prior to a complaint filing, if those asserted are method patents. The idea behind this rule is that one cannot mark a product with a method patent, because it is only practiced if the method is used, while the product itself is not infringing absent such specific use.

Packet Intelligence argued that asserted method claims were directly infringed by NetScout through the latter’s testing prior to filing of the complaint, and as a result, that pre-suit damages should be available. The Federal Circuit, however, disagreed:

This matter provides important guidance to attorneys and experts alike regarding both appropriate royalty bases and damages time periods.

Bayer v. Baxalta, Part II (Federal Circuit opinion, March 1, 2021)

A lot has happened in this matter since we last discussed it on A2C. To recap, Bayer’s expert, Dr. Addanki, had been excluded from offering his specific damages opinion, derived by employing the Nash Bargaining Theorem. In the absence of his damages value, we questioned how and with what the case might continue to trial. It turns out that the surprise is on us, because a lot remained: in fact, so much so that in November 2018, a Delaware jury awarded Bayer damages of $155,190,264 based on a reasonable royalty rate of 17.78%.

How did Bayer secure this damages sum in the absence of Dr. Addanki’s opinion?

In fact, while Dr. Addanki was not allowed to testify to a discrete damages value, he was permitted to testify to a damages-rate range, which he opined fell between 5.1% and 42.4%. As a result, the jury returned a damages figure within Dr. Addanki’s range. In turn, the Federal Circuit affirmed the damages award.

This conclusion to the Bayer v. Baxalta matter teaches us two things. First, damages experts need not opine to a specific number. Ranges on damages are just fine. In fact, very wide ranges on damages are just fine. Secondly, Daubert motions involving opinions with ranges must strategically address the essential roots of analysis, and not just a specific tainted “fruit” offered by the expert.

Bio-Rad Laboratories, University of Chicago v. 10X Genomics Inc. (Federal Circuit, August 3, 2020)

This case finally made it to the Federal Circuit. A2C awaited its outcome and the prospect of available lessons. Way back in September 2018, Judge Andrews in Delaware issued an opinion on Daubert motions. The court found defendant expert Ryan Sullivan’s analysis of comparable licenses sufficiently reliable to pass Daubert.

The court also found that James Malackowski, Bio-Rad’s expert, offered sufficient support for his comparable license analysis opinion, but not enough economic analysis to support his lost profits opinions which asserted a two-supplier market:

Judge Andrews also rejected Mr. Malackowski’s apportionment of the royalty base, which presupposed apportionment through the comparable license relied upon:

Judge Andrews allowed Bio-Rad and Mr. Malackowski to “supplement” damages opinions after having excluded Mr. Malackowski’s lost profits and reasonable royalty opinions. In this second bite of the apple, Mr. Malackowski did not offer a lost profits opinion, but rather only a reasonable royalty opinion. Mr. Malackowski relied upon the same licenses as those relied upon by the opposing expert. And in relying upon those same licenses, Mr. Malackowski’s opinions, like Dr. Sullivan’s initial opinions, were not excluded. Judge Andrews explained that Mr. Malackowski provided sufficient evidence of apportionment with what A2C views as creative analogous analysis of unpatented and unlicensed features:

Trial ensued, Plaintiffs prevailed, and they were awarded approximately $24 million. Defendant appealed the award based upon infringement, validity, willfulness and damages. The Federal Circuit affirmed the jury verdict in full and rejected the claims by defendant 10X that Mr. Malackowski failed to apportion and failed to use comparable licenses. In the first instance, while the Federal Circuit found two of three asserted patents were not infringed, because jury instructions were mute on the question of division of damages among patents, the award necessarily stood:

With regard to comparability, the Federal Circuit noted there was sufficient analysis for its assessment, and that Mr. Malackowski had met a showing of “baseline comparability.” With respect to apportionment, the Federal Circuit agreed with Judge Andrews noting:

This case is interesting to A2C, because it concerns litigation strategy and second bites at the damages apple. Had defendant’s counsel not been so successful in its first Daubert motion, would an appeal have been subsequently more successful? Additionally, would different jury instructions have afforded a new trial on damages for only the single patent?

Takeda Pharmaceuticals v. Mylan Pharmaceuticals (CAFC opinion July 31, 2020)

In this matter, Judge Andrews of Delaware’s District Court rejected an injunction bid by Takeda, which Takeda in turn appealed. The Federal Circuit has now affirmed Judge Andrew’s decision.  Important for A2C’s consideration is the Federal Circuit’s opinion regarding irreparable harm, or lack thereof:

This expressed need for reliance on experts is not new.  In a CAFC opinion from January 2018, the Federal Circuit took issue with a District Court’s claim construction; however, both the District Court and Federal Circuit agreed with Liqwd’s economic expert analysis of the market.  Critical to this opinion is the importance of expert testimony on the issues of both irreparable harm and the definition of the market. 

These cases suggest that if a party requests that a court prohibit the sale of product, it had better hire an economic expert to assess harm and to define the relevant market. The courts have spoken.

Gree, Inc. v. Supercell OY (Opinions, July 20, 2020)

Anyone checking the PACER docket for the Eastern District of Texas will find voluminous filings on behalf of the companies above. It would appear that the makers of Clash Royale and Clash of Clans have differing views of damages in this latest round of litigation.

Gree counsel hired Stephen Becker, and SuperCell counsel hired Christopher Bakewell. Judge Payne found Supercell’s complaints about Dr. Becker’s analysis went to the weight, not admissibility of his opinions; he found the same for Mr. Bakewell’s opinions. Most interesting, however, is that Judge Payne did not allow Mr. Bakewell or Supercell to testify about the cost or implementation of a non-infringing alternative (below, “NIA”).

Judge Payne’s opinion provides yet another cautionary tale of defendant’s untimely disclosure. He found that Supercell did not properly disclose its non-infringing alternatives through interrogatory responses or deposition testimony, and consequently, it could not offer any testimony other than what had been supplied through an interrogatory response:

Jodi A. Schwendimann, et al., v. Arkwright Advanced Coating, Inc. (Federal Circuit Opinion, May 5, 2020)

As regular readers know, we are perplexed by excessive statutory prejudgment rates applied to patent infringement awards. Those rates are historically sourced in a world financially & temporally removed from ours, which presently finds itself staring down negative rates. Antiquated statutory rates are increasingly unreasonable and afford plaintiffs windfall gains. The case below affords another such example.

Defendant Arkwright appealed this matter to the Federal Circuit based, in part, on the jury’s damages award, as well as on the prejudgment interest awarded by Judge Tunheim of the US District Court for the State of Minnesota. We do not address all of the damages-related decisions, but focus here on the determination that 10% per year was the appropriate prejudgment interest rate to apply to the jury’s award.

Here is the story: Initially, plaintiffs sought lost profits damages. Plaintiffs’ damages expert, Donald Gorowsky, provided an opinion relying only on lost profits – he did not provide any reasonable royalty alternative. In pre-trial motions, defense counsel sought to strike Mr. Gorowsky’s opinions, but Judge Tunheim chose to allow Mr. Gorowsky to testify. After plaintiffs presented their affirmative case at trial, however, Judge Tunheim granted defendant’s judgment as a matter of law on lost profits and instructed the jury to disregard the lost profits testimony of Mr. Gorowsky.

The jury then heard testimony from defendant’s expert, Arthur Cobb, who opined to a reasonable royalty of 2%. The jury ultimately returned a damages award of $2.6 million – a figure roughly seven times Mr. Cobb’s proffered damages amount. In his post-trial opinion, Judge Tunheim explained that the jury’s award of $2.6 million amounted to a 15.5% royalty rate on infringing sales from 2010 to 2017, when one averaged competing estimates for accused products at issue.

The court rejected a new trial on damages explaining that defendant’s gross margin supported the double-digit reasonable royalty.

Next, the court awarded prejudgment interest of $1.9 million on the $2.6 million award. This amount was derived using Minnesota’s statutory rate of 10% per annum. As the supporting Exhibit below shows, the 10% statutory rate was applied on the entire $2.6 million award from the date of first infringement through the date of judgment.

The prejudgment interest calculation does not afford consideration that the 15.5% reasonable royalty presumably would have been earned incrementally over the course of the infringement period as individual accused products were sold… and that as of the date of first infringement, only a small portion of total infringement had occurred. Instead, the prejudgment interest approach conceptually presupposes a fully paid-up, lump-sum royalty on the eve of infringement. Defense counsel made these arguments:

Importantly, nowhere in Judge Tunheim’s opinion do we find reference to the 15.5% rate as a “running” royalty; rather, it is described in the excerpt above as “a clean royalty rate.” And the only reference to “lump sum” is excerpted below, which quotes the passage above:

Accordingly, the court accepted Mr. Gorowsky’s PJI calculation.

All of these issues were appealed by defense counsel. In turn, the Federal Circuit ultimately affirmed Judge Tunheim’s judgment, as explained below:

We understand the charge of the trier of fact is to “make the patent owner whole”. Double-digit statutory rates increasingly afford windfall gains in a zero-rate environment by providing far more than the amount adequate to compensate for infringement. In this case, over 42% of the award was an interest payment (i.e., $1,915,328/$4,539,556 = 42.19%). Attorneys representing plaintiffs with a lump-sum royalty prospect stretching back years & years should consider the PJI windfalls evidently on offer from the US District Court for the State of Minnesota.

Argentine Sovereign Bondholders v. Financial Reality (May 22, 2020)

Back in June 2018, we observed that J.C. Penny Argentine century bonds were fetching an 11.9% a yield of nearly 10%… as a way to heap economic derision encourage reflection on 12% statutory prejudgment interest rates.

J.C. Penny filed for Chapter 11 bankruptcy Argentina entered technical default this past Friday.

How are those century bonds trading? The chart below shows that they are available at 34.62 cents on the dollar! So, if you loved ’em at issuance, or even at over 70 cents on the dollar back in August 2019, you gotta love ’em here, when their yield is well north of 20%! Load up!

Argentina's dollar bonds rally back from lows, but still trade in distressed territory

While J.C. Penny Argentine sovereign bondholders may have had to face financial reality, double-digit statutory rates continue to impose their measure of financial disreality.

J.C. Penny v. Financial Reality (May 15, 2020)

Back in June 2018, we observed that J.C. Penny bonds were fetching an 11.9% yield… as a way to heap economic derision encourage reflection on 12% statutory prejudgment interest rates.

J.C. Penny filed for Chapter 11 bankruptcy this past Friday.

While J.C. Penny may have had to face financial reality, double-digit statutory rates continue to impose their measure of financial disreality.

Romag Fasteners, Inc. v. Fossil, Inc. (Supreme Court Opinion, April 23, 2020)

It is *usually* exciting for damages experts when the Supreme Court issues an opinion on an intellectual property matter! We emphasize “usually” because, in this instance, nothing really exciting emerged from this decision.

The Supreme Court held that a “plaintiff in a trademark infringement suit is not required to show that a defendant willfully infringed the plaintiff’s trademark as a precondition to a profits award.”

Opposing arguments appear not to have established much traction:

While this decision resolves this specific dispute, it appears effectively to confirm the typical assumptions experts have afforded damages in Lanham Act cases. But the Supreme Court decided the matter, and thus it merits a post.