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.

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.

Hologic, Inc., Cytyc Surgical Products, LLC v. Minerva Surgical, Inc. (Federal Circuit Opinion, April 22, 2020)

The Federal Circuit issued an opinion regarding apportionment, supplemental damages, post-verdict royalty rate, and enhanced damages. Delaware Federal Circuit Judge Bataillon’s decisions regarding all of these damages issues were affirmed by the Federal Circuit.

The most interesting of the Federal Circuit’s affirmations concerns apportionment. The initial suit accused defendant Minerva of infringing claims of the ‘183 patent and ‘348 patent. Subsequent to the complaint, the PTO determined that the claims (including all asserted claims) of the ‘183 method patent were obvious & invalid. By the time of trial, only the ‘348 patent remained asserted; however, the patent damages experts did not apportion damages between the two patents. Post verdict, Minerva moved for judgment that the jury was not instructed to apportion damages on a per patent basis.

Judge Bataillon and the Federal Circuit agreed that given the overlapping nature of the two asserted patents, as well as the fact that the patent claims found invalid were those of the method patent, the jury’s damages award should stand. The Federal Circuit distinguished this opinion from other opinions about per-patent damages as follows:

This provides an interesting exception to the rule that damages must be apportioned on a patent-specific basis.

Juno Therapeutics, Inc., et al. v. Kite Pharma, Inc. (Final Judgment, April 8, 2020)

There is a good bit we do not know about this case at the moment. Many documents, including Daubert motions and motions to strike, remain under seal. Given the enormity of the damages granted by a jury (i.e., $778 million), we expect this is the first post of what will be several more to come. We do know, however, that Judge Gutierrez in the Central District of California, issued his final judgment which allowed for prejudgment interest at the treasury rate compounded quarterly. We applaud his use of this reference rate.

Judge Gutierrez’s prejudgment interest determination should be compared to CDCA Judge Selna’s decision that prejudgment interest in the SPEX Technologies matter should be seven percent.

Judge Selna did not opine about compounding. We remain perplexed as to why prejudgment interest should afford windfall gains for some, while affording others a simple adjustment for the real time-value of money.

What do we mean?

Consider the chart below from the Federal Reserve Bank of St. Louis (a.k.a., “FRED”). It reports the option-adjusted spread for a high yield debt index for the October 2010 to February 2020 time period specified by Judge Selna. What does this mean in more common parlance (a.k.a., “English”)?

This graph reports a measure of how much additional yield (a.k.a., “spread”) investors demanded/received to hold high-yield bonds (a.k.a., “junk bonds”) relative to holding instead U.S. Treasuries (a.k.a., “risk free rate”) of comparable maturity. The “option-adjusted” component involves backing out from the price of BB-rated bonds in the index any embedded options: this is necessary to establish an “apples-to-apples” comparison for yield alone (because the reference Treasuries do not possess similar embedded options).

What this graph shows is that during the period of time subject to Judge Selna’s 7% statutory rate, the spread on junk bonds remained well below 7%. At no point during the period did that high yield spread achieve 7%. In fact, one of the hallmarks of the period following the Great Financial Crisis was “the hunt for yield“: investors were hard pressed to find much of it. Anywhere. Even in speculative, non-investment grade corporate bonds… where the graph above shows one could only earn between a 2.0% and 6.0% spread.

Where on earth was a 7% yield available during this period? We have no idea, but one place we believe it should not be found is in a prejudgment rate.

But wait – there’s more!

The chart below shows the same OAS High Yield spread from FRED for January 1, 2020 until today. It shows that investors were finally afforded more than a 7% spread by the high yield index… for a brief, one-week period between March 19 and March 26. Gosh… what might have been going on during that week to afford high yield a 7% spread?

Oh yeah… the end of the freaking world.

(N.b., In the bottom left-hand area of its charts, FRED notes “Shaded areas indicate U.S. recessions”; however, FRED has not shaded any area. With 22 million Americans registering for unemployment in the past four weeks, we expect the official arbiter of recessions to report the U.S. economy slipped into recession in March. While FRED shades with grey, if you are like us, and well, half of humanity… hunkered down sheltering in place somewhere… waiting…. then red is the more apt tone for our present circumstance.)

Arctic Cat Inc., v. Bombardier Recreational Products Inc. BRP U.S. Inc. (CAFC Opinion, February 19, 2020)

The Federal Circuit issued a second opinion in this matter concerning the date damages accrue and patent marking. In its first opinion from December 2017, the court vacated the jury verdict from the Southern District of Florida, finding it was premised on the district court’s erroneous judgment on marking. Marking was important in this matter, because Arctic Cat sought damages prior to the date on which it served its complaint on Bombardier. Arctic Cat argued that it should be allowed damages going back in time before the date of its complaint, because a licensee to its patents in suit (i.e., Honda) sold a product that practiced the patent in the earlier time period.

In the first round of this litigation, the district court determined that to allow defendant Bombardier to limit damages to the date the complaint was filed, it was Bombardier’s burden to show that licensee-Honda had failed to mark its practicing products with Arctic Cat’s patents. Bombardier did not meet its burden per the District Court, and thus the damages period extended prior to Arctic Cat’s serving of its complaint.

The Federal Circuit explained in its 2017 opinion that the burden of marking was on the patent-holder Arctic Cat, not the defendant Bombardier. If the patent holder seeks damages prior to notice, it must prove its licensee marked practicing product. In its 2020 opinion, the Federal Circuit reiterated its findings from December 2017 that the burden of proof for marking falls upon the patent holder, not an alleged infringer.

In this latest opinion, the Federal Circuit considered when damages should accrue based on information that Arctic Cat’s licensee, Honda, both did not mark its product and stopped selling its unmarked practicing product prior to filing of the suit. Because there were no products to mark in the year or so prior to filing of the complaint, Arctic Cat argued that damages should accrue at least from when Honda stopped selling unmarked licensed products; but possibly back six years from filing based on Bombardier’s willful infringement. The District Court for its part ruled in favor of defendant Bombardier, which Arctic appealed.

The Federal Circuit affirmed the district court’s opinion that damages do not start and stop based on sales of an unmarked practicing product. It reiterated that in order for a patent holder to collect damages prior to notice, where a product practicing the patent(s) in suit is sold, that product must be marked. If a practicing product is sold but unmarked at any point in time, then the patent holder cannot seek damages prior to notice to the alleged infringer. The court also held that a finding of willfulness is irrelevant to when damages begin to accrue.

Netfuel, Inc. v. Cisco Systems Inc. (Order, March 17, 2020)

Judge Davila from the Northern District of California granted a Defendant’s motion to strike the technical expert and damages expert opinions on apportionment, and the damages expert report on all other issues as well. The court’s order serves as a cautionary tale not only for technical experts, but also for damages experts who would rely on technical experts for apportionment.

Plaintiff’s damages expert, Walter Bratic, relied on technical expert, Aviel Rubin, for an apportionment analysis. Dr. Rubin informed Mr. Bratic that certain percentages of practicing products and accused products were associated with the patents in suit. Mr. Bratic applied those percentages to his damages figures to apportion royalty rates. The court found, however, that Dr. Rubin’s percentages were “plucked out of thin air.” As such, the court further ruled that Mr. Bratic’s damages analysis, which relied on those percentages, would not be presented to the jury.

While reliance on a technical expert for damages opinions is both allowed and encouraged, it must also itself be subject to the damages expert’s critical consideration. Judge Davila made clear that a damages expert may not blindly rely upon a technical expert whose opinions have no basis in the facts of the case, but instead derive solely from his or her unrelated expertise. Damages experts must assess the reasonableness or the logic of the opinions relied upon. In this matter, while the apportionment exercise was not performed by Mr. Bratic himself, reliance on Dr. Rubin’s resulted in the exclusion of both.

Mr. Bratic’s comparable license approach to damages was also struck for being “plucked out of thin air.” Heavily citing the GPNE Corp. matter as well as LaserDynamics, the court rejected Plaintiff’s damages analysis in its entirety:

Finally, in this instance, the court would not entertain a “do over.” Judge Davila sagely noted, “Allowing a ‘second bite’ can encourage ‘overreaching on the first bite.'” We decidedly welcome that perspective.

Bioverativ Inc., et al. v. CSL Behring LLC, et al. (Opinion, March 4, 2020)

This opinion by Judge Andrews in Delaware provides insight into the court’s thinking with respect to convoyed sales. Ultimately, the court excluded certain opinions of Dr. Matthew Lynde, plaintiffs’ damages expert, based upon his opinion that non-infringing uses of the drug at issue constituted convoyed sales and, therefore, were subject to damages.

This case involved not a patented drug itself, but rather “infringing prophylaxis uses and non-infringing prophylaxis and on-demand uses.” Judge Andrews agreed with defendants that those sales to patients prescribed a non-infringing dosing regimen should not be subject to damages. Citing American Seating and Juicy Whip v. Orange Bang, the court explained that such non-infringing sales – generally subject to separate prescription – were not available for damages because they did not pass the functional unit test.

Plaintiffs’ damages here appear a simple case of over-reach.

In Re Chanbond Litigation (Opinion, February 4, 2020)

Judge Andrews of Delaware has provided a host of opinions to help guide patent damages experts. Despite his detailed and well-articulated opinions, patent damages experts continue to fail his gatekeeper tests. Such is the case for Mr. Christopher Bakewell in a recent opinion.

Mr. Bakewell, defendant’s damages expert, was excluded from offering his market approach opinion which appeared to have three “valuation datapoints.” The first datapoint involved investment solicitations for financial interests in the company holding the patents-in-suit. The second was a series of patent transfers among interested parties that were ultimately valuing the litigation and not the patents. The final datapoint was an offer to sell the patents-in-suit, which Judge Andrews found relevant but not sufficient to support a market approach on its own.

With respect to the first datapoint, Judge Andrews offered the following guidance:

With respect to the second datapoint, Judge Andrews did not simply accept a patent transaction as relevant to valuing the patents-in-suit. Rather, he pointed to a measure of circular-reasoning, wherein parties to a transaction value prospective litigation, rather than the patents themselves… which in turn is used for damages purposes in litigation:

Further, rather than afford “a transaction” some measure of casual abstraction, Judge Andrews considered the purchaser and seller of those patents. He explained:

Indeed, Mr. Bakewell needed to acknowledge the incentives of the parties to the transaction making these decisions.

Ultimately, Judge Andrews found the last datapoint relevant for damages, but not sufficiently developed to support an affirmative damages opinion. The three-pronged analysis was excluded, one prong at a time.