USAA v. Wells Fargo (Opinion, December 18, 2019)

Judge Payne of the Eastern District of Texas bench issued an opinion that is most interesting for its treatment of superfluous material included in a damages expert report. Wells Fargo requested that the court strike strike various opinions of Mr. Calman based upon a failure to apportion, based upon a violation of the entire market value rule, and based upon use of a 25% royalty rate which looked very similar to a 25% rule of thumb.

The court denied all requests to strike those opinions based on those claimed failures. The court did, however, strike certain portions of Mr. Calman’s report: namely, those that constituted narrative devoid of expert opinion. One set of such narrative related to industry history and background on the general product category:

A second set of excluded narrative related to willfulness:

Often, the first fifteen to twenty pages of an expert report are devoted to a narrative about the industry at issue or the history of the technology. It appears that such narrative is not only viewed as empty & irrelevant, but also subject to exclusion.

Sprint Communications Company v. Time Warner Cable (Federal Circuit Opinion Modified March 18, 2019)

The Federal Circuit issued an opinion on March 18, 2019 that helps define what may be considered “a comparable” in a reasonable royalty analysis. In this case, a jury returned a verdict hitting Time Warner with a $140 million damages figure to be paid to Sprint. For its part, Sprint’s damages expert had offered a reasonable royalty rate analysis based, in part, on an earlier verdict from a different matter involving Sprint and Vonage.

Time Warner appealed the matter to the Federal Circuit on damages, contending that the district court improperly admitted the Sprint/Vonage verdict involving technology of disputed similarity and a different carrier. The Federal Circuit decided that the district court did not err in its admission:

The opinions of the Federal Circuit in this matter appear to broaden the scope of comparability so as to include comparable jury verdicts. But consistent with earlier Federal Circuit opinions, the differences between any comparable and the hypothetical negotiation at hand should be addressed.

In addition to the issue of comparability, the court made an interesting comment on apportionment. The court states that if the Georgia Pacific analysis is done correctly, then the analysis embodies apportionment principles. This suggests that apportionment may be done through the factor analysis, including at least via Factors 9 and 13:

We expect to see this language appear with frequency in responses to Daubert motions on apportionment.

Qualcomm Inc. v Apple Inc. (Order, January 18, 2019)

In his 11 page order, Southern District of California Judge Sabraw addressed cross Daubert motions on Apple’s experts and Qualcomm’s experts, which in turn provide some general insight for damages experts.

For its part, Apple requested the court exclude Qualcomm’s damages expert (Dr. Kennedy*) and its survey expert (Dr. Prince). Judge Sabraw had provided an opinion a month earlier concerning surveys by Dr. Prince in a different matter, Wi-Lan v. Apple. Judge Sabraw drew analytic contrast between the two cases, however, noting that the survey analysis proffered in Qualcomm addressed fatal limitations advanced in the earlier Wi-Lan expert analysis.

Thus, while Apple took issue with specific formulation of the survey, Judge Sabraw concluded that the formulation spoke more to the survey’s “weight, not admissibility.”

These divergent outcomes concerning surveys from the same expert reveal the essential need for such experts to work closely with technical experts. The obvious precondition for a successful survey is to tie questions to relevant claims; but where those ties are reasonably established, Judge Sabraw’s formulation appears to acknowledge that some “hypothetical ideal survey” must not condemn a “real-world survey” that can otherwise afford some insight into the matter at hand. Rather, limitations of relevant “real-world surveys” can be heard, challenged & defended.

Turning next to Dr. Kennedy’s damages opinion, Apple argued that his “50-50” split was “untethered to the facts of the case.” Judge Sabraw, however, found otherwise:

We can imagine a circumstance where a different expert from an earlier era might advance a “50-50” split based solely on superficial invocation of the Nash Bargaining Solution. But what might otherwise appear as numerical recourse to a rule of thumb can, in fact, be an argued outcome grounded in the facts of the case. So, too, might a “25%” outcome… even if Goldscheider’s formulation no longer enjoys merit after Uniloc. That is to say, round numbers themselves need not be thrown out along with rules of thumb.

Dr. Kennedy’s opinion based upon the Prince survey results was deemed admissible. Dr. Kennedy’s controversial 50/50 profit split was grounded in enough facts of the matter to be allowed as well.

For its part, Qualcomm requested that the court exclude Apple’s damages expert, Dr. Prowse, for failure to establish the economic comparability of relied-upon licenses. A related question concerned whether Apple’s technical experts had done the minimum necessary to establish that the patents-in-suit were technically comparable to others the subject of Apple license agreements. Judge Sabraw agreed with Qualcomm that those technical experts’ opinions “are conclusory and do not meet the standard for technological comparability.”

Given failure to establish technological comparability, related damages opinions, too, must fail. Judge Sabraw offered, however, that Dr. Prowse did establish the necessary economic comparability between the relevant license agreements and a hypothetical license agreement.

Since Uniloc, and the abandonment of rules-of-thumb, the rigor demanded of damages analysis has increased. In response, and with the goal of grounding analysis in the facts of a case, damages experts must make increasing recourse to the analytic foundations established by technical experts and/or survey experts. This pair of cases (i.e., Qualcomm v. Apple and Wi-LAN v. Apple) reveals the multiplicity – and vulnerabilities – of such dependence.

(*These two cases involve experts with identical surnames: Dr. Patrick Kennedy is Qualcomm’s damages expert, while Mr. David Kennedy is Wi-Lan’s damages expert.)

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.

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.

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%.