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.
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.)
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.
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.
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.
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.
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.
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.
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.)
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.
