April 1, 2014
LES Insights
Authored by D. Brian Kacedon, Michael E. Kudravetz, and John C. Paul
A recent decision from the U.S. District Court for the Eastern District of Texas held that a damages expert could employ licenses arising from litigation settlements in determining a reasonable royalty rate when such licenses are the most reliable licenses in the record. Separately, the court also ruled, the damages expert's use of a hedonic-regression analysis to estimate the accused feature's contribution to the overall prices of the accused products was not appropriate because the particular methodology the expert used was scientifically unreliable.
In Stragent v. Intel,1 Stragent sought to introduce two licenses for the patents-in-suit entered into in settlement of litigation by third-party device manufacturers to establish a reasonable royalty for those patents. Stragent also intended to introduce testimony from its expert on reasonable royalty damages based in part on a "quantitative analysis (hedonic regression analysis)" performed by the expert to assess the value contributed by the patented invention. Intel moved to exclude parts of the expert's testimony relating to these licenses and this regression analysis. After the magistrate judge denied Intel's motion, Intel moved for reconsideration.
Reasonable royalty damages are determined using a hypothetical-negotiation approach based on the rate the parties would have agreed to in a pre-infringement negotiation. The "Georgia-Pacific factors" are the most common methodology utilized to determine a reasonable royalty. These factors include examination of royalties paid by other for licenses under the patents-in-suit. Settlement agreements under the patents-in-suit, however, create special issues due to concern that any amounts paid may reflect the nuisance value of litigation rather than the value of the patents.
Federal Circuit Judge Dyk, sitting by designation, acknowledged the Federal Circuit's "longstanding disapproval of relying on settlement agreements to establish reasonable royalty damages." LaserDynamics, Inc. v. Quanta Computer, Inc.2 He noted the potential lack of relevance of such agreements because the litigation can skew the hypothetical negotiation. Judge Dyk noted, however, that in ResQNet v. Lansa,3 the Federal Circuit ultimately upheld admissibility of the litigation-derived license because it was "the most reliable license in the record."
Here, Judge Dyk found, Stragent's two settlement agreements with the device manufacturers were "the only licenses in the record and cover the patents-in-suit, plus one additional closely-related patent." On that basis, the court declined to exclude them from evidence but allowed Intel to argue at trial that the agreements did not show a reasonable royalty rate and to propose instructions that licenses from settlement of litigation should be given less weight than other licenses.
Another aspect of determining a reasonable royalty relates to the value of the accused feature compared with the overall product containing it. Here, Intel also challenged Stragent's damages expert's use of a multivariate hedonic regression to estimate the value of the accused feature's contribution to the overall prices realized by Intel on accused products. The expert first identified a list of 19 features relating to reliability, availability, and service, which he concluded represented 42% of the average selling price for the accused products. Then he assigned an equal value to each of the 19 features and thus concluded that the single accused feature represented 1/19th of the 42%, i.e. 2.2% of the total selling price.
Intel argued that the expert's methodology of attributing equal parts of the combined value to each of the specific features was arbitrary and without factual support. Intel also argued that using a hedonic regression has not been shown to be reliable for determining the value of individual microprocessor features as opposed to the extent to which price changes over time derive from product evolution instead of inflation.
The court held that the damages expert's methodology fell short of the Daubert standard,4 which requires that an expert's testimony be based on "(1) scientific knowledge that (2) will assist the trier of fact to understand or determine a fact in issue." In particular, the court here held that the methodology used by Stragent's damages expert relied on arbitrary assumptions without basis in the facts of the case or in hedonic analysis generally. It further noted that attributing equal value to all 19 related features had no sound basis under Daubert (e.g., verifiability, peer review or publication, an acceptable error rate, or general acceptance in the scientific community). Rather, the court characterized Stragent's expert's analysis as mere guesswork.
The court also rejected Stragent's argument that its expert's calculation was conservatively low and thus permissible, reasoning that "a conservative opinion in that sense does not equal a scientific one." It specifically criticized reliance on internal documentation as "rife with bias and variability." Thus, the court precluded Stragent's expert from testifying on the results of his hedonic-regression analysis.
This case shows that a license reached in settling a litigation may be admissible for demonstrating a reasonable royalty rate if it is the most reliable license in the record and illustrates how courts review the assumptions and methodology used by experts in damages reports for scientific reliability.
Endnotes
1 The Stragent decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2014/Stragent_v_Intel.pdf.
2 The LaserDynamics decision can be found at http://scholar.google.com/scholar_case?case=3451195182531065429.
3 The ResQNet decision can be found at http://scholar.google.com/scholar_case?case=11157562574803531516.
4 The Daubert decision can be found at http://scholar.google.com/scholar_case?case=827109112258472814.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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