March 29, 2022
LES Insights
By John C. Paul; D. Brian Kacedon; Anthony D. Del Monaco; Eric A. Liu
A California court excluded the testimony of a damages expert after finding the expert’s testimony unreliable because her analysis based the royalty to be awarded on a hypothetical negotiation that occurred at a date other than when infringement began. To be reliable and admissible, the testimony would need to base its analysis on a hypothetical negotiation that occurs at a date when infringement began.
RSA sued Delta for infringement of a patent relating to a system that protects buildings from being rammed by vehicles. Delta retained an expert to testify regarding the amount of damages suffered by RSA should Delta be found to have infringed RSA’s patent.
Damages in a patent infringement action typically come in the form of a reasonable royalty or lost profits. One common way for calculating a reasonable royalty is to determine what royalty the parties would have agreed to in a “hypothetical negotiation” between the parties on the date the infringement began. The hypothetical negotiation date is important in this analysis because it informs the circumstances of the negotiation including each party’s bargaining position.
In this case, Delta’s expert applied the “hypothetical negotiation” approach to determine damages. As part of her analysis, the expert determined the hypothetical negotiation would occur at the beginning of the relevant damages period in July 2013 (i.e., six years before the complaint was filed).
RSA filed a motion for partial summary judgment as to damages and to exclude Delta’s expert testimony. RSA argued that the expert’s testimony was “legally erroneous and inadmissible” because the expert incorrectly placed the hypothetical negotiation date in July 2013. RSA argued that the correct hypothetical negotiation date should have been in July 2012, the date of first infringement, when the asserted patent issued.
Delta responded that its expert’s use of July 2013 rather than July 2012 was a “misstatement” and that there was “no material difference in the analysis of RSA’s sales and financials in July 2012 and July 2013.” Relying on a newly filed expert declaration, Delta explained that the expert’s conclusions would not change if considering a hypothetical negotiation between July 2012 or July 2013 and that there was no change in circumstance in that one year. At worst, Delta argued that the expert’s reference to July 2013 instead of 2012 for the hypothetical negotiation date was harmless error because both parties’ experts were analyzing the same information.
Courts will admit an expert witness’s testimony when it meets the Daubert standard, which requires, in part, that “the expert has reliably applied the principles and methods to the facts of the case.” Here, the parties disputed whether the expert’s reliance on an incorrect date for the hypothetical negotiation rendered her opinion unreliable under the Daubert standard.
To answer this question, the court looked to precedent from the Federal Circuit, which made clear that using the wrong hypothetical negotiation date is not harmless error. The Federal Circuit has been “careful to distinguish the hypothetical negotiation date from other dates that trigger infringement liability.” For example, while there is a limitation that a patent owner cannot recover for any infringement that occurred more than six years before the filing of the complaint in a patent lawsuit, this does not preclude the hypothetical negotiation date from taking place on the date infringement began, which can be more than six years before the filing of the complaint. As a result, the court determined that the expert’s use of the incorrect hypothetical negotiation date made her analysis unreliable.
Delta attempted to cure the deficiencies in its responses by relying on the expert’s new declaration, but the court was not persuaded. The court noted that the new declaration was untimely and conflicted with the expert’s deposition, during which she testified that her analysis would have changed based on the dates. RSA was entitled to believe that the expert’s testimony was complete at the close of her deposition. Unlike the deposition, RSA did not have the opportunity to question the expert’s testimony in the new declaration. If the expert wished to amend her deposition testimony to use the correct hypothetical negotiation date, she could have done so by seeking to make changes upon receiving the deposition transcript. Further, Delta could have sought leave to include analysis of the correct hypothetical negotiation date before submitting its opposition briefs. Therefore, the court denied Delta’s attempt to add the expert’s new declaration using the correct hypothetical negotiation date.
Because the expert’s use of the wrong hypothetical negotiation date made her testimony unreliable and because the expert’s declaration to cure her deposition testimony was untimely, the court granted RSA’s motion to exclude the expert’s testimony and further granted RSA’s motion to strike the expert’s declaration.
When considering the hypothetical negotiation date to determine damages, parties should carefully determine the date that infringement started, which may not be the same as the date on which the damages period begins. Further, when there is a discrepancy in testimonial evidence, parties should seek to amend the report in a timely manner.
The RSA Protective Techs., LLC v. Delta Scientific Corp. decision can be found here.
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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