Patent Damages Analysis

The determination of damages for patent infringement by way of a reasonable royalty is no simple matter, typically requiring sophisticated expert opinion testimony. Generally, an accounting, licensing, or economics expert will need to consider evidence relating to as many as 15 separate evidentiary factors which are relevant to the reasonable royalty determination, and be asked to reconstruct a hypothetical negotiation between the parties had they willingly negotiated a royalty prior to the commencement of infringement. He or she must properly determine the bounds of such a hypothetical negotiation, and whether the determined royalty rate should be applied to the value of the entire infringing product, or only to a subset of that product.

Given the complexity of the task, patent damages expert opinion testimony is often the subject of a so-called Daubert motion, where a party seeks to exclude a portion or all of a damages expert's proposed testimony as set forth in his or her expert report under Fed. R. Evid. 702 and/or 703. Faced with such a motion, courts undertake the task of considering whether the expert has formed opinions based on reliable methods, and whether the expert has the suitable, relevant expertise to form the opinions at issue. Even if the Daubert hurdle is met, the expert will face a second challenge in presenting his or her opinions to the court or jury in a credible manner. Several practical tips for meeting these challenges are addressed below.

Background

By statute, a patent owner is entitled to recover, at a minimum, a reasonable royalty for infringement of the patent owner's invention. 35 U.S.C. '284. But how does a patent owner prove to a jury the amount of the reasonable royalty it is entitled to recover? The court in Georgia-Pacific v. U.S. Plywood Corp., in setting forth 15 factors which may be considered in determining what reasonable royalty would have been reached in the hypothetical negotiation, approved the use of expert testimony. 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (factor 14).

Federal Rule of Evidence 702 provides that an expert's testimony is admissible if “scientific, technical, or other specialized knowledge will assist the trier of fact [in understanding] the evidence or [determining] a fact in issue.” Fed. R. Evid. 702. Because the party offering the expert testimony has the burden of proving that testimony is admissible by a preponderance of the evidence, Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 592 & n.10 (1993), a patent owner should ensure the expert's proposed testimony is both relevant and reliable.

The Supreme Court has listed several factors to consider in assessing the reliability of expert witnesses including: 1) whether a theory or technique can be and has been tested, 2) whether the technique or theory has been subjected to peer review and publication, 3) known or potential rate of error of the technique or theory, 4) the standards controlling the technique's operation, and 5) whether the technique or theory has been generally accepted in the relevant scientific community. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 149-50 (1999) (citing Daubert, 509 U.S. at 592-94).

Practical Tips

In formulating opinions and preparing the expert report, the patent owner and expert must be sure to evaluate all potential options in light of the above-noted factors. For example, existing license agreements of the patent owner for the patents in suit or similar technologies, and existing license agreements entered into by the accused infringer, should be considered when available. Likewise, the consideration of comparable patent licenses entered into by third parties is a stalwart of a reasonable royalty analysis. Reliance on less well-known methods for valuing a patent should be more carefully considered, however.

For example, patent auctions have recently become a vehicle for patent owners to sell certain patents and patent applications. Thus, Ocean Tomo has held several patent auctions in recent years where certain intellectual property has been sold. However, reliance on patent auctions as a primary input for the value of a patent for a damages calculation might not meet any of the Daubert criteria. The idea of a patent auction may simply be too new and therefore unreliable, and courts have excluded as speculative and unreliable expert testimony when it was based upon such unestablished markets. Pharmanetics, Inc. v. Aventis Pharmaceuticals, Inc., No. 5:03-CV-817, 2005 WL 6000369, at *12, *16 (E.D.N.C. May 04, 2005); see also generally, Daubert, 509 U.S. at 579, passim.

Also, the patent expert should be sure to apply sound and reasonable methodologies consistent with the way other reasonable impartial experts would do it. For example, all calculations should rely on sound mathematical principles and be sufficiently grounded in facts or data. Experts should be careful to avoid using only a self-serving selection of data, which may be unreliable from a statistical standpoint, because doing so may risk exclusion of that testimony or even the entirety of the expert's testimony. For example, in Rondor Music Int'l Inc. v. TVT Records LLC, No. CV 05-2909, 2006 WL 5105272, at *5 (C.D. Cal. Aug. 21, 2006), the court excluded a patent damages expert's conclusions as lacking a statistical basis and therefore not reliable.

Also of critical importance is making sure the patent expert has applied proper legal standards. The attorney working with the patent expert should be sure to provide accurate legal principles, including any recent changes to the law. Failure to do so can result in the exclusion of a portion or even the entirety of a patent expert's testimony. For example, in Technology Licensing Corp. v. Gennum Corp., No. 01-CV-4204, 2004 WL 1274391 (S.D. Cal. Mar. 26, 2004), the court precluded a damages expert from using an enhancing multiplier in a reasonable royalty calculation because such a multiplier “fails to comport with applicable Federal Circuit law.” Likewise, in Informatica Corp. v. Business Objects Data Integration, Inc., No. 02-03378, 2007 WL 607792, at *6 (N.D. Cal. Feb. 23, 2007), the court excluded expert testimony concerning a reasonable royalty rate which rested on the assumption that the date of the hypothetical negotiation was the date of filing suit, rather than the time of first infringement.

When selecting a damages expert, a patent owner should consider the expert's previous experiences and testimony before making the selection. The patent owner should be careful to select an expert who has not given testimony that would utterly contradict opinions that he or she would need to give in the patent owner's case. Also, consideration should be given to an expert's previous clients. If the expert has only represented one side of an industry or has only represented patent owners (and not any alleged infringers), the expert may be biased to the point where his or her testimony may be excluded.

Conclusion

Selection of a damages expert and preparation of the expert report require vigilant consideration of all of the above factors to ensure admissible and reliable opinions. The patent owner and its expert should be careful to balance the desire for obtaining a large damages award with the application of sound mathematical principles which are sufficiently grounded in facts or data, to avoid losing a Daubert challenge by the opposition.

The determination of damages for patent infringement by way of a reasonable royalty is no simple matter, typically requiring sophisticated expert opinion testimony. Generally, an accounting, licensing, or economics expert will need to consider evidence relating to as many as 15 separate evidentiary factors which are relevant to the reasonable royalty determination, and be asked to reconstruct a hypothetical negotiation between the parties had they willingly negotiated a royalty prior to the commencement of infringement. He or she must properly determine the bounds of such a hypothetical negotiation, and whether the determined royalty rate should be applied to the value of the entire infringing product, or only to a subset of that product.

Given the complexity of the task, patent damages expert opinion testimony is often the subject of a so-called Daubert motion, where a party seeks to exclude a portion or all of a damages expert's proposed testimony as set forth in his or her expert report under Fed. R. Evid. 702 and/or 703. Faced with such a motion, courts undertake the task of considering whether the expert has formed opinions based on reliable methods, and whether the expert has the suitable, relevant expertise to form the opinions at issue. Even if the Daubert hurdle is met, the expert will face a second challenge in presenting his or her opinions to the court or jury in a credible manner. Several practical tips for meeting these challenges are addressed below.

Background

By statute, a patent owner is entitled to recover, at a minimum, a reasonable royalty for infringement of the patent owner's invention. 35 U.S.C. '284. But how does a patent owner prove to a jury the amount of the reasonable royalty it is entitled to recover? The court in Georgia-Pacific v. U.S. Plywood Corp., in setting forth 15 factors which may be considered in determining what reasonable royalty would have been reached in the hypothetical negotiation, approved the use of expert testimony. 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970) (factor 14).

Federal Rule of Evidence 702 provides that an expert's testimony is admissible if “scientific, technical, or other specialized knowledge will assist the trier of fact [in understanding] the evidence or [determining] a fact in issue.” Fed. R. Evid. 702. Because the party offering the expert testimony has the burden of proving that testimony is admissible by a preponderance of the evidence, Daubert v. Merrell Dow Pharmaceuticals, Inc. , 509 U.S. 579, 592 & n.10 (1993), a patent owner should ensure the expert's proposed testimony is both relevant and reliable.

The Supreme Court has listed several factors to consider in assessing the reliability of expert witnesses including: 1) whether a theory or technique can be and has been tested, 2) whether the technique or theory has been subjected to peer review and publication, 3) known or potential rate of error of the technique or theory, 4) the standards controlling the technique's operation, and 5) whether the technique or theory has been generally accepted in the relevant scientific community. Kumho Tire Co. v. Carmichael , 526 U.S. 137, 149-50 (1999) (citing Daubert , 509 U.S. at 592-94).

Practical Tips

In formulating opinions and preparing the expert report, the patent owner and expert must be sure to evaluate all potential options in light of the above-noted factors. For example, existing license agreements of the patent owner for the patents in suit or similar technologies, and existing license agreements entered into by the accused infringer, should be considered when available. Likewise, the consideration of comparable patent licenses entered into by third parties is a stalwart of a reasonable royalty analysis. Reliance on less well-known methods for valuing a patent should be more carefully considered, however.

For example, patent auctions have recently become a vehicle for patent owners to sell certain patents and patent applications. Thus, Ocean Tomo has held several patent auctions in recent years where certain intellectual property has been sold. However, reliance on patent auctions as a primary input for the value of a patent for a damages calculation might not meet any of the Daubert criteria. The idea of a patent auction may simply be too new and therefore unreliable, and courts have excluded as speculative and unreliable expert testimony when it was based upon such unestablished markets. Pharmanetics, Inc. v. Aventis Pharmaceuticals, Inc., No. 5:03-CV-817, 2005 WL 6000369, at *12, *16 (E.D.N.C. May 04, 2005); see also generally, Daubert, 509 U.S. at 579, passim.

Also, the patent expert should be sure to apply sound and reasonable methodologies consistent with the way other reasonable impartial experts would do it. For example, all calculations should rely on sound mathematical principles and be sufficiently grounded in facts or data. Experts should be careful to avoid using only a self-serving selection of data, which may be unreliable from a statistical standpoint, because doing so may risk exclusion of that testimony or even the entirety of the expert's testimony. For example, in Rondor Music Int'l Inc. v. TVT Records LLC, No. CV 05-2909, 2006 WL 5105272, at *5 (C.D. Cal. Aug. 21, 2006), the court excluded a patent damages expert's conclusions as lacking a statistical basis and therefore not reliable.

Also of critical importance is making sure the patent expert has applied proper legal standards. The attorney working with the patent expert should be sure to provide accurate legal principles, including any recent changes to the law. Failure to do so can result in the exclusion of a portion or even the entirety of a patent expert's testimony. For example, in Technology Licensing Corp. v. Gennum Corp., No. 01-CV-4204, 2004 WL 1274391 (S.D. Cal. Mar. 26, 2004), the court precluded a damages expert from using an enhancing multiplier in a reasonable royalty calculation because such a multiplier “fails to comport with applicable Federal Circuit law.” Likewise, in Informatica Corp. v. Business Objects Data Integration, Inc., No. 02-03378, 2007 WL 607792, at *6 (N.D. Cal. Feb. 23, 2007), the court excluded expert testimony concerning a reasonable royalty rate which rested on the assumption that the date of the hypothetical negotiation was the date of filing suit, rather than the time of first infringement.

When selecting a damages expert, a patent owner should consider the expert's previous experiences and testimony before making the selection. The patent owner should be careful to select an expert who has not given testimony that would utterly contradict opinions that he or she would need to give in the patent owner's case. Also, consideration should be given to an expert's previous clients. If the expert has only represented one side of an industry or has only represented patent owners (and not any alleged infringers), the expert may be biased to the point where his or her testimony may be excluded.

Conclusion

Selection of a damages expert and preparation of the expert report require vigilant consideration of all of the above factors to ensure admissible and reliable opinions. The patent owner and its expert should be careful to balance the desire for obtaining a large damages award with the application of sound mathematical principles which are sufficiently grounded in facts or data, to avoid losing a Daubert challenge by the opposition.