Damages: Federal Circuit Again Demands More Substance from Damages Experts

PatentLawPic923ResQNet.com and Jeffrey Kaplan v. Lansa, Inc. (Fed. Cir. 2010)

The district court held that one of ResQNet’s patents was infringed and awarded $500k in past damages based on a 12.5% royalty rate. The court denied the patentee’s requested permanent injunction but instead ordered an ongoing license at the 12.5% royalty rate. The court also awarded sanctions against ResQNet’s counsel for failing to withdraw patents from suit that were clearly not infringed.

On appeal, the Federal Circuit took issue with the damages calculation — holding that the lower court had “relied on speculative and unreliable evidence divorced from proof of economic harm linked to the claimed invention.” 

This appellate decision should be seen as an extension of the Federal Circuit’s 2009 Lucent v. Gateway decision.  The issue of sufficiency of expert testimony on damages has been brewing for some time. I remember sitting near Judge Rader (one of the authors of this opinion) and both of us listening to Northern District of California Judge Ron Whyte refer to economic damages experts as the “most intellectually dishonest witnesses” that testify in his court.

Hypothesize Rather than Speculate: The statutory minimum damages for patent infringement is a “reasonable royalty.” That calculation typically involves a “hypothetical negotiation” in an attempt to calculate the rate at which the patentee would have licensed the patent to the infringer prior to the infringement.  Although the hypothetical negotiation is always involves guesswork, here the Federal Circuit reiterated the koan that the guesses must be based on evidence: “a reasonable royalty analysis requires a court to hypothesize, not to speculate.” Everyone understands that the arguments must have some evidentiary basis. Here, the real question was the type of evidence that can be applicable.  In particular, the appellate court held that the only relevant evidence is evidence related to “compensation for the economic harm caused by infringement of the claimed invention.”

Past Royalty Rate Must be Tied to Invention: The first problem with ResQNet’s evidence was that it presented past ResQNet license rates that were not bare patent licenses.  Addressing a similar issue, the CAFC wrote in its 2009 Lucent decision that a reasonable royalty damage award “cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ball-park of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.”  Lucent.  According to the appellate panel, ResQNet’s expert witness Dr. Jesse David “used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”  The court indicated that experts need even more credible justification when the proposed royalty rate is much higher than might be expected.

Although the discredited prior licenses used by Dr. David were ResQNet licenses, those licenses were directed to the software code and re-branding rights but apparently did not specifically mention the patent number in suit and the evidence did not tie the licenses directly to the claimed invention. The appellate panel rejected these licenses as irrelevant to estimating royalty rate for the infringed patent: “In simple terms, the ’075 patent deals with a method of communicating between host computers and remote terminals—not training, marketing, and customer support services. The re-bundling licenses simply have no place in this case.”

The defendant Lansa did not offer any expert testimony on damages to counter Dr. David.  However, that failure does not remove the patentee’s burden to properly prove its damages. “As a matter of simple procedure, Lansa had no obligation to rebut until ResQNet met its burden with reliable and sufficient evidence.”

Judge Newman writing in dissent argued that the appellate panel over-stepped its bounds:

This is not a case of constructing, and applying, a royalty rate from totally unrelated content; it is simply a case of determining the evidentiary value of the infringed subject matter by looking at the various licenses involving that subject matter, and allocating their proportional value, with the assistance of undisputed expert testimony.

In the district court, ResQNet’s damages expert Dr. David, a qualified economist with experience in the field, followed the traditional application of the Georgia-Pacific factors, analyzing the impact of all of these factors in an extensive Expert Report and in testimony at trial. He was subject to examination and cross-examination in the district court, and the district court provided a full and reasoned analysis of the evidence. No flaw in this reasoning has been assigned by my colleagues, who, instead, create a new rule whereby no licenses involving the patented technology can be considered, in determining the value of the infringement, if the patents themselves are not directly licensed or if the licenses include subject matter in addition to that which was infringed by the defendant here. In this case, the added subject matter was usually the software code that implements the patented method, as the district court recognized, and whose contribution to the value of the license was evaluated by the damages expert and discussed by the court. My colleagues’ ruling today that none of that information is relevant to the assessment of damages is unprecedented, and incorrect.

Judge Newman was a member of the Lucent panel and argues that the majority decision here is “distorting the principles” of that case.

Ongoing damages: The appellate panel did not consider the issue of ongoing damages (compulsory license) because that question was not appealed.

Sanctions: The appellate panel did reverse the imposition of sanctions on Jeffrey Kaplan’s firm. In its decision, the court noted (i) the untimeliness of the motion for sanctions; (2) Kaplan’s prompt withdrawal of one of the three patents-in-suit; and (3) the actual “litigation substance” concerning the patent that was only withdrawn at the last minute.

74 thoughts on “Damages: Federal Circuit Again Demands More Substance from Damages Experts

  1. “It’s supposed to mean that reasonable royalty determinations don’t “automatically come out in favor of ignoring people’s government-issued and presumed-valid rights”, in contrast to IANEA’s assertion upthread. I believe it was made in an attempt to defend CA’s proposed “solution” which, at least as proposed, leads to inaccurate estimates of reasonable royalty rates.”

    Then why don’t you just post that instead of “nice strawman” maybe then your mom wouldn’t h ate you so much.

  2. “Nice strawman”

    Not sure what that’s is really supposed to mean

    Read the thread more carefully, then.

    It’s supposed to mean that reasonable royalty determinations don’t “automatically come out in favor of ignoring people’s government-issued and presumed-valid rights”, in contrast to IANEA’s assertion upthread. I believe it was made in an attempt to defend CA’s proposed “solution” which, at least as proposed, leads to inaccurate estimates of reasonable royalty rates.

    Hobbes: Quit trying to change the subject.

    I was simply responding to your comment, Hobbes.

    Hobbest: Now you’re just making stuff up…

    Actually, I’m not. Maybe you live out in the deep suburbs where parking isn’t an issue?

    Okay, then. I see the sockpuppet “Adam Smith” and NAL are more interesting in talking about me than the thread (as usual).

    Let’s ignore them.

  3. “Nice strawman”

    Not sure what that’s is really supposed to mean, except that Mooney is always trying to show that he was on the debate team for a couple of days when he was 10 years old and learned a few debate terms. Mooney shows all the signs of the typical egotist – always trying to prove that he is legit. The more he tries to prove, the more everyone including his mom, h8tes him.

    Strawman arguments can actually be useful. If you want to refute a strawman, just distinguish it from the real man

  4. “Quit trying to change the subject.”
    “Now you’re just making stuff up…”

    Mr Hobbes, meet Mr. Mooney.

    Of course, good sir, you have already met “him” under any number of “rare” aliases.

    The easiest way to dispel of this person is to put forth a substantive challenge. You may choose to bookmark the challenge and any nonsensical response that follows, as Mr. Mooney has an abundance of convenient forgetfulness (what the Sam Hill?!). This attribute nicely coordinates with his persistent shield of ignorance.

    A fair warning – there exists a risk of alienating certain readers who have built up an immunity to Malcolm’s posts, but bristle at the sense of someone assailing inanities.

    It is these enduring qualities that lead to the familiar moniker “The Trainwreck”. My, what will Mr. Mooney say next?

  5. “Some jurisdictions do shoot for 100% compliance, at least in some areas.”

    Nice caveat there. But like I said, my analogy wasn’t that great. And there’s nothing that says that every jurisdiction is maximizing the public welfare with there parking policies.

    “100% compliance and increased parking fees is the answer to greater parking availability.”

    Undoubtedly, but not necessarily the answer to maximum public welfare. Quit trying to change the subject.

    “The reason you don’t see more of this is that local politicians are sensitive to enraged lunatics screaming about their “right” to park their car for extended periods of time no more than one block from their destination without paying squat.”

    Now you’re just making stuff up…

  6. OK, so why does no jurisdiction shoot for 100% compliance? Because at some point the costs to get better compliance outweigh the marginal improvements in increased availability of parking spaces and increased revenue.

    Some jurisdictions do shoot for 100% compliance, at least in some areas. 100% compliance and increased parking fees is the answer to greater parking availability.

    The reason you don’t see more of this is that local politicians are sensitive to enraged lunatics screaming about their “right” to park their car for extended periods of time no more than one block from their destination without paying squat.

    Sound familiar?

  7. See fn. 3 of the opinion. Apparently, defense counsel moved for rule 11 sanctions in part based upon the discussion a settlement letter where the plaintiff agreed that if discovery showed what defendant said it showed, there would be no infringement of two patents. This letter should have been excluded from evidence under Rule 408. But district court cited an exception to Rule 408 to consider it. The Feds said, in fn. 3, that they doubted this exception would apply here and that the letter should not have been used against the plaintiff.

    Why this issue merited only a footnote is a question in itself. But it seems clear that the district court was entirely wrong to sanction the plaintiff in part based on the contents of a settlement letter.

  8. “For what it’s worth, there is likely a direct correlation between stronger enforcement of parking regulations and the public interest, at least where the public interest is characterized as increased availability of parking spaces and increased revenue for the city to maintain streets, etc.”

    OK, so why does no jurisdiction shoot for 100% compliance? Because at some point the costs to get better compliance outweigh the marginal improvements in increased availability of parking spaces and increased revenue.

    In any case, my analogy isn’t that great. Back to the point, it’s true that you don’t want a wholesale breakdown in recognition of patent rights (anarchy being a bad thing, and all that), but the more significant concern should be the relationship between a particular level of compliance and the perceived value of a patent, as it is that value that drives whether an inventor chooses to accept the quid pro quo. If we give the inventor too much value, then the public is getting a raw deal. So, improving the value of a patent for the inventor might be a good thing (it’s unquestionably good for me, as a retailer of patent services), but the added value for the inventor needs to be weighed against the increased costs to the public.

  9. Thomas, absolutely not.

    The acceleration is in the commercialization. When researchers publish a finding, it just gets laid out in a journal and it’s up for grabs. The problem is that those researchers move on to something else because they have a new research grant that requires it, and you then need your own researchers to figure out what they did, understand it, and begin replicating a commercial version of it. But, that’s a huge expense, and because it’s in the public domain, you can’t guarantee a return on investment, especially when you can just wait for someone else to do the leg work and then rip them off.

    By contrast, with a patent, the researchers ARE the ones supporting commercialization. They get a license fee which pays them to continue on in that research, and you get to use them to bring it to market because their compensation is at least partially based on it. Plus, there’s a good potential ROI because no one else can do what you’re doing without contributing the same (or more) in licensing fees to the researchers.

    It’s just the nature of the game with research grants.

  10. IANEA How would you characterize the decision between agreeing to a reasonable royalty and forcing someone else to litigate at great expense (which he might not do) to force you to pay a reasonable royalty?

    What does this question have to do with your unproven assertion that reasonable royalty determinations “automatically come out in favor of ignoring people’s government-issued and presumed-valid rights”.

  11. Hobbes We shouldn’t just assume that more compliance and/or more punitive treatment of infringers is necessarily in the public interest, just as we don’t assume that stronger enforcement of parking regulations is necessarily in the public interest.

    For what it’s worth, there is likely a direct correlation between stronger enforcement of parking regulations and the public interest, at least where the public interest is characterized as increased availability of parking spaces and increased revenue for the city to maintain streets, etc.

  12. Probably has a lot to do with “simply published” ideas being buried in scholarly journals where business people rarely go looking for marketable ideas, coupled with the lack of incentive to actively approach a company and pitch your idea.

  13. That’s interesting, Bad Joke. I’d love to see data on that. It would be interesting to know whether the acceleration is a consequence of the patenting/licensing, or just a result of the selection process. In other words, perhaps the patented innovations are showing up quicker because they’re fundamentally more valuable ideas, which is why they were selected for patenting in the first place?

  14. Thomas Hobbes: Re public benefit

    Also, I had a conversation with some people the other day. When they simply publish their discoveries/inventions, it typically takes about 15 years for those ideas to show up in the field. When they get patents and pursue licensees, it typically reaches market in less than 5 years. The acceleration to market is a pretty big public benefit as well.

  15. “I think it’s in the public interest to see that rights are generally respected once they’re granted, and policy shouldn’t encourage a “fine, then sue me” attitude.”

    I agree that the public has an interest in patent rights being respected, just as it has an interest in compliance with other laws. (Not to mention compliance with contracts – but in that area of law, we are intolerant of punitive remedies, and thus pretty accepting of a “fine, then sue me” attitude.) That said, compliance and enforcement have costs. (We accept much less than 100% compliance in many other areas of law, including areas where the exact bounds of the obligations or rights at issue are much easier to ascertain than they are in patent law.)

    The granting of a patent monopoly unquestionably imposes costs on the public, but we presume that those costs are offset by the benefits disposed by the disclosure of the patented technology. All I’m suggesting is that the costs and benefits of enforcement need to be considered as well. We shouldn’t just assume that more compliance and/or more punitive treatment of infringers is necessarily in the public interest, just as we don’t assume that stronger enforcement of parking regulations is necessarily in the public interest.

  16. Nice strawman.

    Thanks.

    How would you characterize the decision between agreeing to a reasonable royalty and forcing someone else to litigate at great expense (which he might not do) to force you to pay a reasonable royalty?

  17. IANAE The goal is to adjust the calculation so it doesn’t automatically come out in favor of ignoring people’s government-issued and presumed-valid rights

    Nice strawman.

  18. First, we do have willfulness penalties, which are presumably intended to distinguish between “innocent” infringers and those who are knowingly calculating the risks/rewards of infringing.

    Everyone calculates the risks/rewards of infringing, from the guy who doesn’t do a clearance search so he’s not aware of prior art to the guy who attempts to negotiate a license in good faith to the guy who designs around what he finds in his clearance search to the shady character who blatantly copies a patented invention. Not all of those people are willful infringers, but they all make a business decision.

    The goal here is not to prevent that calculation. The goal is to adjust the calculation so it doesn’t automatically come out in favor of ignoring people’s government-issued and presumed-valid rights, and forcing rights-holders to litigate in clear cases because it’s worth it for infringers to take the chance. Maybe awarding court costs as a matter of course would be an improvement too.

    Second, making the cost of infringement higher than the cost of licensing would tend to encourage companies spend resources on patent clearances rather than research [...] and/or encourage gaming on the part of the patentee.

    What if the patentee can claim more than a reasonable royalty if he can show that he offered the infringer a license at a demonstrably reasonable royalty? Then at least the infringer would be encouraged to negotiate instead of forcing the patentee into court.

    Third, the argument presupposes that it’s in the public interest for the patentee to be empowered to extract the maximum possible rents from his patent.

    I don’t see it that way. I think it’s in the public interest to see that rights are generally respected once they’re granted, and policy shouldn’t encourage a “fine, then sue me” attitude. Certainly the patentee is entitled to extract some value from his patent if it’s being infringed, and he shouldn’t always have to resort to expensive litigation, the cost of which he can’t hope to recover.

  19. Hobbes Colorado’s formula should at least be updated to reflect the probable validity of both patents.

    Ya think? ;)

    It’s still rather ridiculous. As CA notes upthread, the model hardly promotes “accurate” and “reasonable” royalty rates: As a practical matter, you’re not going to see a plaintiff’s damages expert testify that the plaintiff’s patent only had a 5% shot at being found valid, enforceable and infringed. It would be a bit counterproductive.

  20. IANAE All I was saying was “you are being as pedantic as an examiner”.

    No, you didn’t understand me, IANAE. I was telling you that your comment was asinine.

  21. ciceroPatent holder’s will now be able to appeal royalty rates they deem too low by arguing that the district court relied on licenses not involving the patents-in-suit.

    That has always been the case.

  22. “One other point: one could argue that there are good public policy reasons for why a reasonable royalty should be higher than an “actual” royalty.”

    Yes, once could argue that, but I’m not sure those arguments would be terribly convincing. First, we do have willfulness penalties, which are presumably intended to distinguish between “innocent” infringers and those who are knowingly calculating the risks/rewards of infringing. Second, making the cost of infringement higher than the cost of licensing would tend to encourage companies spend resources on patent clearances rather than research (some would argue that is a good thing, but it’s not necessarily economically efficient) and/or encourage gaming on the part of the patentee. Third, the argument presupposes that it’s in the public interest for the patentee to be empowered to extract the maximum possible rents from his patent. That presupposition is not self-evident, in my humble opinion.

    I appreciate your comments.

  23. “I question whether the result, under these unrealistic assumptions, is likely to produce a “reasonable” royalty.”

    Hobbes: you’re not alone! One thing to keep in mind is a “reasonable royalty” is the minimal amount that a patent holder should be compensated after a finding of validity and infringement. Accordingly, these assumptions (validity and infringement) should be made when determining the royalty amount.

    Since these assumptions are normally not present in an actual license negotiation, this is one reason why a reasonable royalty derived from a hypothetical negotiation may be higher than the actual royalty the parties would have negotiated. Of course, actual royalty negotiations are often influenced by several other “real-world” factors (anticipated legal expenses, etc.) that do not come into play in a “hypothetical” negotiation.

    One other point: one could argue that there are good public policy reasons for why a reasonable royalty should be higher than an “actual” royalty. If it were not, companies would have no incentive to not infringe, as the price for infringing (and being caught) would be the same as acting lawfully and taking a license (excluding any willfulness penalties).

  24. “With the courage which only comes of justified self-confidence, he dared to rest his case upon its strongest point, and so avoided that appearance of weakness and uncertainty which comes of a clutter of arguments. Few lawyers are willing to do this; it is the mark of the most distinguished talent.”
    –Learned Hand

  25. “One of the baseline assumptions in determining a reasonable royalty under the “hypothetical negotiation” framework is that both parties assume that the patent-in-suit is both valid and infringed.”

    I won’t argue with you, WJ, but I question whether the result, under these unrealistic assumptions, is likely to produce a “reasonable” royalty.

  26. Isn’t a reasonable royalty supposed to be the minimum? The MIMIMUM. In the absence of an injunction, why can’t the court decide a rate higher than the reasonable royalty?

    Also, Newman is once again correct in her analysis of the record.

  27. Lawyers have a tendency to make every possible argument that supports their position. This opinion illustrates the danger of that approach. And the danger cuts both ways. Every accused infringer damages expert report I have seen cites licenses with low royalty rates in related technology areas. Patent holder’s will now be able to appeal royalty rates they deem too low by arguing that the district court relied on licenses not involving the patents-in-suit.

  28. “The basic premise is valid, despite my careless avoidance of double-negations.”

    I wasn’t criticizing your language, I was simply trying to point out that the reference patent (described as “confirmed-valid” in your comment) also has some finite possibility of later being rendered invalid. Thus, any comparison of the royalty associated with that patent with others should reflect the same sort of discounting that Colorado suggests. I think Colorado’s main insight is right on target – the rate a licensee willingly agrees to pay should reflect a discount for potential flaws in what’s being purchased. It’s just that this insight should be applied to the reference licenses as well as to the patent-in-suit.

    “Everything is easily modeled, it just depends on how accurate you want the model to be. You could ballpark those information costs and estimate the effect on the royalty rates for a particular licensee (past or hypothetical) who expects to sell a particular number of units.”

    Agreed. Colorado’s examples assumed a nice, simple linear model. I was pointing out that a better model would reflect the potentially huge, non-linear, biases introduced by information costs. Yes, you could model those information costs, but you’re getting farther and farther from reality.

    I hear you that the other side’s expert can rebut the model – that’s the American way and the system we’re working with. But given the proportion of my classmates at law school (Tier 1, mind you) who panicked at the notion of having to use division on an exam, I’m more than a bit skeptical of the ability of a judge, jury, or opposing counsel to properly evaluate the credibility or validity of an expert’s model of reality. In some cases, I think less might be more.

  29. I’m not sure that the “likelihood of validity” or whether whether a patent has survived multiple invalidity challenges impacts the reasonable royalty determined in a hypothetical negotiation. The key distinction here is “hypothetical.”

    One of the baseline assumptions in determining a reasonable royalty under the “hypothetical negotiation” framework is that both parties assume that the patent-in-suit is both valid and infringed. In my view, this assumption likely precludes one from applying either a discount (or premium) to the royalty depending on whether the patent has previously withstood invalidity arguments in separate litigations.

    The assumptions of validity and infringement are obviously not present in most “real-life” negotiations. In a “real” license negotiation, whether or not the patent has previously been litigated and found to be valid would absolutely impact the negotiating position of the parties, and ultimately, the royalty amount. This is just one of the many areas where what is considered under the “hypothetical negotiation” framework differs from what is often considered in a “real” negotiation.

  30. I think you’ve explained it properly, IANAE, but one problem with the approach Colorado proposes is that there’s no such thing as a “confirmed-valid” patent, at least not until the patent in question expires. If my patent makes it through a given validity challenge I can say that it’s not-yet-invalid, but that’s really all.

    The basic premise is valid, despite my careless avoidance of double-negations.

    Those information costs distort the probability assessments by licensees, and thus distort the agreed royalty rates, in ways that are not easily modeled.

    Everything is easily modeled, it just depends on how accurate you want the model to be. You could ballpark those information costs and estimate the effect on the royalty rates for a particular licensee (past or hypothetical) who expects to sell a particular number of units. If your expert witness has a better way, he’s free to present it.

    I would argue that even an imperfect model is better than no model at all, but the Circuit might disagree.

  31. “The reasonable royalty for a confirmed-valid patent (patent A) increases relative to a possibly-invalid patent (patent B) as the likelihood of validity of patent B decreases.”

    I think you’ve explained it properly, IANAE, but one problem with the approach Colorado proposes is that there’s no such thing as a “confirmed-valid” patent, at least not until the patent in question expires. If my patent makes it through a given validity challenge I can say that it’s not-yet-invalid, but that’s really all.

    A consequence of this is that Colorado’s formula should at least be updated to reflect the probable validity of both patents.

    Another problem with Colorado’s approach is that the information costs associated with patent validity are VERY high, perhaps millions of dollars. Further, those information costs tend to be absolute numbers, not relative ones, and thus don’t scale with the number of units (or the value of units) that I, a potential licensee, plan to sell. Those information costs distort the probability assessments by licensees, and thus distort the agreed royalty rates, in ways that are not easily modeled.

    Bottom line – Colorado’s approach is way too simplistic, in my opinion.

  32. LOL. If you were capable of “seeing past the words to what people really mean”, then you’d understand that except for a few tinfoil hat types around here nobody believes I’m an examiner. And trust me: it’s not my allegedly “pedantic” nature that inspires the tinfoil hats. It’s the fact that I don’t join them in trashing the PTO.

    See, there you go again. I know all that. All I was saying was “you are being as pedantic as an examiner”.

    Call me dense, but what’s the logic? Why does the reasonable royalty increase as the likelihood of validity decreases?

    The reasonable royalty for a confirmed-valid patent (patent A) increases relative to a possibly-invalid patent (patent B) as the likelihood of validity of patent B decreases.

  33. Colorado: are these the same expert economists that believe you can spend your way out of debt?

    I’ll just follow what the accountants say in that case.

  34. Yes, that’s the math. No, I don’t propose it as a hard and fast rule; but rather as an insight that should regularly, but doesn’t, factor into the reasonable royalty analysis.

    Call me dense, but what’s the logic? Why does the reasonable royalty increase as the likelihood of validity decreases?

  35. So if the “established” royalty is 3%, and there is a 5% chance of finding the patent valid, enforceable and infringed, then that translates to a reasonable royalty of 60%?

    Yes, that’s the math. No, I don’t propose it as a hard and fast rule; but rather as an insight that should regularly, but doesn’t, factor into the reasonable royalty analysis.

    As a practical matter, you’re not going to see a plaintiff’s damages expert testify that the plaintiff’s patent only had a 5% shot at being found valid, enforceable and infringed. It would be a bit counterproductive. Even if the damages phase was bifurcated from the liability phase, such testimony would suggest that the jury was composed of suckers.

  36. So, is it just me, or are we describing a feature of CP/M, a product of Gary Kildall of Digital Research inc.

    This Computer Operating System product, common in the 1970s and into the mid-1980s, certainly qualifies not only as prior art, but a working example of the patent.

    One not owned by the patent holder.

    Even Blind Freddy can see that this insane concept of patenting abstract concepts, or anything based or theoretical or physical models of science or mathematics, is never going to end in anything but disaster.

    The last clear example of this nonsense was the Wright brothers patent wars, which dragged the whole aviation industry backwards for decades.

    As for why this patent wasn’t invalidated, it’s clearly high past time that all software, business methods and other frivolous patents involving mathematics and science, be they pure or theoretical, were given a divorce from the legal system.

    I also see no good reason why any patent, lacking a demonstrable working model, or that is encumbered by anything Blind Freddy is alleged to be able to discern, should not be invalidated, as a matter of course.

  37. I propose that the “established royalty” on a never-before-litigated patent be divided by the pre-litigation hypothetical expected probability that the patent would be found valid, enforceable, and infringed.

    So if the “established” royalty is 3%, and there is a 5% chance of finding the patent valid, enforceable and infringed, then that translates to a reasonable royalty of 60%?

    And how does one become an “expert” in patent litigation handicapping? Or is it one of those occupations where you just point to your grey hair and your litigation experience and nobody really cares that you’re batting average for predicting outcomes in patent cases is less than .133?

  38. IANAE You’re pedantic to a fault, and completely incapable of seeing past the words to what people really mean.

    LOL. If you were capable of “seeing past the words to what people really mean”, then you’d understand that except for a few tinfoil hat types around here nobody believes I’m an examiner. And trust me: it’s not my allegedly “pedantic” nature that inspires the tinfoil hats. It’s the fact that I don’t join them in trashing the PTO.

    Maybe you should simply learn to write what you actually mean instead of trusting others to read your minds.

    You can’t see the subtext we’re seeing in the majority reasons?

    The subtext, my friend, is that the defendants in this case wrote a better brief and made more compelling arguments for their position than the plaintiffs, at least with respect to the damages. That’s the subtext that I see.

    I can certainly recall reading cases where the majority’s reasoning was not persuasive and I was left with the sense that they were ignoring inconvenient facts (or their own prior decisions) to reach a conclusion.

    Definitely not seeing that here, though. They are quite clear about what the problem is.

    Obviously expert testimony would be the best way to get evidence on the other factors, so is the opinion of an expert without regard to the other factors also a factor? If so, it’s a factor that the majority failed to consider here.

    Who knows if they considered it and why does it matter? They failed to expressly discuss that factor because it wasn’t relevant after it was determined that the royalty rate was based on unreliable and insufficient evidence.

  39. It should be taken account as part of the “amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement”. At least, that’s where I’d try to argue it.

    I would like to see a case in which this argument worked. It certainly has logical merit. Yet when I researched this issue about 5 years ago, I was surprised I couldn’t find a case discussing and adopting this argument. In assessing a reasonable royalty, I propose that the “established royalty” on a never-before-litigated patent be divided by the pre-litigation hypothetical expected probability that the patent would be found valid, enforceable, and infringed.

    For example, a 3% established royalty on a never-before-litigated patent would translate to a reasonable 6% royalty if there was originally only a 50% expected chance of success in enforcing the patent.

    Maybe it just hasn’t occurred to anyone to make that argument before (huh?). Plaintiff’s lawyers, it’s time you start making this argument!!!

    Plaintiff’s patent damage experts should start taking statistics on the % of litigated-to-final-judgment patents that are determined to be valid, enforceable, and infringed, into account in opining on the amount of a reasonable royalty.

    I wonder whether the Federal Circuit, as it is currently composed, would give the argument its due. The majority ResQNet.com opinion, on page 19, seems more concerned with how the threat of litigation can distort a reasonable royalty upward than with the fact the cost of enforcing their patent motivates many licensors to accept far less than they might otherwise demand:

    this court has acknowledged that the hypothetical reasonable royalty calculation occurs before litigation and that litigation itself can skew the results of the hypothetical negotiation. See Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078-79 (Fed. Cir. 1983) (“[S]ince the offers were made after the infringement had begun and litigation was threatened or probable, their terms should not be considered evidence of an ‘established royalty,’ since license fees negotiated in the face of a threat of high litigation costs may be strongly influenced by a desire to avoid full litigation.”) (quotations and alterations omitted).

    On the other hand, on the next page the Court writes:

    And a reasonable royalty may permissibly reflect “[t]he fact that an infringer had to be ordered by a court to pay damages, rather than agreeing to a reasonable royalty.” Maxwell v. J. Baker, Inc., 86 F.3d 1098, 1109-10 (Fed. Cir. 1996).

    So perhaps there is an opening for this line of reasoning.

  40. Why is it that the Georgia-Pacific factors don’t take this into account?

    It should be taken account as part of the “amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement”. At least, that’s where I’d try to argue it.

    I find it more troubling that “the opinion testimony of qualified experts” is a separate factor. Obviously expert testimony would be the best way to get evidence on the other factors, so is the opinion of an expert without regard to the other factors also a factor? If so, it’s a factor that the majority failed to consider here.

  41. Economists would agree that a reasonable royalty on a never-before-litigated patent would likely be lower than a reasonable royalty on a patent that has survived — at great expense — multiple challenges (e.g., non-infringement under a narrow claim construction; invalidity under sections 101, 102, 103, 112; unenforceability due to inequitable conduct; etc.) in litigation.

    In a never-litigated patent, the ultimate royalty rate to which reasonable parties would agree would be heavily discounted by the risk of the patent being found non-infringed, invalid over prior art or for other defects, or unenforceable due to inequitable conduct or other causes.

    But in the absence of those multiple risks, the ultimate royalty rate to which reasonable parties would hypothetically agree should be much higher.

    Why is it that the Georgia-Pacific factors don’t take this into account? (At least I am not aware of any case that takes this into account).

  42. So the majority here is just b.s.ing everyone because they simply didn’t like the past royalty rate? And how do you know this?

    Now I know why so many people here think you’re an examiner. You’re pedantic to a fault, and completely incapable of seeing past the words to what people really mean.

    I mean, yeah, Newman’s dissent definitely put the facts of the case in a different light than the majority, but really? You can’t see the subtext we’re seeing in the majority reasons?

  43. IANAE The concern some of us have is that these “egregious errors” seem to get found whenever somebody doesn’t like the final result.

    So the majority here is just b.s.ing everyone because they simply didn’t like the past royalty rate? And how do you know this? Because Judge Newman dissented?

    I really hope that isn’t your litmus test.

    metoo I would have absolutely no problem with this decision if indeed the 12.5% was based solely on 5 other licenses which had nothing whatsoever to do with the patent in suit. But, that does not appear to be the situation.

    I don’t see why a bogus royalty rate calculated “solely” using 5 irrelevant license is so much better than a bogus royalty rate calculated those same 5 irrelevant licenses and and “some other data”. Criminal cases are routinely overturned based on similar evidentiary abuses.

  44. But Malcolm, there already WAS other evidence that supported 12.5%, at least if we are to believe Judge Newman. Yet, the majority simply ignored the other evidence. I would have absolutely no problem with this decision if indeed the 12.5% was based solely on 5 other licenses which had nothing whatsoever to do with the patent in suit. But, that does not appear to be the situation.

    As for making up a lower number, only juries do such scurrilous things.

    And I am still scratching my head as to what the defendant actually did at trial with respect to damages. Sure the patent owner has the burden of proof with respect to damages. But the court is obligated to award at least a reasonable royalty. If the patent owner presents evidence, expert witness testimony, etc., that goes completely unrebutted, what is the trial judge supposed to do? I find it hard to believe that the expert (or someone else) did not offer any evidence as to how those 5 licenses were related to the patented technology–every damages expert I have ever worked with or against is incredibly meticulous when supporting their damage opinion (even if a lot of them tend to be “intellectually dishonest”).

    And even if one assumes that the the 5 licenses should not have been considered, the plaintiff’s expert testified that the 12.5% royalty was also supported based on the infringer’s profit margin (and apparently other factors too). That too apparently went unrebutted.

    I will leave this case with a short war story. Years ago I was defending a client in an infringement action. The plaintiff’s expert said a royalty of 12% (or thereabouts) would be reasonable, while our expert opined that 3.5% was reasonable (couldn’t get him any lower). The other side’s expert had a CV almost as long as War and Peace, and he claimed to have negotiated hundreds of patent licenses over his long and illustrious career for one of the largest companies in the world. When I asked him what was the largest royalty he had ever negotiated for a patent license, his answer was something like 8%.

  45. 2 out 3 judges on this panel who reviewed the briefs and the district court opinion clearly felt that egregious errors were made.

    The concern some of us have is that these “egregious errors” seem to get found whenever somebody doesn’t like the final result.

    And if a reasonable explanation is provided for a 12.5% past royalty rate, then the Federal Circuit would have no choice but to accept that past royalty rate.

    Well, actually, there is one other choice. They can do what they did this time – say that the explanation is unreasonable and send it back with a clear subtext that there’d better be a lower number at the bottom the next time they see it.

  46. IANAE They should exercise a little more deference to the trial court on questions of fact.

    I’m still waiting for the usual peanut gallery members to chime in, applauding this sentiment, IANAE. I wonder what could be preventing them from doing so?

    Generally speaking “a little more deference” might be nice but 2 out 3 judges on this panel who reviewed the briefs and the district court opinion clearly felt that egregious errors were made. And I agree with them.

    metoo No, the clear and unmistakable message is don’t come back with anything close to 12.5%.

    Sorry, but you’re wrong. I read those same passages and even cited one of them in my earlier comment explaining the holding to you. The Federal Circuit is only suggesting that the proper rate should not rely on unrelated licenses with extremely high royalty rates. If that means that the ultimate royalty rate is lower than 12.5%, so be it.

    Come now, Malcolm, you really think that the trial court is going to come back with anything close to 12.5%?

    Based on the record, unless some new evidence is allowed to be considered, it seems likely that the number will be lower than 12.5%. But the district court would have to be incredibly stoopit to “make up a lower number” as someone suggested they do upthread. And if a reasonable explanation is provided for a 12.5% past royalty rate, then the Federal Circuit would have no choice but to accept that past royalty rate.

  47. So if injunctions are no longer available (ebay), treble damages are passe (seagate), and undisputed reasonable royalties are unreasonable (this case), where does that leave the value of a patent?

  48. The majority’s concern would also make more sense if we were talking a “mega” damage award (like in the Lucent Technologies case).

    If there were a really important principle at stake, I wouldn’t begrudge the Circuit pronouncing on it before a high-quantum case came along. After all, the law is supposed to be the same for everybody, and in theory the trial judge in the hypothetical future mega-damages case would be bound to follow Circuit precedent.

    I’m more concerned with the Circuit usurping the functions of the trial court.

  49. IANAE,

    Good question. You’re also on point in saying that the majority is “micromanaging” the royalty rate determination. The majority’s concern would also make more sense if we were talking a “mega” damage award (like in the Lucent Technologies case). But slightly over $500,000 is hardly a “mega” damage award in this day and age.

  50. I wouldn’t be surprised if this district court judge comes back with a revised royalty rate that is under 6%, given the majority’s comment about the royalty rate in the Trell case.

    I wonder if the evidence in the Trell case included licenses that were closely linked the ResQNet patent.

  51. In my prior post, please add “and Newman” after “what the majority” in the first sentence of the 3rd paragraph.

    Metoo,

    Your comment that “the clear and unmistakable message is don’t come back with anything close to 12.5%” is very much on point. In fact, I wouldn’t be surprised if this district court judge comes back with a revised royalty rate that is under 6%, given the majority’s comment about the royalty rate in the Trell case.

  52. Come now, Malcolm, you really think that the trial court is going to come back with anything close to 12.5%? The panel did everything possible to send the clear message that 12.5% was too high:

    “The inescapable conclusion is that Dr. David used unrelated licenses on marketing and other services—licenses that had a rate nearly eight times greater than the straight license on the claimed technology in some cases—to push the royalty up into double figures.”

    [In Trell,] “[t]his court vacated even [a] 6% rate (far less than in this case), finding that the Bewator license was not commensurate to the patent in suit.”

    The panel refers to an “inflated” rate. They also talk about the one license being the “most reliable” one to use. And they conclude with this admonition:

    “During that remand, however, the trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.”

    No, the clear and unmistakable message is don’t come back with anything close to 12.5%.

  53. That’s true of every patent case.

    Well yeah, in some sense, but in another more important sense “the end result that the panel majority wants to see” is not always the appropriate standard for review.

    I realize the Federal Circuit loves deciding these things for itself, but it seems kind of micromanagey. They should exercise a little more deference to the trial court on questions of fact.

  54. “That’s a greatly simplified and rather misleading characterization of the majority’s opinion ”

    MM,

    I did read the majority’s opinion (all of it) before I posted my comment, and I stand by my characterization of it. I’m also not saying the majority’s view that the district court gave too much weight to the 5 “re-bundled” licenses was necessarily out of line, although the district court judge was in a much better position to evaluate the testimony of the damage expert than was the Federal Circuit majority.

    But the majority opinion goes even further and tells the district court to completely ignore these 5 “re-bundled” licenses, rather than suggesting they not be given the weight that the district court obviously gave them. And Judge Newman suggests that these “re-bundled” licenses were more relevant to the cliamed invention than the majority suggests. We also can’t evaluate who’s telling the whole story here as the majority opinion provides no specifics on what was in these “re-bundled” licenses.

    There’s also an obvious difference of view between what the majority said the factual record was, which is a “red flag” to me that this district court judge was being “second guessed” by the majority based on findings of fact, not conclusions of law. Your suggestion that Judge Newman distorted the factual record is also disingenuous. Newman was pretty specific in her dissent about the evidence presented on factor 2 and factor 4 of the Georgia-Pacific factors, whereas the majority was fairly general about why the 5 “re-bundled” licenses were unrelated to the claimed invention.

    Again, I’m not saying the majority was necessarily wrong that too much weight was given to the 5 “re-bundled” licenses. But what I see here is a dispute between the majority and Newman about what the factual record was which leaves a very unsettling precedent about how the Georgia-Pacific factors should be treated and prioritized in a given case.

  55. metoo the majority reached the subjective conclusion that 12.5% was too high, and therefore weaved an opinion directing the trial court to come up with something lower.

    There is no such direction in the majority opinion. There is only this:

    “On remand, the district court will have the opportunity to reconsider the reasonable royalty calculation. At that time, the district court may also consider the panoply of “events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.” Fromson, 853 F.2d at 1575. During that remand, however, the trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.”

    There is nothing in the holding that would suggest that a 12.5% past royalty rate could not be arrived at again, provided that relevant evidence existed to support such a royalty rate.

    That’s all this case is about–how to get the end result that the panel majority wants to see.

    That’s true of every patent case.

  56. How about if on remand the trial court bases its redetermination on the other pertinent evidence already presented (e.g., the infringer’s profit marrgin)? You know, the other evidence which Judge Newman discusses in her dissent, and the majority conveniently ignores so that they can reach the result they want? Only a fool would not see this case for what it is–the majority reached the subjective conclusion that 12.5% was too high, and therefore weaved an opinion directing the trial court to come up with something lower. That’s all this case is about–how to get the end result that the panel majority wants to see. Sadly, these cases make a complete mess of things for future litigants.

  57. IANAE I don’t see how any other outcome is possible (other than settlement), unless there is new and more pertinent evidence supporting a lower percentage.

    There doesn’t have to be “new and more pertinent evidence.” The majority would likely be happy if the non-pertinent “evidence” was ignored and a reasonable royalty was determined based on the pertinent evidence already presented (e.g., the “straight” license with an “ongoing rate substantially less than 12.5%”).

  58. EG Regarding the 12.5% royalty rate determination. you can clearly sense from the majority opinion that they felt the district court weighed too heavily the Georgia-Pacific factor 1 evidence (existing licenses).

    That’s a greatly simplified and rather misleading characterization of the majority’s opinion (then again, so is Newman’s dissent, as I pointed out upthread). Just read the majority’s opinion starting at page 14, with particular attention to the paragraph on page 15. The damages expert grabbed 5 unrelated licenses and stuck them into his “calculation”.

    As for two other licenses: “The rates in the re-bundling licenses are not consistent at all with the other two licenses in the record. Those two “straight” licenses arose out of litigation over the patents in suit. One of them was a lump-sum payment of stock which Dr. David was unable to analogize to a running royalty rate. The other was an ongoing rate averaging substantially less than 12.5% of revenues.”

    Perhaps what is most distressing is that there is a complete disconnect between the majority and Judge Newman on what the “totality of evidence” was

    This is true of most Newman dissents.

  59. In light of the holding of this case, it would be phenomenally wrong-sighted for anyone on remand to merely “make up a lower number” for a past royalty rate.

    I don’t see how any other outcome is possible (other than settlement), unless there is new and more pertinent evidence supporting a lower percentage.

  60. IANAE the 12.5% figure was significantly less than the “unjustified double-digit levels” in the prior licenses, in part because of the more distant relationship to the claimed invention.

    12.5% may be “significantly less” than some other number but that doesn’t make 12.5% “reasonable”. As the majority indicated, there has to be a reason for the number other than “here’s some unrelated patents where 30% and 50% royalties were paid so I guess 12.5% is pretty reasonable past royalty rate.”

    Effectively this decision is “12.5% seems too high for a made-up number, go make up a lower one”,

    In light of the holding of this case, it would be phenomenally wrong-sighted for anyone on remand to merely “make up a lower number” for a past royalty rate.

  61. Regarding the 12.5% royalty rate determination. you can clearly sense from the majority opinion that they felt the district court weighed too heavily the Georgia-Pacific factor 1 evidence (existing licenses). But as Judge Newman points out, there was other evidence for determining the royalty rate including factor 2 (royalties paid by the licensee to others) and factor 4 (licensor’s policies and practices regarding the grant of licenses to its technology). I’m also sympathetic with IANAE’s point that the majority is somewhat “second guessing” the district court finding that the 12.%% royalty rate was supportable by the “totality of evidence” in the record

    Perhaps what is most distressing is that there is a complete disconnect between the majority and Judge Newman on what the “totality of evidence” was for determining the royalty rate of 12.5%. In fact, from reading the majority opinion v. Newman’s opinion, you might think each was talking about a different factual record. That’s not good for “reasoned” precedent that others can follow with certainty on damages determinations. Instead, this case appears to be a step back from Lucent Technologies in which Chief Judge Michel spilled quite a bit of worthwhile judiciial ink to render order out of how to prove what a “reasonable royalty” is to determine damages

  62. IMHO, the majority got it wrong. It is also odd that, although the panel remanded for a “redetermination of damages,” the compulsory license royalty rate of 12.5% remains unchanged. The infringer did not appeal that aspect of the decision. (Of course it is possible that they simply have moved on from the patented technology, and therefore do not care about the ongoing royalty rate.)

  63. 1. Apparatus for implementing a computer terminal to be connected to a remote computer, said apparatus comprising:

    means for identifying a particular user logged on to said remote computer through said computer terminal;

    means for identifying, based upon a position, length and type of each of a plurality of fields, a particular screen to be displayed to said user; and

    a plurality of special function keys, each key performing a specified function, the specified function performed by each key being determined by the particular user logged on and the particular screen identified to be displayed.

  64. Except the majority does state, among other things, that the plaintiff’s expert “used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”

    The dissent states that this was all taken into account by the trier of fact, the infringer had the opportunity to cross-examine on all these issues, and the 12.5% figure was significantly less than the “unjustified double-digit levels” in the prior licenses, in part because of the more distant relationship to the claimed invention.

    I agree that it’s the plaintiff’s job to prove his damages, but when the plaintiff’s evidence is somewhat probative and the defendant brings no evidence at all in rebuttal, the risk is that the plaintiff’s evidence will win the day.

    economic damages experts are the “most intellectually dishonest witnesses” testifying in patent cases today.

    Probably, but they’ll only be called to testify again. Effectively this decision is “12.5% seems too high for a made-up number, go make up a lower one”, which strikes me as a review of findings of fact and credibility.

    Unless the Circuit thinks there are more pertinent prior licenses to be unearthed on remand.

  65. Regarding the district court’s analysis of the plaintiff’s expert’s testimony, Judge Newman writes in dissent: No flaw in this reasoning has been assigned by my colleagues

    Except the majority does state, among other things, that the plaintiff’s expert “used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels.”

    That sounds like pointing out “a flaw in reasoning” to me. Worse, as the majority points out, the use of those other licenses is simply irrelevant and does not amount to a proof of any damages whatsoever.

    This is the right result, and it’s a good result for the reasons alluded to by Judge Whyte: economic damages experts are the “most intellectually dishonest witnesses” testifying in patent cases today. That should come as no surprise when these “experts” are, by and large, creatures of the legal system whose reason for existing is to dissemble in courtrooms.

  66. I’m with Newman on this one. The Circuit shouldn’t be reviewing findings of fact without a more compelling indication that something has gone seriously wrong. Especially in an area that is inherently at least a little bit speculative.

    Also, it’s sad that the parties have to endure an appeal and remand for the sake of maybe half of a half-million dollars in damages.

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