ResQNet.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.