Opportunity Lost: Economic Analysis in Apple v. Motorola

This is a Guest Post from Professor David McGowan of the University of San Diego School of Law. McGowan is co-director of USD’s Center for Intellectual Property Law & Markets.

Two years ago Judge Posner wrote an opinion in Apple v. Motorola
that caught the attention of economic experts and the lawyers who work with them. He excluded expert reports on both sides of the case, notably imagining a conversation in which one of Apple’s experts reported his methodology to a client, to be rewarded with a resounding “Dummkopf! You’re fired.”

Judge Posner made three central points, each plausibly grounded in what he saw as the requirement that economic experts employ in litigation the practices clients would demand from a business consultant. The first point was that such experts must add value; they may not simply recite contentions advanced by other experts. The second point was that economic experts may not extrapolate opinions from irrelevant comparisons. The third was that such experts must consider all economic options available to an accused infringer.

These points were sound and they implied a broader critique. Judge Posner plainly felt that customary practices in the economic analysis of patent cases are deficient and should be reformed. He rightly noted that when two opinions differ by a factor of 140, a difference present in this case and unsurprising to those who litigate such cases, something fundamental is wrong. His opinion was transparently an exercise in what he saw as swamp draining.

After an initial wave of schadenfreude rippled through the expert ranks everyone had the same question: Will this approach stick? Last Friday came the answer: No. The Federal Circuit’s opinion reversing Judge Posner sees no swamp, and that is unfortunate.

Although notionally applying regional (7th) circuit law to the Daubert questions Judge Posner decided, the court’s opinion establishes principles likely to influence future patent cases in any forum. None of these principles is compelled by Daubert or by the rules of evidence. Together they are likely to worsen economic analysis in patent cases.

The Federal Circuit’s opinion rejects each of Judge Posner’s central points. On the first point the court seemed to chide Judge Posner when it warned against a court imposing “its own preferred methodology” at the expense of plausible alternatives, an ironic comment for a field in which experts routinely slog through the Georgia Pacific factors–a test articulated by a district court. The court held “questions regarding which facts are most relevant or reliable to calculating a reasonable royalty are `for the jury.’” Such questions are a large part of what a “method” is in this context, so we may expect looser constraints on methodology in the future.

The Federal Circuit’s opinion does not explain what value an economist adds by repeating an engineer’s statement about a competitor’s costs. To add value, one would think, an economic consultant would analyze market data. In this regard Judge Posner’s literary flourish proved costly. The Federal Circuit quoted, and seemed put off by, the dummkopf passage. The court held “[t]he district court’s decision states a rule that neither exists nor is correct. Experts routinely rely upon other experts hired by the party they represent for expertise outside of their field.” Quite true. That, in part, was why Judge Posner perceived a systemic rather than an idiosyncratic problem.

The Federal Circuit’s opinion is more significant on Judge Posner’s second point and third points—extrapolations from comparisons and consideration of alternatives. Judge Posner excluded one expert’s opinion in part on the ground that his figures with respect to one phone feature (turning a page with a tap rather than a swipe) actually aimed at another feature (which interpreted an imperfectly vertical swipe as a vertical swipe), which in turn were extrapolated from the price difference between a computer mouse and a trackpad. Judge Posner held the mouse-trackpad difference “tells one nothing about what they will pay to avoid occasionally swiping unsuccessfully because their swiping finger wasn’t actually vertical to the screen,” the function that was itself a proxy for the relevant damages figure. The Federal Circuit disagreed, noting that both the trackpad and the swipe feature involve finger gestures to communicate commands and that one of the client’s engineers vouched for comparability. Imagine that.

The Federal Circuit relegated the comparability question largely to the jury:

[I]f the Trackpad is not an accurate benchmark, Motorola is free to challenge the benchmark or argue for a more accurate benchmark. But such an argument goes to evidentiary weight, not admissibility, especially when, as here, an expert has applied reliable methods to demonstrate a relationship between the benchmark and the infringed claims.

The net result? If your technical expert tells your damages expert two technologies are comparable, everything else is for the jury. This aspect of the holding exemplifies what will no doubt be the most common lesson taken from the case:
unless an expert is filmed throwing darts at numbers, even the most cogent criticisms will be held to go to weight rather than admissibility.

This aspect of the opinion threatens to bleed into the use of licenses rather than technology to derive a royalty. With respect to a separate issue the court held that “whether [asserted] licenses are sufficiently comparable such that Motorola’s calculation is a reasonable royalty goes to the weight of the evidence, not its admissibility.” Taken literally that rule could undo much of the work the Federal Circuit has been doing in cases such as Laser Dynamics, which held that “[w]hen relying on licenses to prove a reasonable royalty, alleging a loose or vague comparability between different technologies or licenses does not suffice.” Does it now suffice because it is a jury issue?

The Federal Circuit applied a similar approach to consideration of alternatives. Judge Posner’s point was that a consultant asked to minimize costs from infringement would be derelict if he or she considered only non-infringing ways to implement a function and ignored the possibility that the function could be deleted profitably. The Federal Circuit was unimpressed:

[t]hat a party may choose to pursue one course of proving damages over another does not render its expert’s damages testimony inadmissible. Nor is there a requirement that a patentee value every potential non-infringing alternative in order for its damages testimony to be admissible.

Taken as a general rule (and the trackpad discussion certainly invites such a reading), the language will encourage fanciful comparisons at the expense of economically more probable options. Litigants will draw such comparisons in an effort to anchor jurors on a high or low number. Opinions that differ by a factor of 140 will be even more common than they are now. Not good.

Are the methods of patent damages analysis really so elastic that a difference of 140x bespeaks no cause for concern? Must we tolerate in innovation policy practices no one would rely on to decide any important question in their own lives? The Federal Circuit’s decision implies that the answer is yes. Its opinion will ensure that we will see plenty more such differences. It could have been, and should have been, otherwise.

50 thoughts on “Opportunity Lost: Economic Analysis in Apple v. Motorola

  1. Litigation isn’t licensing. Uncertainty in litigation is what makes licensing possible, and an over reliance on “comparable” real world licenses for the RR analysis accomplishes nothing more than a downward spiral of patent devaluation. Federal Circuit actually got one right.

    1. Yes, if one views the requisite “not less than a reasonable royalty” award for infringement damages to logically be an imaginary license negotiated with the owner of a patent for which infringement and invalidity are at that point incontestable by the licensee, i.e, more than a license before a litigation decision. [But, still highly dependent on the profit margin for the product to be licensed. That could be mere pennies for a memory chip, for example.]
      But other reasonable royalty calculations may be even more unreasonable, it seems.

  2. My take: figuring out a RR in absence of standard rates charged to others is a matter of conjecture, not one of science – and Daubert should exclude most such opinion testimony as unsound. I think that is what Posner was really saying.

    Weight? How does one give weight to something completely of the wall unreliable?

    In the present case, the cost of programming a feature out is irrelevant if the feature itself is what sells the phone. I would think that if the inventions are software based, that the small cost and short time to remove the infringing feature from the cell phone argues heavily of an injunction. Then the real value of the infringing feature will be make known when the parties negotiate for a license.

    As to the amount of an RR if there is no agreement, I would suggest that court award 1%, which is the IBM standard rate for 1 patent.

    1. “I would suggest that court award 1%”

      And with 200,000 patents implicated on a smartphone, that would lead to a -199,900% profit margin at best. Well, at least it’s consistent with the patent system’s continual attacks against innovation in semiconductors and consumer electronics.

  3. Could it simply be that this is the result of other non-sensical damages decisions by the Federal Circuit. Has anyone ever negotiated a license in real life that didn’t use the entire product as the royalty base? Do rents for apartments vary by whether the landlord built the apartment himself or bought it up post-construction like some type of troll?
    Every move, has a counter-move whether we recognize it or not at the time.

  4. I see a real gist of this blog debate as “why are economists treated like Rodney Dangerfield in patent cases?”
    Here are two blunt suggested reasons:

    1. 1. The very fact that some of them can be so easily hired to testify under oath to such vastly varying calculations.
      2. The inability to predict, even on the eve of massive economic disasters, as in 2008, that they are coming.

      1. Well, I remember the case where the two expert reports were exchanged, and the numbers were within 20%. I just about fell out of my chair.

      2. The inability to predict, even on the eve of massive economic disasters, as in 2008, that they are coming.

        There were economists who saw that disaster coming and made it perfectly clear to everyone that it was coming (because it was perfectly clear). The economists who didn’t see it coming or who celebrated the awesome “freedums” granted to homeowners by banksters should generally be ignored going forward. That’s the price paid for accepting money for your expertise then having your “expertise” revealed to be in the fine art of shilling rather than in understanding or integrity.

  5. RE: “..a court imposing “its own preferred methodology” at the expense of plausible alternatives, an ironic comment for a field in which experts routinely slog through the Georgia Pacific factors–a test articulated by a district court.”
    My impression [contrary to the impression created by the above] was that the Georgia Pacific District Court was accurately summarizing a list of factors that had been accepted by many different courts for many years before then [and since], [presumably even including some old Sup. Ct. cases?], NOT making up it’s own? [Now there is a worthy academic research project.]

  6. I think this blog is missing the strong hint made in this Fed. Cir. decision by its noting that just because proffered evidence survives a Daubert test does not mean it will ultimately survive summary judgement.
    However, doing so on 103 issues before even getting into a battle of new experts on damages would be far more appropriate. Hopefully, that will be what happens next in this litigation [unless an IPR beats the D.C. remand to it].
    P.S. I wonder if the asserted analogy of portable PC track pad finger swipes to smartphone finger swipes might even be usable as an admission against interest for 103 purposes?

    1. I wonder if the asserted analogy of portable PC track pad finger swipes to smartphone finger swipes might even be usable as an admission against interest for 103 purposes?

      Maybe there’s some other even older art out there about moving stuff around with your fingers. You probably would have to look really, really, really hard to find it, though.

  7. McGowan He rightly noted that when two opinions differ by a factor of 140, a difference present in this case and unsurprising to those who litigate such cases, something fundamental is wrong. His opinion was transparently an exercise in what he saw as swamp draining.

    I’m curious as to whether anyone has done any analysis to determine the typical (and atypical) sorts of differences that exist between the damages estimates proferred by the experts on each side of a patent case, particular in the area of computer-implemented patents (which, as we all know, is the are most desperately keen to remain in an infantile state for as long as possible).

  8. Are the methods of patent damages analysis really so elastic that a difference of 140x bespeaks no cause for concern?

    There may be cause for concern, but it may also be self-limiting. If the defendant’s expert says “damages are ten million dollars” and the patentee’s expert says “damages are 1.4 billion dollars”, I think the jury may say “that’s like Dr. Evil asking for 100 billion dollars; it just sounds made up.” It may be that juries will tend to just go with the defendant’s figure outright rather than splitting the difference.

    And do we really not trust juries to consider the weight that should be accorded a given expert’s testimony? If the patentee’s expert says “damages are 1.4 billion dollars because of reasons” and the defendant’s attorneys tear it apart on cross-examination, do we think the jury will blithely ignore that and either flip a coin between ten million and 1.4 billion or award 705 million? I know many people (attorneys among them) have dim opinions of juries, but I think they are capable of gauging how believable a witness’s testimony is, even complex expert testimony.

    1. I know many people (attorneys among them) have dim opinions of juries, but I think they are capable of gauging how believable a witness’s testimony is, even complex expert testimony.

      A substantial fraction of these people think the earth is four or five thousand years old and all the animals in it could fit inside a big wooden boat.

      If judges aren’t required to control what goes before a jury, or if they refuse to control what goes before a jury, then you can rest assured that the jury decision on that issue is going to be a complete crap shoot determined by which attorney has the best haircut or some equally unjust measure.

    2. How exactly the jury proceeds to determine the damage when the experts testimonies are day dreaming? Is there any approach better than making up numbers? Will they sum the two numbers and divide by two?

      You get the point. They may know the numbers from the experts are made up but they won’t have a clue of what the correct numbers will be and they will be required to make a guess.

  9. Yes, patent infringement damages calculations are a mess, but this may be reading too much into this single Fed. Cir. panel opinion. This Fed. Cir. panel was undoubtedly seriously affronted [I will avoid the P word] by the arrogant way in which J. Poser refused to even try the case, as if there were no possible damages at all, even though major commercial products are involved, and was reacting accordingly.

    1. This Fed. Cir. panel was undoubtedly seriously affronted [I will avoid the P word] by the arrogant way in which J. Poser refused to even try the case, as if there were no possible damages at all, even though major commercial products are involved, and was reacting accordingly.

      Reacted accordingly? They acted like pearl-clutching ninnies desperate to avoid the fact that the typical patent damages “expert” is a charlatan or a hack who is allowed to say pretty much anything he/she wants.

      major commercial products are involve

      And also some “major” junky patents and some experts who were complete hacks. Posner’s opinion wasn’t a joke. He was making an important point and, whether they appreciated it or not, the Federal Circuit certainly got the message.

      There will be more to come.

  10. Dennis, your analysis is spot on this time. This decision is a disaster on multiple fronts, and overall, an embarrassment for the Federal Circuit.

    One of the problems with the Federal Circuit is that many of them have little or no experience in actually litigating a case involving damages. The result is that the court seems to believe that it is really difficult to prove patent damages with any degree of certainty, and thus, the court has to give huge latitude to these retained economic experts.

    But what the court does not understand is that the true problem in damages analyses stems from a much simpler factor–greed and overreaching in the amount of the damages ask. Take this case as an example. Apple sues on patents covering somewhat minor swipe gesture features, but rather than formulate a damages theory seeking a fair and reasonable return for the competitor’s use of that technology, Apple demands a king’s ransom in the form of a “reasonable royalty” that would rival the GDP of many smaller nations.

    And therein lies the problem–the fundamental disconnect between the somewhat secondary nature of the patented technology to the overall product, and the huge damages demand. The disparity between these two factors forces economic experts to employ a number of tricks to hide the fact that, in reality, they’re exceeding the limits of logic and making a number of unwarranted leaps to justify the number the client demanded. In this case, that means asking Apple what it would cost to design around its own technology, asking Apple what the value of the technology was (eschewing any objective survey evidence), and employing many other silly and disingenuous comparisons to bolster the result. In this case, Napper stuck closely to biased sources and superficial analyses (like the ridiculous trackpad comparison) because he knew that impartial surveys and rigorous analysis could not have supported the insane damages ask his client demanded.

    It’s not hard to come up with a reliable and admissible theory of damages where the reasonable royalty is rooted in economic reality, and based on a rigorous analysis. The reason these factors were ignored here was that the damages analysis, properly applied here, would have resulted in a modest royalty.

  11. Thanks, Professor McGowan. I thought your most troubling observations were these:

    … when two opinions differ by a factor of 140, a difference present in this case and unsurprising to those who litigate such cases, something fundamental is wrong.

    How can it be said that “experts” are useful to the jury if this is the best that they can do? Doesn’t Daubert require that the expert’s methodology be reliable?

    The net result? If your technical expert tells your damages expert two technologies are comparable, everything else is for the jury. This aspect of the holding exemplifies what will no doubt be the most common lesson taken from the case: unless an expert is filmed throwing darts at numbers, even the most cogent criticisms will be held to go to weight rather than admissibility.

  12. I am not only completely unimpressed with yet another Ivory Tower piece, but clearly the lack of understanding of how patent law is to be written (which branch) and the explicit desire to employ judicial activism to achieve desired ends leaves me with the desire to heavily (and righteously) bash another professor.

    Wake up. The ends do not justify the means. They never have. They never will.

    1. You’re such a legal formalist. As if Congress could possibly get this one right. The whole of patent damages jurisprudence is judge-made, by Congress’ own design. And Posner knows more about economic analysis of legal issues than the entire CAFC judiciary combined. It’s bad enough that lawyers get paid (lots) to obfuscate, thanks to the CAFC so can the economists. Doesn’t lead to good use of judges’ or jury members’ time, nor does it instill confidence in the results of litigation or the legal process generally.

      1. legal formalist…?

        These things mattered enough for the Founding fathers to be clear in that “formalism.”

        Thanks “Well…” but I will go with what they wanted all the same.

        (and yes, there are historical lessons to be kept in mind as to WHY they chose that particular legal formalism)

        Posner is way too full of himself – there is NOTHING that says that he cannot apply his wisdom within the proper confines of how the law works – there is EVERYTHING to say that the ends do not justify the means.

        Ever.

        If you had a smidgen of understanding of the legal system you would immediately recognize just how off-base you are regarding following that system and instilling confidence by PREVENTING the notion of the ends justifying the means to take root.

        1. If you had a smidgen of understanding of the legal system

          Looks like its time to get your meds adjusted again, TB.

          He’s your boy, Dennis. If you keep protecting TB from his mental illness, he’ll never get himself treated.

        2. the ends do not justify the means. Ever.

          A man that you know is innocent breaks out of prison. He shows up at your house on his way to Mexico. Do you turn him in, even if you are certain you won’t be punished for helping him?

          Or do you give him one of your weird sermons while you secretly dial 911?

          Just curious.

          1. give him one of your weird sermons while you secretly dial 911?

            Nice strawman. Do you want to return to the here and now?

            1. Why do you think that you must be ‘defending’ something when you engage in a projecting type of behavior?

              You might want to open up that little psych book of yours again and try to understand your symptoms.

            2. “a projecting type of behavior?”

              Because it isn’t “projection” if it isn’t being used as a defense mechanism to defend against something re re.

            3. “Your misunderstanding is amazing – and delusional.”

              Or you could try reading a wiki about the subject you’re always bringing up so you don’t look like such an ignoramus.

            4. Here, let me just look this up for you since you’re lazy on top of ignorant.

              link to en.wikipedia.org

              Psychological projection is the act or technique of defending oneself against unpleasant impulses by denying their existence in oneself, while attributing them to others.

              Got that? The act (or technique) of defending oneself (note not defending other people) against unpleasant impulses (note not just “anything”) by denying their existence in oneself, all while attributing them to others.

              Thus it is the act of defending oneself against unpleasant impulses or denying their existence in oneself. All while attributing them to others.

              Put more simply, for fifth grader anon, it is an act of defending oneself against x by y means. Where x is an unpleasant impulse and y is denying their existence in oneself while attributing them to others.

              See also Sigmund Freud, Case Histories II (PFL 9) p. 132

            5. I see why your inability to read well makes you think that you are not projecting when you are projecting 6.

              You gave your own answer at 1.1.2.1.1.5 as to why what you do here is in fact projecting.

              Since you are steadfastly refusing to recognize the symptom you exhibit, you will not likely seek out the help you need, and the chaff and gnat’s buzzing that you post will in most likelihood continue unabated.

              Just remember that I did try to reach out to you and implore you to get help for yourself.

            6. “You gave your own answer at 1.1.2.1.1.5 as to why what you do here is in fact projecting.

              Since you are steadfastly refusing to recognize the symptom you exhibit”

              How so?

              And symptom of what re re?

            7. 6,

              The fact that you feel compelled to ask questions the answers to which are already plainly evident on the record here just shows the depth of the lack of your understanding.

              That you do so while seeking to throw in gratuitous insults just heightens your own lack of caring about how others may feel.

              Review the attributes you wish to project onto me. Analyze your own actions. Remove the log from your own eye first.

    2. No obsession Malcolm – the professor here makes his own bed.

      You too seemed obsessed with making the error of thinking that because I say something, that something just cannot be a fact in its own right.

      Try to actually read before you decide to respond. Then – after just a little careful thought and contemplation – respond to the content, not the author.

      You might be surprised at what you might find when you let yourself think first.

      1. You too seemed obsessed with making the error of thinking that because I say something, that something just cannot be a fact in its own right.

        I’m sure it seems that way to someone like you who suffers from severe delusion of grandeur on a daily basis.

        1. LOL – when you base your posts in facts, law and without spin, you would be surprised how effective those posts become.

          No delusions required.

          You might try to post without your spin (if you ever remember how) to see how it feels.

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