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Client Alerts Newsletters

Patent Damages Newsletter

June 20, 2012

Client Alerts Newsletters

Patent Damages Newsletter

June 20, 2012

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Federal Circuit: matter of first impression—settlement negotiations are not privileged from discovery

Ongoing royalty same as jury verdict where circumstances had not changed

NDCA allows use of Nash bargaining as “check” on royalty rate; rejects use of entire market value rule in case of involving method claims

Lost profits rejected where patentee failed to prove it “would have made” a competing product absent the alleged infringement

Patent Damages Newsletter
Federal Circuit: matter of first impression—settlement negotiations are not privileged from discovery

On April 9, 2012, the Federal Circuit decided In re MSTG, Inc., Misc. Docket No. 996, holding as a matter of first impression that license negotiation communications, even with other parties in the same case (including those who had dropped out of the case), are not privileged and thus may be discoverable.

MSTG filed two lawsuits against cellular service providers and mobile phone manufacturers for infringement of three patents. MSTG settled with all defendants except AT&T. MSTG produced six settlement agreements, and AT&T sought further discovery into the underlying negotiations. MSTG resisted discovery on the negotiations, and AT&T moved to compel. The magistrate judge denied the motion. But then in MSTG’s damages expert report, the expert analyzed the six settlement agreements but did not find their royalty rates to be comparable to the hypothetical negotiation between MSTG and AT&T. AT&T renewed its motion to compel, which the magistrate judge granted, finding that the negotiation documents “might contain information showing that the grounds [the expert] relied on to reach his conclusion are erroneous.” Slip op. at 4 (quoting the magistrate’s order). The district court adopted the magistrate’s order.

MSTG petitioned the Federal Circuit for a writ of mandamus to vacate the order. The Federal Circuit granted the petition, temporarily staying the discovery order. The court considered two arguments by MSTG: 1) that license negotiations between MSTG and its other licensees are protected by a settlement negotiation privilege, and 2) that the district court had abused its discretion in ordering production of underlying license negotiations where the settlement agreements were fully integrated. The Federal Circuit rejected both arguments.

First, the court rejected MSTG’s plea to fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages. Two circuit courts were split on this issue—the 6th Circuit had adopted such a privilege, while the 7th Circuit had declined to do so. The Federal Circuit sided with the 7th Circuit, holding “that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.” Slip op. at 19 (citing In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 n.20 (7th Cir. 1979)).

The court did note that it was not ruling on “the extent to which evidence of settlement negotiations would be admissible under Rule 408.” Slip op. at 17 note 4. The court also reserved “for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations. But the existence of such authority, whatever its scope, strongly argues against the need for recognition of a privilege. In other words, the public policy goals argued to support a privilege can more appropriately be achieved by limiting the scope of discovery.” Slip op. at 19.

On the second issue, the Federal Circuit ruled that the district court had not abused its discretion in ordering production of settlement negotiation documents. The magistrate judge had reconsidered AT&T’s motion and ordered discovery into the negotiations “because they might contain information showing that the grounds [MSTG’s expert] relied on to reach his conclusion are erroneous.” Slip op. at 20 (quoting the magistrate judge’s order). As noted above, the district court adopted this ruling.

MSTG argued that its expert relied only on information in the four corners of the integrated settlement agreements and did not consider the negotiations. However, the Federal Circuit observed that AT&T had pointed to specific opinions offered by the expert that went beyond the agreements themselves. The court identified an example where the expert offered an opinion on the settlement agreements that relied on discussions with an MSTG executive concerning MSTG’s reasons for entering into the agreements. The court reasoned, “as a matter of fairness,” MSTG could not in one breath rely on information about the settlement negotiations and in another deny discovery of those same negotiations.

The Federal Circuit made an additional noteworthy observation: “Nor has MSTG attempted to show that the district court awarded overly broad discovery into the settlement negotiations, or that denial of discovery of the settlement negotiation documents was necessary here to encourage settlement.” Slip op. at 20-21. This statement suggests that denial of or limits on discovery of settlement negotiations may be appropriate in the right circumstances.

Ongoing royalty same as jury verdict where circumstances had not changed

On April 25, 2012, the Western District of Pennsylvania in University of Pittsburgh v. Varian Medical Systems, Inc., Case 2:08-cv-01307-AJS, addressed ongoing royalties in a case that has produced several orders on damages issues. (One of those orders is cited below in the summary of the Mformation case.) The court concluded that the ongoing royalty rate should be the same as the jury’s rate because circumstances had not changed between the dates of the two hypothetical negotiations—the date used at trial and the post-verdict date.

The court first observed that validity and infringement of the patent were the same for both hypothetical negotiations. The jury was told that, in the hypothetical negotiation, the patent was assumed valid and infringed. In the ongoing royalty negotiation, the patent had been adjudged valid and infringed.

The court distinguished the Federal Circuit’s Amado and Paice opinions and Affinity Labs of Texas, LLC v. BMW North America, LLC, 783 F. Supp. 2d 891 (E.D. Tex. 2011), because in those cases the plaintiff had sought a permanent injunction, whereas here the plaintiff (“Pitt”) did not. The change in position in those cases was that a permanent injunction was not available for sales pre-judgment but could have been for post-judgment. Here, Pitt never sought a permanent injunction and thus no such change in position had occurred.

The court rejected Pitt’s argument that the ongoing royalty rate should be higher because the jury found Varian’s infringement willful. The court distinguished Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 2009 WL 920300, at *4-9 (D. Ariz. March 31, 2009), aff’d, 670 F.3d 1171 (Fed. Cir. 2011), in which the district court increased the ongoing royalty in part due to willful infringement, and the Federal Circuit affirmed. The Varian court said it carefully read Bard and found the reason the district court awarded a higher royalty was the interaction between the willful infringement and other factors that were not present in this case. It cited as an example the direct competition between the parties in Bard, which meant the patentee would have stood to improve its competitive position, while the infringer would have been harmed if the infringer had been forced to stop selling its product. In contrast, Pitt and Varian did not compete, and thus if Varian had been forced to stop selling its products both Pitt and Varian would have suffered financially. The court concluded that enhancement of damages and attorneys’ fees were the correct punitive measures for willful infringement—not an increased ongoing royalty.

Finally, the court found that the jury’s reasonable royalty would adequately compensate Pitt in the future while leaving Varian with a substantial profit margin. The court opted not to undertake a detailed Georgia-Pacific analysis at this point because it had presided over the trial on damages and read all the damages experts’ reports. Based on this experience, the court concluded the jury’s verdict adequately considered Georgia-Pacific and was just. The court thus awarded Pitt the same ongoing royalty rate as the jury had awarded.

NDCA allows use of Nash bargaining as “check” on royalty rate; rejects use of entire market value rule in case of involving method claims

On March 29, 2012, in Mformation Techs., Inc. v. Research in Motion Ltd, No. C 08-04990 JW (N.D. Cal.), the court ruled on motions to exclude expert testimony, including testimony from damages experts. The case addresses two interesting damages issues: 1) use of the Nash bargaining solution in determining a reasonable royalty rate, and 2) the entire market value rule for accused products where method claims are at issue.

The defendant moved to exclude plaintiff’s expert’s reasonable royalty opinions as unreliable because they were based on the Nash bargaining solution, contending this is an impermissible rule of thumb for determining the royalty rate. The Nash bargaining solution, named for Nobel Prize-winning mathematician John Nash, is a controversial methodology for determining a reasonable royalty. Indeed, in an earlier case, the Northern District of California addressed Nash bargaining at length and criticized its utility for determining a reasonable royalty in patent cases. See Oracle America, Inc. v. Google Inc., No. C 10-03561 WHA (N.D. Cal., July 22, 2011) (stating that Nash bargaining is a theory “that a patent plaintiff would love…because it awards fully half of the surplus to the patent owner, which in most cases will amount to half of the infringer’s profit, which will be many times the amount of real-world royalty rates”).

In the Mformation case, however, the court was not forced to address Nash bargaining squarely. The court found that the expert had conducted an “extensive” Georgia-Pacific analysis, and merely used Nash bargaining “in addition to, rather than in lieu of,” Georgia-Pacific. Slip op. at 7 n.19. Having determined that Nash bargaining was used as a “check” instead of the primary methodology, the court denied the defendant’s motion to exclude the expert’s royalty rate calculation.
The court also considered the entire market value rule (EMVR). The court found application of the EMVR to be unwarranted, however, because the expert did not attribute all of the defendant’s customer demand to use of the Patent-in-Suit—even if all the accused products were capable of operating in the accused manner, when connected to the system at issue, there was no proof that customer demand was driven by the patented method as opposed to other features of the accused products. The court therefore excluded the expert’s testimony as to the total profitability of Defendants’ products.

Note that the court relied on the three-part EMVR test from Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 285-87 (N.D.N.Y. 2009) (Rader, J., sitting by designation) (part one of the test holds that the infringing components of a larger machine must be “the basis for customer demand for the entire machine including the parts beyond the claimed invention”). Other district courts have used the Cornell three-part test for EMVR analysis. See, e.g., Univ. of Pittsburgh v. Varian Med. Sys., Inc., No. 08cv1307 (W.D. Pa., February 10, 2012).

Lost profits rejected where patentee failed to prove it “would have made” a competing product absent the alleged infringement

On March 29, 2012, in Avidyne Corp. v. L-3 Comms. Avionics Sys., Inc., Civil Action No. 05-11098 GAO (D. Mass.), the court ruled on summary judgment motions, including a motion against the patentee’s claim for lost profits. The court initially observed that whether lost profits are categorically recoverable is a question of law for the court, and only after lost profits are deemed recoverable does the jury determine the amount of lost profits. See Wechsler v. Macke Int’l Trade, Inc., 486 F.3d 1286, 1293 (Fed. Cir. 2007).

The issue here turned on whether the patentee, L-3, which did not make a product that competed with Avidyne’s accused product, had the ability to make and market a product but for some legitimate reason did not. The court cited Wechsler on this point. There the Federal Circuit held that, even though the patentee did not make a product that competed with the accused product, the patentee was entitled to lost profits because it not only could have sold a competing device, but likely would have done so during the period of infringement. Id. at 1294.

According to L-3, had Avidyne not infringed, L-3 would have made a device covered by its patent and sold it to Avidyne’s customer, Cirrus, which purchased Avidyne’s accused product. L-3 attempted to support this position by arguing that only it and Avidyne were plausible sources for the product at issue, and that if Avidyne had not contracted with Cirrus, L-3 would have done so and would have earned profits. In other words, but for Avidyne’s infringement, L-3 would have sold its product to Cirrus and would have profited from those sales.

The court rejected this argument, citing several factors. First, when Cirrus sought bids for the product, Avidyne submitted a bid but L-3 did not. Second, L-3’s development efforts with other partners had failed, and the court decided this inability to develop a product for others undermined L-3’s claim that it would have done so for Cirrus. Finally, the court cited the fact that L-3’s parent did not support the project. The court concluded that these factors placed a substantial cloud on whether L-3 would have ever produced a device for Cirrus, and that merely showing that it may have developed a competing product was insufficient to remove the situation from speculative to reasonably probable. See Wechsler, 486 F.3d at 1293 (holding that lost profits requires proof of “causation in fact,” meaning a reasonable probability that the patentee would have made additional profits “but for” the alleged infringement).

 

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