Competitor Case: EDVA Guts Price Erosion and Lost Sales Case and Finds Lump Sum Reasonable Royalty Theory Flawed


Defendant, United Technologies Corp., filed two Motions in Limine to preclude Plaintiff, Rolls Royce, from Presenting Evidence or Argument at Trial of "Lost Profits and Price Erosion" and "Unsupported Lump Sum Reasonable Royalty" Damages. On May 4, 2011, Judge Leonie Brinkema of the Eastern District of Virginia granted both of Defendant's motions as well as further limiting Plaintiff's damage claims. Rolls-Royce PLC v. United Tech. Corp., Case No. 1:10CV457 (E.D. Va., May 4, 2011).

At issue is Plaintiff's ?077 patent, which Plaintiff claims Defendant infringes. The ?077 patent relates to a fan blade used within jet engines. Both Plaintiff and Defendant produce jet engines for the Airbus A380 jumbo jet. Plaintiff's damages expert ("Woodford") wrote the report that Defendant seeks to suppress, citing its flawed methodologies.

The Court's opinion breaks into three sections: (A) "Price erosion damages," (B) "Lost Profits," and (C) "Royalty calculation."

(A) Price Erosion Damages

Plaintiff argued that "absent competition from [Defendant], it would have been able to charge a higher price for its engine" and "it would have received [] more in aftermarket repair services and spare parts for those engines[.]" Id. at 5. Plaintiff asked for a large damages figure based on that assumption.

First, Defendant argued that 35 U.S.C. 286 "bars [Plaintiff] from seeking damages for any infringement that occurred more than six years before" the filing of this action. Id. Plaintiff countered that Defendant's argument was waived for failing to plead a statute of limitation defense; however, the Court disagreed with Plaintiff. Because, "the Federal Circuit has examined Section 286 and determined that it is a bar on damages, not a statute of limitations[.]" Id.

Second, Defendant argued that the "calculation of price erosion damages should be stricken because it is based on incorrect economic assumptions." Id. at 9. Specifically, Woodford's report relies on the flawed assumption that jet engines are necessities and therefore "inelastic." Further, Woodford cited the "processed fluid milk market" in support of her inelasticity contention. In particular, the Court chastised the report for not "cit[ing] any evidence that a jet engine is a necessity in the same way as milk." Moreover, Woodford's report states that the consumer would not care about paying a small amount more for tickets. However, the Court stated that the focus had to be on how the purchaser, the airlines, would react in determining the appropriate figures. Ultimately, the Court concluded that the "unsupported assumption of price inelasticity [undermined] the validity of [Plaintiff's] price erosion damages claim." Id. at 10

(B) Lost Profits

First, Defendant argued that Woodford's report incorrectly included lost profits for orders occurring before May 5, 2004. (This was the Section 286 argument again.) In response, the Court agreed with Plaintiff that it could recover lost profits for orders placed before the May 5, 2004 but filled after the date; the court called this "concrete acts." Further, Plaintiff attempted to recover damages for manufactured engines after May 5, 2004 but that had not been delivered. With that in mind, the Court refused to do so since engines manufactured and not delivered could be canceled and therefore the Defendant had no guaranteed profit.

Second, the Court found that Plaintiff incorrectly based "its lost profits claim on the price of the entire engine, even though the patent only cover[ed] one design aspect of the fan blade[.]" Id. at 13. This, the Court found, violated the Entire Market Value Rule. The Entire Market Value Rule requires that a plaintiff "demonstrate that the patented feature is the 'basis for customer demand' for the entire product" if it wishes to base damages on the entire product and not only the infringed portion. Id. at 15. Simply put, the Court disagreed that Plaintiff's expert had "cited any economic evidence that the design of [the] fan blade [was] the basis for customer demand for the entire engine." Id. Moreover, the Court rejected Plaintiff's argument that the "fan blade ha[d] been a major driving force behind sales" by stating that "[a] finding of commercial success does not necessarily lead to application of the entire market value rule." Id. at 17. Ultimately, the Court (somewhat arbitrarily) limited the amount that Plaintiff could claim in damages to a "maximum of 50 percent of the market value." Id.

Third, the Court struck portions of Woodford's report regarding "aftermarket services" and "sale of future engines" for failing to provide sound evidence and using "overly inflated assumptions about actual sales." Id. at 20.

(C) Under an alternative damages theory, Woodford's report calculated a reasonable royalty of 1.3 billion. Defendant argued that that calculation was flawed and the Court agreed. Woodford's calculation was based on an assumption that defendant would have paid $493 million to license the patent originally. The Court stated that this was highly speculative given that the Defendant had entered into a $1 billion joint venture with another company at a 50/50 split to produce the entire engines. Therefore, the Court concluded the methodology was flawed because Defendant would not have paid half a billion dollars to license the patent when its total contribution to the entire engine was half a billion dollars.