DDE Excludes Damages Testimony Based on "Built-In Apportionment," Prior Jury Verdicts, and Settlement Agreements


In IOENGINE, LLC v. PayPal Holdings, Inc., Civil Action No. 18-826-WCB (D. Del. June 15, 2022), Judge William Bryson granted defendants PayPal and Ingenico's motion to exclude IOENGINE's damages expert, Dr. Jeffery A. Stec, from testifying as to reasonable royalty damages, where Dr. Stec had relied on a license agreement between third parties, jury verdicts, and settlement agreements. PayPal and Ingenico contended "(1) that Dr. Stec failed to properly apportion the value of the licensed technology across the royalty base, (2) that he relied on a non-comparable license agreement to support his assessment of the royalty rate to which the parties would have agreed, and (3) that he improperly based his damages opinion on jury verdicts and settlement agreements in other cases." Slip op. at 40-41. The court agreed with PayPal and Ingenico.

With regard to apportionment and license comparability, the court found that Dr. Stec did not apportion to account for non-patented features present in the accused product, nor did IOENGINE assert the entire market value rule. Rather, IOENGINE contended that "built-in apportionment" attributable to the licenses which Dr. Stec relied on satisfied the apportionment requirement. Id. at 42.

Dr. Stec cited a number of agreements, but the only one he relied on that was not a litigation settlement was between iPIN Debit Network, Inc. and Infantly Available, Inc. ("iPIN license"). The iPIN license was an exclusive license covering technology that was viewed as inferior to the technology in the instant case; it did not cover the patents in suit, but covered a patent that had expired and another one year from expiration at the time the license became effective, as well as products, services, and other obligations. Nonetheless, Dr. Stec used the five-percent royalty rate adopted in the iPIN license as a floor for the hypothetical negotiation.

The court found that Dr. Stec failed to explain "how the details of the iPIN license provides built-in apportionment necessary to satisfy the apportionment requirement," "what portion of the five-percent royalty rate in the iPIN license was attributable to the technology covered by those patents as opposed to the other provisions of the license," and "how the iPIN license could be useful in separating the value of the patented features from the value of the unpatented features in the accused [products] at issue in these cases." Slip op. at 45. The court decided that the iPIN license "is not highly comparable to the technology at issue in these cases, such that principles of apportionment are effectively baked into the iPIN license," and the court excluded Dr. Stec's testimony regarding the iPIN license. Id. at 46.

Regarding Dr. Stec's reliance on two prior jury verdicts for IOENGINE against Interactive Media Corp. ("IMC") and Imation Corp. that involved one of the patents in suit, Judge Bryson first observed that courts "have generally expressed concern with the prejudice that could result from introducing a prior verdict to the jury." Id. at 48. Moreover, Judge Bryson noted that Judge Andrews has "questioned the reliability of using jury verdicts to inform a hypothetical negotiation." Id. at 49. Turning to the verdicts at issue, Judge Bryson observed:

[T]he verdicts in the IMC and Imation cases were never tested in post-trial motions or on appeal, because those cases both settled before the court had an opportunity to rule on the post-trial motions and before any appeal f[ro]m the verdict was taken to the Federal Circuit. Moreover, in the Imation case, the defendants had specifically challenged the damages methodology of IOENGINE's expert in a post-trial motion for judgment as a matter of law, but in light of the settlement, that issue was never resolved. The fact that the verdicts in those cases were not further analyzed by the district court or the Federal Circuit render them less reliable evidence of the parties' positions at a hypothetical negotiation than might otherwise be the case. Moreover, as IOENGINE acknowledged during the oral argument on these motions, the juries in the IMC and Imation cases awarded damages that were different from (albeit close to) the amounts requested by IOENGINE. It is not clear what the precise basis was for the figures awarded by the juries in those cases, which further calls into question the reliability of the jury's awards in those cases as an indication of the outcome of a hypothetical negotiation in the cases at bar.

Slip op. at 49-50 (citation omitted). Accordingly, the court excluded Dr. Stec's testimony to the extent that it relied on the two jury verdicts because their prejudicial effects substantially outweighed their probative value.

The court further excluded Dr. Stec's reliance on the settlement agreements that IOENGINE entered into with IMC and Imation following the jury verdicts in those cases. Judge Bryson observed that Federal Circuit cases held that "litigation itself can skew the results of the hypothetical negotiation," so that "a licensing agreement entered into to resolv[e] an ongoing infringement claim is tainted by the coercive environment of patent litigation and is therefore generally unsuitable to prove a reasonable royalty." Slip op. at 51, 52 (quoting AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1336 (Fed. Cir. 2015); LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 77 (Fed. Cir. 2012)) (quotation marks omitted).

Similarly, Judge Bryson found here that "settlement agreements such as those in the IMC and Imation cases, which were reached after the juries had already obligated the defendants to pay a fixed amount of damages, do not reliably demonstrate the economic demand for the patented technology that was at issue in those lawsuits." Slip op. at 52. Moreover, the Federal Circuit has held that "prior litigation can be relevant to a reasonable royalty analysis when the hypothetical negotiation occurs shortly after the prior litigation." Slip op. at 53 (citing Applied Medical Resources Corp. v. U.S. Surgical Corp., 435 F.3d 1356, 1366 (Fed. Cir. 2006)). The IMC and Imation settlement agreements both occurred in 2017, after the hypothetical negotiation date in the current case, which was June 2015. Additionally, the court found that the admission of the settlement agreements at trial "would also present a significant risk of prejudice, for much the same reason that the admission of jury verdicts would be prejudicial," because "the jury will defer to the earlier result and thus will, effectively, decide a case on evidence not before it." Slip op. at 54 (quoting Coleman Motor Co. v. Chrysler Corp., 525 F.2d 1338, 1351 (3d Cir. 1975)). Accordingly, the court excluded Dr. Stec's testimony that relied on the settlement agreements because they lacked comparability to the hypothetical licenses and because their probative value would be substantially outweighed by the danger of unfair prejudice to the defendants.