NDCA addresses lump sum/EMVR and comparable licenses


On September 6, 2013, Magistrate Judge Grewal of the Northern District of California issued an opinion in HTC Corp. v. Technology Properties Ltd., Case No. 5:08-cv-00882 PSG (Doc. No. 563), addressing a Daubert motion filed on the eve of trial to strike the patentee's expert's damages testimony. (Note the parties are reversed from the standard order: HTC was accused of infringement, and TPL was the patentee.) HTC argued that TPL's damages expert (Dr. Stephen Prowse) had made two errors: (1) he used a lump sum royalty to avoid the EMVR; and (2) the license agreements on which he relied were not comparable. The court denied the motion. At the outset, Judge Grewal made a couple interesting comments about the state of Daubert motions and evolving damages theories:

Another patent case on the eve of trial, another Daubert motion to strike a patent damages expert's testimony. The undersigned only recently observed that such motions have become a routine affair in patent litigation.[Footnote 1 see below] And yet, as routine as the motion has become, skilled experts continue to fashion new theories prompting additional lines of attacks. In short, no two motions are quite the same.

Slip op. at 1 (citing in footnote 1: Dynetix Design Solutions Inc. v. Synopsys Inc., 5:11-cv-05973-PSG (N.D. Cal. Aug. 22, 2013) (Doc. No. 564)).

The court noted that the patentee (TPL) "seize[d] upon a particularly interesting section" of LaserDynamics in which the court suggested "that in certain cases, the record might support a relatively straightforward way to avoid the restrictions of the entire market value rule in a Section 284 reasonable royalty analysis: a lump sum payment." Slip op. at 2. Dr. Prowse examined the 100 or so licenses entered into by TPL for the patents-in-suit. He offered the opinion that HTC, like the licensees in those other agreements, would have agreed to a lump sum payment. The court described HTC's argument as follows:

HTC nevertheless cries foul. The heart of HTC's complaint is that, in calculating the value the lump sum, Dr. Prowse returns to the entire revenue of its accused mobile phones for his estimate even as he acknowledges there is no evidence that any of claimed inventions is the basis of demand for the phones. And thus, says HTC, Dr. Prowse's professed reliance on a lump-sum structure is nothing more than a ruse to avoid the entire market value rule ("EMVR") and the Federal Circuit's increasingly demanding standards surrounding it. HTC separately challenges Dr. Prowse's efforts to "tier" the existing TPL licenses to weigh what HTC would have paid here in light of the assumption in any hypothetical negotiation that the patents-in-suit are valid and infringed.
With little to guide its analysis beyond the single sentence in LaserDynamics, the court is not persuaded that Dr. Prowse's analysis is so methodologically flawed that it must be kept from the jury.
Here's why. Lump sums are one species of the broader genus of reasonable royalties, running royalties being another. Depending on the certainty of the market opportunity, the cash constraints of the licensee, the licensor's appetite for risk and superior insight into the utility of the patented invention, the parties' competitive posture, and undoubtedly other factors, a lump sum structure might better reflect what the hypothetical negotiation would produce. Especially where, as here and in LaserDynamics, the patentee itself consistently and regularly negotiated lump sum payments with its licensees, there is even more reason to believe that the parties would have agreed to a lump sum to allow the licensee to infringe.[footnote 6 citing Lucent where the court rejected a lump sum award in the absence of comparable lump sum licenses to the patents-in-suit].

Slip op. at 3 (footnote 5 omitted).

The court next turned to how Dr. Prowse had arrived at his lump sum number. According to the court, Prowse reasoned that, when TPL and its licensees entered into a deal, they would estimate the anticipated revenue of the entire licensed product in arriving at a lump sum number. The court stated, with this evidence in the record, it could not hold that Dr. Prowse's estimate was so unreliable as to violate FRE 702. The court also cited Lucent for the proposition that an expert may opine on the magnitude of the lump sum payment by estimating total royalty based on a running royalty on the accused product as a whole. (Citing Lucent, 580 F.3d at 1327.) The court also opined that the Federal Circuit has not required EMVR to be satisfied in such a case.

Finally, the court cited evidence in the record that TPL and its licensees did enter into lump sum licenses where the amount was estimated from total sales. Slip op. at 4 (see footnote 9: "The court appreciates that LaserDynamics appeared to limit its endorsement of lump sums to those not calculated as a percentage of any component or product. LaserDynamics, 694 F.3d at 70. But the Circuit did not retreat from its broader suggestion in Lucent, and nothing else suggests that the Circuit would not further endorse, lump sums calculated on such a base where as here, the record includes real world evidence of precisely this methodology."). Second, the court noted that TPL could not use licenses that "bear little resemblance to the hypothetical license in terms of patents licensed and field of use." Id.

The court also discussed the alleged comparability of the proferred licenses:

While HTC raised hackles about the licenses TPL relies on, the present situation is hardly analogous to the circumstances in Lucent and other recent cases before the Circuit. For example, in Lucent, there was no attempt to compare the subject matter of the patents licensed in the other agreements. Here, there is no dispute that while the other agreement did license broader rights, those rights included the very same patents asserted against HTC. The licensor was none other the TPL, the same licensor here. While the other agreements did involve broader geographic rights than just those of the United States, so long as this broader scope is accounted for, the agreements may still be properly considered. Perhaps this explains why HTC's own damages expert agreed that the agreements were comparable.

Slip op. at 4 (footnotes omitted).