Expert Patent Damages Opinions Hit the Spotlight as Federal Circuit Scuttles Two Patent Infringement Verdicts Worth $1.2 Billion in One Day
In two recent decisions, both issued on February 4, 2022, the United States Court of Appeals for the Federal Circuit (the “CAFC”) erased two huge patent damages awards because the underlying expert opinion on damages was untethered to the specific facts of each case. In Apple Inc. v. Wi-LAN Inc., 25 F.4th 960 (Fed. Cir. 2022) and California Inst. of Tech. v. Broadcom Ltd., 25 F.4th 976 (Fed. Cir. 2022), the court vacated verdicts of $85 million and $1.1 billion, respectively, and remanded both cases for new trials on damages. Plaintiffs, and their respective experts, should heed this warning or risk a similar fate.
Background on the Patent Damages Analysis
As a brief reminder, the statute governing patent damages is 35 U.S.C. § 284. Under § 284, when a patent is found valid, enforceable, and infringed, the patent holder is entitled to “damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs fixed by the court.” Lost profits are sometimes available, but patent holders far more commonly pursue reasonable royalties from accused infringers.
Reasonable royalties serve to fairly compensate the patentee for the use of the invention by an infringer, and can be calculated in several ways. Often they are determined by considering the results of a “hypothetical negotiation” between the patentee and the accused infringer, at the commencement of infringement. This artificial construct turns back the clock in order to derive the royalty rate the parties would have negotiated to license the patent(s) before any allegedly infringing activity took place. In analyzing a hypothetical negotiation, experts and courts look to the fifteen Georgia-Pacific factors, used since 1970. Despite the Federal Circuit’s admonishment that it has never described the fifteen factors as “a talisman for royalty rate calculations,” and that not all of them are applicable in every situation, they are often used as the governing framework in a reasonable royalty analysis. Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1230 (Fed. Cir. 2014).
A growing body of case law is elucidating the misapplication of these factors, and failure to relate them to the specific facts of the case. The Federal Circuit’s most recent decisions in this line of cases, outlined below, continue this trend and highlight certain patent damages-related pitfalls that plaintiffs should avoid.
Apple v. Wi-LAN
In the latest development of the tortured procedural history in the long dispute between Wi-LAN and Apple, Chief Circuit Judge Kimberly Moore penned a panel decision concluding that Wi-LAN’s damages expert’s methodology in the second damages trial between the parties was flawed. As a result, the district court abused its discretion by denying Apple’s motion for a new trial. This ruling sent the case back to district court for a third trial on damages.
Apple first sued Wi-LAN in 2014 seeking a declaratory judgment that it did not infringe Wi-LAN’s LTE standard essential patents. Wi-LAN countered with claims of infringement and sought resulting damages. A jury ultimately returned a verdict of $145.1 million in favor of Wi-LAN, after which Apple moved for judgment as a matter of law (JMOL) and asked for a new damages trial or, alternatively, a remittitur. The district court granted Apple’s motion on damages—because of flawed expert testimony—and gave Wi-LAN the options of a remittitur to $10 million or a new trial. Wi-LAN chose to have a new trial.
At the second damages trial, the jury awarded Wi-LAN reduced damages of $85.23 million. Apple again moved for JMOL, arguing that Wi-LAN’s damages expert failed to properly apportion the comparable licenses to reflect the value of the asserted patents. The district court denied Apple’s motion and Apple appealed.
Expert Methodology
In determining a reasonable royalty, parties often rely on comparable license agreements. But the law is clear that, when doing so, they must “account for differences in the technologies and economic circumstances of the contracting parties.” VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1330 (Fed. Cir. 2014). Wi-LAN’s damages expert, David Kennedy, culled more than 150 Wi-Lan license agreements down to just three that formed the basis of his opinion. He selected these three licenses because they: (1) involved phones as licensed products; (2) became effective in 2013 or later; (3) licensed patents covering LTE or related technology; and (4) were executed after the asserted patents issued.
Mr. Kennedy then attempted to adjust for differences between those licenses and the one that would have resulted from the parties’ hypothetical negotiation. He noted that the most valuable assets in a portfolio typically drive the licensing rate and that the others are included for a nominal upcharge. He likened this to throwing chaff in with the wheat. He then opined that Apple’s continued use of the technology after the patents were asserted against it was a clear indication of their value to Apple.
Federal Circuit Opinion
The Federal Circuit found several fatal flaws in the expert’s opinion, in the main because it concluded that the opinion was untethered to the facts of the case. Despite Mr. Kennedy’s attempt to adjust for differences in the comparable licenses, he failed to account for the inclusion of non-asserted patents. He also failed to apportion the royalty specifically and solely to the asserted patents. For these reasons, the Federal Circuit concluded his ultimate opinion was unreliable and, consequently, the jury’s reliance upon it was improper. The court also emphasized that Mr. Kennedy had opined, without support, that the asserted patents were “key” and attempted to capture the same rates as the comparable licenses without further analysis.
The Federal Circuit further noted that there was no evidence that the asserted patents in fact were considered “key,” and also took issue with the expert’s failure to consider other non-asserted patents in the comparable licenses. The court deemed this failure “troubling.” For all of these reasons, the court tossed the damages award as relying on an expert analysis that was unreliable.
Caltech v. Broadcom and Apple
In the second case, California Inst. of Tech. v. Broadcom Ltd., the Federal Circuit affirmed a Central District of California jury’s findings on invalidity and infringement. But, like the result in the Apple v. Wi-LAN case, the court vacated the jury’s $1.1 billion damages award to Cal Tech because of a flawed damages methodology and remanded the case for a new trial on damages.
In January 2020, a Central District of California jury found that Broadcom and Apple infringed three Caltech data transmission patents via their sale of Wi-Fi chips and awarded Caltech a combined $1.1 Billion in damages, with $837 million against Apple and $270 million against Broadcom. Broadcom and Apple appealed.
Expert Methodology
Caltech’s damages experts presented a two-tier reasonable royalty model based on hypothetical negotiations with Broadcom and Apple. The experts opined that the parties would have engaged in two simultaneous hypothetical negotiations, one with Broadcom at the “chip level” and one with Apple at the “device level.” The hypothetical negotiations attempted to exclude from the scope of the negotiation those Broadcom chips incorporated into Apple’s devices, on the theory that Apple would have been negotiating a separate license for those chips. Apple and Broadcom argued that the theory improperly advanced two different hypothetical negotiations for the same products—only at different points in the supply chain. Over these objections, the district court allowed the theory to go to the jury, which reached the massive award assessed by the Federal Circuit.
Federal Circuit Opinion
The Federal Circuit agreed with defendants, and found the experts’ opinions to be legally unsupportable. There was no evidence showing that companies similarly situated to Broadcom and Apple would engage in separate negotiations. Nor were there any additional facts in the record that would justify different treatment of the same products at different points in the supply chain. In other words, the court concluded that there was little evidence to support the experts’ opinion. Notably, the Federal Circuit found that the presence of two separate accused infringers in the same suit did not support treating the same accused products differently. This all meant that the experts’ opinions were not sufficiently tied to the facts in the case to reliably support the jury’s damages award.
The court ultimately disagreed that the Broadcom and Apple products could be valued differently based solely on their different respective level in the supply chain. To agree with this premise would ignore established precedent that, in the absence of a compelling showing otherwise, a higher royalty is not available for the same device at a different point in the supply chain. The Federal Circuit also found nothing in the record to suggest that Broadcom and Apple would have been willing to negotiate in the artificial two-tiered way used by the experts and not in the more conventional way parties typically negotiate a single license for the same products.
Conclusion
Both of these decisions emphatically show that an expert’s opinion must be sufficiently tied to the facts of a case to be admissible, and that the Federal Circuit is not shy in erasing an award of damages based on flawed expert methodology. In particular, these cases edify that any reasonable royalty analysis should account for differences in comparable licenses to the hypothetical one between the parties, and explain how the facts support divergence from established norms, if any. In short, the expert’s opinion must be closely tied to the specific facts, including the patents, products at issue, and parties. It will be interesting to see how each of the patent holders in these high-profile cases shift their approach on remand.
To learn more from the Mintz IP team, follow us on LinkedIn and check out our Exclusive Rights podcast.
Authors
Andrew DeVoogd
