This is one in a running series intended to highlight rulings and/or issues from the District Courts that may be relevant to the calculation of damages in intellectual property matters. While rulings from the District Courts may not establish general precedent outside of their particular district, they can involve thought provoking issues and can also reflect how the District Courts are interpreting and responding to rulings by the Court of Appeals for the Federal Circuit (“Federal Circuit”). The goal of this article is to provide a synopsis of particular issues, rulings, and cases.

Novel Approach to Determining RAND Royalty Rate

In Microsoft Corporation v. Motorola, Inc., et al. (“Microsoft v. Motorola”), a case from the Western District of Washington, Motorola filed a Daubert motion to exclude certain testimony from three of Microsoft’s expert witnesses. Motorola argued that the experts opined to a royalty rate that was derived by using an unsupported methodology. Motorola’s patents-at-issue were “essential” to certain standards established by the Institute of Electrical and Electronics Engineers (“IEEE”) and the International Telecommunication Union (“ITU”), organizations of which both Microsoft and Motorola are members. Such organizations often require or encourage their members to license standard essential patents on reasonable and non-discriminatory (“RAND”) terms to anyone who requests a license.

As is customary, Microsoft’s experts utilized the framework of a hypothetical negotiation to determine a reasonable royalty. However, they utilized two atypical assumptions in structuring the hypothetical negotiation. First, rather than assuming the hypothetical negotiation took place on or about the date of first infringement, they assumed that it would have occurred prior to the date when the standard was adopted. Second, rather than contemplating a bilateral negotiation between Microsoft and Motorola, they assumed a multilateral negotiation involving the full participation of standard essential patent holders and potential standards implementers.

Microsoft argued its framework addressed two key risks presented by licensing of standard essential patents, namely: 1) the “improper capture of the ‘hold-up’ value of the standard as the result of the patentee’s ability to leverage its monopoly over implementers of the standard; and 2) [the] stacking of royalties by many holders of essential patents resulting in unreasonable royalty burdens to implementers.”¹

Motorola countered by arguing that its agreements with IEEE and ITU clearly indicate that RAND license agreements are bilateral in nature, involving only the patentee and the implementer. Motorola also argued that industry participants and academics understand that a RAND license is the product of a bilateral negotiation and that Microsoft’s own experts have previously testified this to be the case.

The Court acknowledged that Microsoft’s proposed framework was not typical and that it has not been subjected to peer review and publication. However, the court indicated that “[w]here peer review and publication are absent, ‘the experts must explain precisely how they went about reaching their conclusions and point to some objective source – a learned treatise, the policy statement of a professional association, a published article in a reputable scientific journal, or the like – to show that they have followed the scientific evidence method, as it is practiced by (at least) a recognized minority of scientists in their field.’”²

The Court ultimately found that “Microsoft’s proposed framework reasonably relies upon and logically addresses widely acknowledged and published concerns of hold-up and stacking found in licensing standard essential patents.”³ And while Microsoft’s proposed framework is subject to criticism, the Court did not exclude the testimony of Microsoft’s experts, reasoning that issues raised by Motorola could be addressed at trial through cross examination.

Admissibility of Defendant’s Decision to Stop Commercialization of the Accused Product

In Monsanto Company and Monsanto Technology LLC v. E.I. Du Pont Nemours and Company et al. (“Monsanto v. DuPont”), a case from the Eastern District of Missouri, Monsanto accused DuPont of infringing one of its patents related to genetically modified (“GM”), herbicide-resistant soybeans. The accused activity occurred while DuPont was attempting to develop its herbicide-resistant soybeans, a process which can take years, if not decades, to ultimately result in a commercial product. At some point during the development process, DuPont stopped development and terminated its plan to commercialize the GM soybean. Monsanto sought reasonable royalty damages for DuPont’s infringing use of its patented technology.

DuPont requested the Courts approval to present evidence to the jury regarding its current lack of intent to commercialize the product. Monsanto was opposed to such information being presented to the jury. Monsanto argued that only DuPont’s intentions at the time of the hypothetical negotiation are relevant to assessing damages and not any subsequent decision to terminate the development/commercialization process.

The Court sided with Monsanto, finding that “Defendants’ present intentions concerning commercialization of [the accused] soybeans are irrelevant and inadmissible under Federal Rule of Evidence 402.”⁴ The Court reasoned that “any remote probative value of this evidence was greatly outweighed by the danger of confusing the jury, wasting time, and unfairly prejudicing Monsanto and would be excluded under Federal Rule of Evidence 403.” The Court did, however, allow DuPont to present evidence that no sales have occurred to date.

Post-Verdict Royalty Rate

In Soverain Software LLC v. J.C. Penney Corporation, Inc., et al., a case from the Eastern District of Texas, Soverain accused multiple defendants of infringing three of its patents that generally related to the use of shopping cart features and online statements in performing electronic commerce transactions over the internet. After a five-day trial, the jury found for Soverain and awarded damages of approximately $18 million.⁵ Both parties filed post-verdict motions, which included Soverain’s motion for post-verdict damages.

Soverain requested that the Court impose a post-judgment royalty rate that was quadruple the royalty rate implied by the jury verdict. Soverain argued that a higher royalty rate than that found by the jury was warranted since factors/circumstances considered in the hypothetical negotiation have changed. Soverain argued that in consideration of those changes, the implied royalty rate should be doubled. Moreover, Soverain requested that the royalty rate be doubled again based on defendants’ continued willful infringement.

The Court noted that Soverain’s expert utilized the “book of wisdom” and considered post-1998 evidence in arriving at his damages model. Moreover, this evidence was presented to and considered by the jury. As such, the Court found that the rate implied by the verdict already reflected the evidence of changed circumstances and consequently an adjustment based on this argument was not warranted.

The Court then considered the Read factors, which provide guidance in determining whether and how much damages should be enhanced in light of a defendant’s ongoing and willful infringement.6 After evaluating the Read factors, the Court determined that a 2.5x enhancement to the jury’s implied royalty was appropriate.

Appropriate Consideration of Acceptable, Non-Infringing Alternatives

In Carnegie Mellon University v. Marvell Technology Group, LTD, and Marvell Semiconductor, Inc. (“CMU v. Marvell”), a case from the Western District of Pennsylvania, Carnegie Mellon University (“CMU”) filed suit against defendants alleging infringement of its patents related to high density magnetic recording sequence detectors. CMU sought damages in the form of a reasonable royalty. During the course of the litigation, CMU filed a Daubert motion asking the Court to exclude the testimony of two witnesses, one a technical expert and the other a damages expert.

CMU argued that neither experts’ reports were reliable because they failed to analyze whether certain allegedly alternative technologies were, 1) available and/or 2) acceptable during the period of the alleged infringement.

Defendant’s countered, maintaining “that there is no requirement that the alternatives be ‘on the market’ to be considered ‘available.’”⁷ Rather, they argued that “the question of alternatives is more accurately stated as whether it ‘could have used, built, and/or implemented’ the alternatives.”⁸ With regard to acceptability, defendants argued that the alternatives considered by the witnesses address the key benefit of the patents, namely an improved signal-to-noise-ratio (“SNR”) gain.

In addressing the issue of availability, the Court cited the opinion in Mars, Inc., v. Coin Acceptors, Inc.,¹⁰ where the Federal Circuit found that “even though ‘[t]here was …no available and acceptable noninfringing alternative to which [the defendant] could have switched at the time of the hypothetical negotiation,’ the fact that there was a possibility that the defendant ‘could have come up with one’ was sufficient” since it was shown “that [defendant] had the ability, resources and desire to design around the [plaintiff’s] patents.”¹¹ Likewise, in the instant case, the Court found that “[d]espite the lack of evidence on ‘availability,’ the mere existence of [alternatives as proffered by defendants’ witnesses] is indicative that not only had others discovered different means of improving SNR gain, but that Marvell probably ‘could have come up with one’ as well.”¹²

With respect to acceptability, the Court acknowledges that defendants’ technical expert addressed the alleged key feature of the patents: improved SNR. Assuming improved SNR is a key characteristic, the Court found that the expert’s opinion showed that the “important properties” of the various alternatives were “effectively identical” to that of the patented technology. As such, the Court found, they would qualify as acceptable. Moreover, the Court found that the existence of noninfringing alternatives is a question of fact and should, therefore, not be addressed in a Daubert review.

CMU also challenged the damages expert’s testimony for failing to “price” the alleged alternatives in a manner that would enable him to properly compare the alternatives to the technology at issue. In making this argument, CMU pointed to an opinion in Grain Processing in which the Federal Circuit essentially said that the high cost of an alternative can render it “unavailable.”¹³

The Court found that “while availability is clearly affected by the price of the alternative technologies, the burden is not on Marvell to establish what CMU’s damages are; that burden lies with CMU.”¹⁴ Furthermore, considering that CMU’s position had effectively been that Marvell would be willing to pay almost any price to license the advantages resulting from CMU’s technology, the Court reasoned that it must be that the price of licensing an alternative would have been inconsequential to Marvell as well. As such, the Court denied CMU’s Daubert motion.

“Cap” on Reasonable Royalty Damages

In Ergotron, Inc., v. Rubbermaid Commercial Products, LLC, a case from the District Court of Minnesota, Ergotron, Inc. (“Ergotron”) filed suit against Rubbermaid Commercial Products, LLC (“Rubbermaid”), alleging infringement of a patent covering a lift system for a flat panel monitor and keyboard that is vertically adjustable and stores in a minimum profile.

Rubbermaid’s damages expert opined that damages should be calculated using a royalty rate of 0.4% of net sales, and in no event greater than 2.4% of net sales.¹⁵ The expert arrived at the 2.4% maximum royalty rate by comparing the estimated profit margin on the accused products (42.4%) with Rubbermaid’s target profit margin of 40%. As a reasonableness check, Rubbermaid’s expert also considered the cost of implementing a design around, the cost of which reflected a royalty rate of 1.0% to 1.6% of net sales.

Ergotron filed a Daubert motion requesting the Court exclude the testimony of Rubbermaid’s damages expert. Ergotron argued it is settled law that a defendant’s profit expectations and design around costs do not reflect an absolute ceiling on damages. As such, Ergotron contended that the methods employed by Rubbermaid’s expert were unreliable because they misapplied existing damages law.

The Court found that while Rubbermaid’s expert did repeatedly state that 2.4% would be a “cap” on the royalty rate, that conclusion was drawn not from a misapplication of the law, but rather from the expert’s analysis of the facts of the case. Specifically, the fact that Rubbermaid personnel were available to engineer a non-infringing alternative at a low cost led Rubbermaid’s expert to conclude that Rubbermaid would not agree to a royalty rate that would result in profits below the 40% target.

In denying the Daubert motion, the Court also stated that it is not improper for an expert to consider the profits of an infringer or the costs of non-infringing alternatives in determining a reasonable royalty, rather, it is endorsed.

Use of Infringer’s Selling Price in Calculating Lost Profits

In Illinois Tool Works, Inc., v. MOC Products Company, Inc., a case from the Southern District of California, MOC Products Company (“MOC”) filed a Daubert motion seeking to preclude Illinois Tool Works’ (“ITW’s”) expert from opining to lost profits damages in part because MOC claimed his damages calculation was based on an incorrect and unsound methodology.¹⁶

As the Court noted, “[g]enerally speaking, ‘[t]he measure of lost profits is the difference between the patent owner’s cost of production and the price at which the patent owner would have sold the product.’”¹⁷ In performing his calculation, ITW’s expert used MOC’s selling price less ITW’s cost of production/sales. MOC argued that it was improper to use MOC’s price with ITW’s costs and that doing so resulted in lost profits damages that were overstated and unreliable.

ITW argued that the Daubert motion should be denied since MOC could cross-examine that witness with regard to all of the Panduit factors including his use of the ITW’s selling price.

The Court researched the topic and while it found no case law supporting the methodology of using the infringer’s price and the patentee’s cost, it also found no case law discrediting the method. As such, the Court doubted that methodology was so unreliable as to warrant exclusion. Moreover, the Court emphasized that “the measure of lost profits damages need only be a ‘reasonable approximation.’”18 As such, the Court denied MOC’s Daubert motion.

1 Microsoft Corporation v. Motorola, Inc., et al., No. 10-1823 (W.D. Wash. Oct. 22, 2012)
(order denying motions to exclude testimony), p. 21-22.
2 Id. at p. 23.
3 Id. at p. 25.
4 Monsanto Company and Monsanto Technology LLC v. E.I. Du Pont Nemours and Company et al., No. 09-686 (E.D. Mo. July 11, 2012) (memorandum and order), p. 2.
5 Soverain Software LLC v. J.C. Penney Corporation, Inc., et al., No. 09-274 (E.D. Tex. August 09, 2012) (memorandum opinion and order), p. 3.
6 Read Corp. v. Portec. Inc., 970 F.2d 816 (Fed. Cir. 1992).
7 Carnegie Mellon University v. Marvell Technology Group, LTD, et al., No. 09-290, (W.D. Pa. August 24, 2012) (memorandum opinion), p. 6.
8 Id. (emphasis added in brief).
9 Marvell maintained that CMU’s position has been that the key benefit of its patents is an improved SNR gain.
10 Mars, Inc., v. Coin Acceptors, Inc., 527 F.3d 1359, 1373 (Fed. Cir. 2008).
11 Carnegie Mellon University v. Marvell Technology Group, LTD, et al., No. 09-290, (W.D. Pa. August 24, 2012) (memorandum opinion), p. 7. Citing Mars, Inc., v. Coin Acceptors, Inc.,
527 F.3d 1359, 1373 (Fed. Cir. 2008).
12 Carnegie Mellon University v. Marvell Technology Group, LTD, et al., No. 09-290, (W.D. Pa. August 24, 2012) (memorandum opinion), p. 7.
13 Grain Processing Corp., v. American Maize-Products Co., 183 F.3d 1341, 1354 (Fed. Cir. 1999).
14 Carnegie Mellon University v. Marvell Technology Group, LTD, et al., No. 09-290, (W.D. Pa. August 24, 2012) (memorandum opinion), p. 9. Citing Lucent Techs., Inc. v. Gateway, Inc.,
580 F.3d 1301, 1324 (Fed. Cir. 2009).
15 Ergotron, Inc., v. Rubbermaid Commercial Products, LLC, No. 10-2010 (D. Minn. August 28, 2012) (memorandum opinion and order), p. 6.
16 Illinois Tool Works, Inc., v. MOC Products Company, Inc., No. 09-1887, (S.D. Cal. August 17, 2012) (order on motions in limine), p. 7. More generally, MOC sought to preclude ITW
from seeking lost profits damages at trial.
17 Illinois Tool Works, Inc., v. MOC Products Company, Inc., No. 09-1887, (S.D. Cal. August 17, 2012) (order on motions in limine), p. 13. Citing Beckon Marine, Inc. v. NFM, Inc., 2007
U.S. Dist. LEXIS 21916, at *7 (W.D. Wash. Mar. 27, 2007) (citing Kori Corp. v. Wilco Marsh Buggies & Draglines, Inc., 761 F.2d 649, 655 (Fed. Cir. 1985)).
18 Illinois Tool Works, Inc., v. MOC Products Company, Inc., No. 09-1887, (S.D. Cal. August 17, 2012) (order on motions in limine), p. 13. Citing Kori Corp., 761 F.2d. at 655.