Federal Circuit direction relating to settlement agreements, jury instructions, and verdict forms provides valuable insight for damages experts and lawyers.

September 27, 2017

Courts have often found settlement agreements to be less useful than traditional license agreements in evaluating comparability for purposes of determining a reasonable royalty. In Prism v. Sprint, the Federal Circuit discussed the need to assess the probative value and prejudicial implications of the Rule 403 balance.[1]

The Federal Circuit also discussed and acknowledged the connection between nonsettlement patent license agreements and the potential for litigation, given that the threat of litigation looms over all license agreements. Finally, the Court addressed ambiguity related to the jury’s damages award and whether the award provided compensation for only past damages or both past and future damages.

Background

On April 4, 2012, Prism filed suit against Sprint in the District of Nebraska, alleging that Sprint infringed two of its patents: U.S. Patent Nos. 8,127,345 (“the ’345 patent”) and 7,290,288 (“the ’288 patent”). The suit was amended in March 2013 to include infringement contentions with regard to U.S. Patent 8,387,155 (“the ’155 patent”), a continuation of the applications that resulted in the ’288 and ’345 patents. In March 2014, Prism withdrew its assertions regarding the ’288 patent. Generally, the technology at issue related to methods and systems for managing access to protected information provided over certain networks.

On the same day that Prism filed its initial suit against Sprint, Prism also filed separate suits against four other wireless service providers, including AT&T Mobility (“AT&T”). The district court consolidated some of the pretrial proceedings in the five separate suits but tried the cases separately. The case against AT&T went to trial in October 2014. On the last day of trial, just prior to closing arguments, Prism and AT&T entered into a settlement agreement (“the AT&T Settlement Agreement”), and the case was dismissed.

Sprint filed a motion asking the district court to refuse the admission of the AT&T Settlement Agreement into evidence. Sprint argued that the settlement agreement was not comparable and that it would be unfairly prejudicial under Federal Rule of Evidence 403 (“Rule 403”). The district court denied the motion.

In June 2015, a jury found that Sprint infringed claims of both the ’345 and the ’155 patents, and awarded Prism reasonable royalty damages amounting to $30 million. Both parties subsequently filed posttrial motions. Sprint moved for judgment as a matter of law and a new trial, while Prism moved for additional damages and an ongoing royalty. The district court denied both motions.

Significant Damages Issues Addressed on Appeal

While a number of legal issues were considered by the Federal Circuit on appeal, two damages issues that were addressed in particular may offer guidance for future cases. The first issue relates to Sprint’s appeal of the district court’s admission of the AT&T Settlement Agreement. The second issue relates to Prism’s appeal of the district court’s denial of an accounting and ongoing royalties for Sprint’s infringement beyond the damages period considered at trial (through 2014).

Admission of the AT&T Settlement Agreement

Per Rule 403, a district court may exclude evidence if its probative value is substantially outweighed by any one of a number of dangers, including (as Sprint alleged in this matter) undue prejudice. In considering Sprint’s argument, the Federal Circuit recognized that under certain circumstances, it has ruled in favor of the admissibility of settlement agreements in patent suits (e.g., AstraZeneca v. Apotex,[2] LaserDynamics v. Quanta,[3] ResQNet v. Lansa[4]). Moreover, it reasoned that in contemplating the admission of a settlement agreement, one must consider and balance the various reasons that a particular settlement may or may not be probative in valuing the patented technology.

On the one hand, the Federal Circuit reasoned that a settlement agreement could be probative of the technology’s value, particularly if that agreement covered the same technology as the instant action. It reasoned that “a settlement can reflect the assessment by interested and adversarial parties of the range of plausible litigation outcomes on that very issue of valuation.” Furthermore, it reasoned that the further along in the litigation process the settlement was reached, the more the issues would have been explored and tested, thereby allowing for a more informed and instructive settlement.

On the other hand, the Federal Circuit acknowledged that there exist reasons why a settlement may reflect a value that is too low or too high relative to the value of the technology at issue. For example, if the settlement value involves a discount related to the probability of losing on validity or infringement, the value would be too low given that a hypothetical negotiation construct assumes the asserted patents are valid and infringed. A settlement could also undervalue the technology if the patent owner chose to accept too little in order to avoid further litigation costs that would otherwise be unrecoverable.

Similarly, a settlement could reflect a value that was too high relative to the value of the technology at issue if the prior suit involved the risk of enhanced damages and that risk was reflected in the settlement. The avoidance of future litigation costs could also be a reason for the defendant in the prior matter to have agreed to a settlement value that exceeded the value of the technology.

The Federal Circuit even went a step further, and for the first time acknowledged the “inherent connection between patent licenses and at least the potential for litigation.” The Federal Circuit explained:

“We have frequently recognized that a (non-exclusive) license to practice a patent is in substance nothing but a covenant not to sue; what such a license is, at its core, is an elimination of the potential for litigation. Although the potential for litigation therefore must loom over patent licenses generally, including those signed without any suit ever being filed, Sprint has not contested the long accepted proposition that a ‘party may use the royalty rate from sufficiently comparable licenses.’ But as a logical matter, the mere filing of a complaint – shifting from potential to actual litigation – does not automatically turn the prejudice side of Rule 403 balance into one that substantially outweighs the probativeness side.”

With regard to the AT&T Settlement Agreement at issue, the Federal Circuit found that the district court had adequate basis for admitting it into evidence. It reasoned that although the agreement covered the patents in suit as well as additional patents, Prism provided evidence and expert testimony that reasonably addressed what bearing the terms of the AT&T Settlement Agreement had on the value of the patents in suit in the matter with Sprint. Furthermore, it reasoned that because the settlement was entered into just prior to closing arguments in the trial, “the record was fully developed and thoroughly tested in the adversarial process, enhancing the reliability of the basis on which Prism and AT&T were assessing the likely outcome.“ Additionally, the court noted that the concern about litigation-cost avoidance affecting the settlement was diminished because a very large portion of the costs had been incurred by the time the parties reached the settlement.

Denial of an accounting and ongoing royalties

Prism also appealed the district court’s denial of its motion requesting an accounting of ongoing royalties covering infringement by Sprint beyond the date of trial. The question on the jury instructions and verdict forms was “What amount of reasonable royalty damages, if any, do you find that Prism has proven by a greater weight of the evidence is adequate to compensate Prism for Sprint’s infringement of U.S. Patent No. 8,387,155 and/or U.S. Patent No. 8,127,345?”[5]

Prism argued that the jury interpreted this to cover damages only for past infringement and not for future infringement. Moreover, Prism argued that the jury arrived at this interpretation as the result of the district court’s response to a jury question. The jury asked, “Does Royalty Payment/damages now give Sprint the license to 4 Asserted Patents?” The district court responded “no” to this question.

The Federal Circuit found that it had no basis for overturning the district court’s ruling. With regard to the response to the jury’s question, the Federal Circuit found the related discussion in the record to be “not unequivocal.” It recognized the uncertainty in the meaning of the question, but posited that the jury may have been attempting to clarify whether four patents were at issue as opposed to just two. Additionally, it pointed to the fact that Prism’s damages expert testified that the value of the patents could be based on Sprint’s expected cost savings from avoiding the costs associated with implementing an alternative. As such, the Federal Circuit reasoned that the jury could have considered the significant initial capital costs associated with the alternative to reflect adequate compensation for a fully paid license.

Key Takeaways for Attorneys and Damages Experts

The Federal Circuit’s opinion in Prism v. Sprint touched on a number of important issues relating to damages. Attorneys and damages experts should take away these key points from the ruling in this case:

  1. In considering whether to use a settlement agreement as a comparable agreement for determining a reasonable royalty, one must consider and balance the various reasons why the settlement may or may not be probative in valuing the patented technology

  2. The Federal Circuit has acknowledged the “inherent connection” between a settlement agreement and an agreement negotiated outside the context of litigation, recognizing that the potential for litigation looms over all patent licenses, including those signed without any suit ever being filed

  3. It is important to provide sufficient guidance and clarity in both jury instructions and the verdict form to ensure the intent of the jury’s award is properly communicated to the court. It is important to clearly understand the jury’s intent with regard to the time period for which the damages award provides compensation. Additionally, it is important to understand whether the jury’s award is intended to be a paid-in-full royalty or if it only considers damages though trial

  1. Prism Technologies LLC v. Sprint Spectrum L.P.,849 F.3d 1360 (Fed. Cir. 2017).
  2. AstraZeneca AB v. Apotex Corp. United States District Court for the Southern District of New York. April 7, 2015.
  3. LaserDynamics, Inc. v. Quanta Computer, Inc., United States Court of Appeals for the Federal Circuit, August 30, 2012.
  4. ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. February 5, 2010).
  5. Prism Technologies, LLC v. Sprint Spectrum L.P., D/B/A Sprint PCSJury Form, 8:12CV123 filed June 23, 2015.