The Eastern District of Texas, in Metaswitch Networks Ltd. v. Genband US LLC, Case No. 2:14-cv-00744 (Judge Payne) (March 5, 2016), addressed defendant Genband's Daubert motion seeking to strike plaintiff's expert Mr. Sims’ opinions relating to apportionment, royalty base calculation, and the application of the "analytical approach." The court concluded that Mr. Sims' opinions were reliable under FRE 702 and thus, denied Genband's Daubert motion.
The court rejected Genband's challenge that Mr. Sims failed to apportion his damages analysis to encompass the incremental value of the patented invention. Mr. Sims' analysis used the difference between the cost of practicing the patent and the cost of transitioning to the non-infringing alternative. Genband argued that this calculation overstated the incremental value of the patent because it also included the value of unpatented features. The court concluded that comparing the cost of the patented invention to the cost of the next best non-infringing alternative was a reliable measure of the patent's incremental value. The court further held that the additional benefits obtained from switching to the patented invention "does not mean that this methodology incorporates the value of unpatented features." Slip op. at 5.
Royalty Base Determination
The court also rejected Genband's two challenges to Mr. Sims' royalty base calculation. First, Genband argued that Mr. Sims' royalty base calculation improperly included non-infringing products. The court noted that Mr. Sims had cited to evidence noting that the purported cost benefits were enjoyed by all products included in the royalty base. In contrast, Genband did not cite any technical opinion disputing this assertion. Accordingly, the court concluded that Mr. Sims' selection of a royalty base was rooted in evidence and economic reasoning, and thus, reliable. The court explained that whether the accused products infringe is a fact dispute and not a Daubert issue.
Second, Genband argued that Mr. Sims inappropriately included allegedly infringing products sold by a third party. In response, Metaswitch argued that the sale of these products by a third party may be attributed to Genband under a direct infringement or induced infringement theory. The court concluded that Mr. Sims' inclusion of these products in his royalty base did not violate Rule 702. Again, the court noted that the issue of whether Genband infringes, directly or indirectly, with respect to the third party sales is a fact issue and not a Daubert issue.
Genband moved to strike Mr. Sims' opinions regarding his reasonable royalty calculation based on the "analytical approach.” Mr. Sims characterized the analytical approach as the difference between the patented product and the "standard industry profits." Genband argued that Mr. Sims' analysis was flawed because it used a specific, unaccused product—and not the standard industry profits—as the point of comparison for the analytical approach. In support of this argument, Genband cited Mr. Sims own characterization of the analytical approach as well as the references to "industry standard profit" in TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 899 (Fed. Cir. 1986). The court refused to strike Mr. Sims' opinions, reasoning that the comparison to a specific, unaccused product did not render Mr. Sims' calculation unreliable: "So long as the comparison isolates the value of the patented features—and no more—it is immaterial whether the profitability of a specific product or of an industry is used." Slip op. at 10. Relatedly, the court noted that the parties had not identified any differences between the compared products that improperly inflated the patent's value.
Finally, the court refused to strike Mr. Sims' reasonably royalty calculation based on the analytical approach, merely because it resulted in a patent valuation equal to 8% of the accused products' total revenue.