First published in LES Insights
A Delaware court recently excluded an expert’s damages opinion estimating a reasonable royalty based on generic statistics rather than the specific facts of the case. Though the expert considered the royalty rate of a license in a prior settlement agreement for the asserted patent, the court faulted his opinion on translating the royalty rate in that past license his opinion on the amount of a reasonable royalty in the present case for failing to consider the particular facts of the present case, such as the nature of the asserted patent, the accused products, and the litigation strategy of the parties.
For an expert witnesses’ testimony to be admissible in Federal district courts, the expert must be qualified, and his or her opinion must be both reliable and supported by the facts of the case. Recently, in MAZ Encryption Technologies LLC v. Blackberry Corp., No. 13-304-LPS, Judge Stark of the United States District Court for the District of Delaware found an expert witness’ opinion on a reasonable royalty for patent infringement damages to be inadmissible. The expert relied on an amount for which the patent owner agreed to settle a prior litigation. But in using the amount of that prior settlement to estimate a reasonable royalty rate for the litigation based on a hypothetical negotiation taking place before infringement, the expert had based his estimate of the likelihood of liability for patent infringement only on a general statistic of litigation success rates by patent owners in the District of Delaware. The district court faulted this approach for failing to consider the particular facts of the case, such as the nature of the asserted patent, the accused products, and the litigation strategy of the parties.
Plaintiff MAZ Encryption Technologies LLC sued Defendant Blackberry Corporation, alleging infringement of a single patent. Plaintiff offered an expert report estimating its damages in the case under a reasonable royalty theory. A reasonable royalty aims to estimate a royalty rate that the parties would have agreed to had they successfully negotiated an agreement just before infringement began. In forming his opinion, the plaintiff’s expert relied on a previous license agreement for the infringed patent that was made in the context of settling a litigation. In the expert’s opinion, the damages amount of this prior settlement was lower than a reasonable royalty rate because at the time of settlement, issues of validity and infringement are in dispute. In contrast, in the "hypothetical negotiation" used in a damages analysis, the parties must assume the patent is valid and infringed. Thus, the patentee occupies a better bargaining position in the latter case. In order to translate this rate reached during settlement into a rate the same parties would have arrived at just before infringement began, the expert factored in the likelihood of liability for the defendant at that time. Specifically, he opined that if "Settlement Value = Likelihood of Liability * Expected Damages," then "Expected Damages = Settlement Value/Likelihood of Liability."
The plaintiff’s expert applied a 40% likelihood of liability based on a study of success rates of patent suits in the District of Delaware. Based in part on his reliance on the 40% estimate, Defendant moved to exclude the entirety of the plaintiff’s expert’s opinions as not reliable and not sufficiently tied to the facts of the case.
The MAZ Encryption Decision
The court rejected the expert’s reasonable royalty opinions for failing to consider facts relating to the merits of the plaintiff’s case. In particular, the court faulted the expert’s reliance on the 40% rate of the generic study for failing to consider the nature of the asserted patent, the accused products, and the litigation strategy of the parties. The court compared the expert’s approach to the "25%" rule-of-thumb license rate rejected by the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp. (Fed. Cir. 2011). Quoting the Federal Circuit in that case, the court criticized Plaintiff’s expert for failing to say anything about the particular technology, industry, or parties in the case. In light of these failures, the court struck the criticized portion of the expert’s report. But though Defendants asked the court to strike the entire opinion, the court allowed the possibility of an amended report correcting the analysis, and asked the parties to confer and provide proposals accordingly.
Strategy and Conclusion
This decision illustrates the value in having a proposed damages award supported by reliable methodology and having the entire analysis consider the particular facts of the case rather than generic statistics.
The decision can be found here.