First published in LES Insights

A California district court excluded an expert's opinion of a reasonable royalty rate from being considered as evidence at trial because the expert calculated the rate based on royalty rates in prior license agreements having a broader scope, covering technologies well beyond the asserted standard-essential patent. The prior licenses covered all standard essential patents owned by the companies to those agreements, and the court found that the expert had made an implausible and unjustified assumption by attributing the entire value of those licenses to the patent-in-suit without accounting for the value of the other standard-essential patents licensed in the prior agreements.

Courts have made "reasonable royalty" rate determinations in patent-infringement suits for decades, most often under the framework used in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). New challenges have emerged in recent years as courts tried to define "fair, reasonable, and non-discriminatory" (FRAND) royalty rates for standard-essential patents (SEPs)—patents covering inventions necessarily used to comply with a technical standard. While issues such as patent holdup and royalty stacking can lead to unique royalty-rate considerations for SEPs, courts have still applied traditional principles in their analyses. Recently, in Golden Bridge Tech., Inc. v. Apple Inc.,1 (N.D. Cal. June 1, 2014), the Northern District of California excluded an expert's reasonable royalty rate calculated from prior license agreements because the expert failed to account for the broader scope of those prior licenses, which went well beyond the asserted standard-essential patent. 

Background

Golden Bridge Technology ("GBT") sued Apple in the Northern District of California, alleging that the GSM models of Apple's iPhone 4, 4S, and 5, and second-generation iPads infringed its U.S. Patent No. 6,075,793 ("the '793 patent"). GBT deemed the '793 patent as essential to the "3GPP" or "WCDMA" standard and committed to license it on FRAND terms.

GBT's damages expert, Karl Schulze, first opined that in a hypothetical license negotiation, the parties would have agreed to an uncapped percentage of the sales price of each and every iPhone 4, 4S, and 5, and second-generation iPad. The court excluded this opinion from being considered as evidence of a reasonable royalty, citing flaws in choosing a proper royalty base and calculating a FRAND royalty rate. According to the court, Schulze failed to allocate value between the patented and nonpatented features in the accused products and failed to rely on real-world industry practices.

As permitted by the court, GBT submitted a new expert report one week later. In the new report, Schulze abandoned his earlier "entire market value" theory, instead advocating a per-unit royalty of $0.0869. Schulze based this royalty largely on his analysis of portfolio licenses Apple signed with Ericsson and Nokia. These licenses covered "all standards essential patents" owned by the companies, meaning the patent-in-suit represented only a small subset of the standards covered by those licenses. Apple therefore moved to exclude Schulze's revised report.

The Golden Bridge Decision

On the night before trial, the court excluded Schulze from testifying, agreeing with Apple that Schulze unjustifiably allocated the entire value of the Ericsson and Nokia licenses to the technology covered by the patent-in-suit. As the court observed, the license agreements covered a wide array of technologies in addition to WCDMA, such as Wi-Fi, GSM, and LTE. In his deposition, Schulze admitted that he attributed no value to these other standards, contending that their value would have been "marginal." The court emphasized, however, that Schulze's expert report contained no evidence supporting his contention. Thus, ultimately, because Schulze attributed the entire value of the licenses to the patent-in-suit without accounting for the other standard-essential patents, the court excluded his royalty rate as an implausible and unjustified assumption.

Strategy and Conclusion

This case illustrates the importance in (1) using prior license agreements of similar scope to justify a proposed royalty rate, (2) allocating value in the prior license agreements to the specific technology covered by the patent at issue and appropriated by the infringer, when the prior agreements are of different scope, and (3) providing sufficient justification for assumptions in calculating a royalty rate.