In recent years, many courts have placed increased scrutiny on the opinions provided by damages experts in patent litigation. In turn, this has led to many more instances of expert testimony being excluded on the subject of damages. A recent decision in the district court of Illinois by Judge Posner of the Seventh Circuit Court of Appeals further illustrates this recent trend.
In Promega Corp. v. Applied Biosystems, LLC.,1 Promega sought a declaratory judgment that the reissue patent owned by Applied Biosystems, Life Technologies Corp., and California Institute of Technology was invalid or unenforceable. The defendants counterclaimed for patent infringement and both parties submitted reports as to the appropriate royalty rate to be applied should the patents be found valid and infringed. At a pretrial evidentiary hearing, Judge Posner considered challenges to the expert opinions provided by both parties' damages experts. In his ruling, Judge Posner found that both parties' experts, whose professional backgrounds qualified them to testify on royalty rates, failed to sufficiently explain their proposed reasonable royalty rates.
Judge Posner first addressed the opinion of Life Technologies' expert. That expert opined that a reasonable royalty rate would be 10%. In his expert report, he relied on twenty intellectual-property licenses entered into by either Life Technologies or Promega, with royalty rates ranging from 3-15%. Of the twenty licenses, he then identified six licenses as most relevant to the reissue patent, enabling him to further narrow the range to 7.5-15%. Without much explanation, he again narrowed the range to 8-12%, where he ultimately concluded that the midpoint, 10%, constituted a reasonable royalty for sales of infringing products outside the field of use.
Judge Posner excluded this royalty-rate opinion, noting two main weaknesses in the expert's theory. First, the license agreements used to derive the 10% royalty rate did not always relate to the specific patent claims at issue. Specifically, these licenses covered multiple patents, not just the reissue patent at issue here. Judge Posner emphasized that a comparison of past patent licenses to present infringement must account for "technological and economic differences" and that the past licenses must be sufficiently comparable. Because there were other patents in the mix, the ranges of royalty rates were derived from the combined value of these patents, not solely from the reissue patent at issue. Therefore, according to Judge Posner, the expert should have determined what percentage of the royalty rates in these licenses covering multiple patents was attributable to the patent-in-suit.
Second, according to Judge Posner, the expert made an arbitrary decision to use the midpoint of a range of royalty rates in unrelated licenses as an estimate of a reasonable royalty rate for Promega's products. Although the expert considered all 20 licenses, Judge Posner concluded that, without proper computation and evidentiary support, the mere consideration of the totality of the circumstances was but a generalized impression of the reasonable royalty rate. Therefore, Judge Posner excluded the expert's royalty-rate opinion because he found it was inadequate for the jury to assess damages.
Judge Posner suggested several ways that an expert might strengthen this faulty damages analysis. For example, he noted that in 2006, Promega and a subsidiary of Life Technologies entered into a cross-license agreement that specified a 2% royalty on sales of Promega's products in the "Genetic Identity" field of use—such as forensic and paternity testing. He suggested starting from the 2% royalty rate in the 2006 cross-license, then identifying likely differences between the 2006 negotiations and a hypothetical 2012 negotiation for a royalty on sales outside the field of use, and finally, quantifying the impact of these differences to adjust the 2% royalty accordingly. In particular, where the expert had noted that the development of the stem-cell market might have made the patent more valuable outside the Genetic Identity field of use, he should have offered an estimate of that added value. The expert also argued that Life Technologies deserved a share of Promega's profit from sales of the allegedly infringing products as lost profits. But he offered no estimate of what Promega would have lost in sales had it not taken the license and instead ceased selling those products.
Judge Posner then addressed the opinion of Promega's expert. Promega's expert opined that 80% of Promega's direct-customer sales were within the field of use licensed by the 2006 cross-license. As a result, the expert argued that Life Technologies could not include 80% of the distributor sales in the basis for damages. But Promega's damages expert admitted that he had no information on what percentage of the distributor's resales fell within the cross-license scope. Therefore, Judge Posner concluded that the expert could not testify that any distributor sales were covered by the 2006 crosslicense. On the royalty rate itself, he noted that Promega's expert conceded that a 2% or slightly higher reasonable royalty should apply to products outside the field of use under the 2006 cross-license.
In conclusion, Judge Posner found that both parties failed to provide the jury with an adequate basis to determine damages and requested that the parties submit briefs clarifying their damages positions and explaining their damages evidence.
Strategy and Conclusion
This case illustrates the need to justify reliance on past licenses as well as any departures from the rates in those licenses as part of the reasonable royalty analysis. It also illustrates the need for strong evidentiary support to back up any expert opinion.