Reprising his role as trial judge in Apple v. Motorola, Judge Richard Posner of the Seventh Circuit Court of Appeals recently issued yet another patent damages opinion worth notice. In an Order dated January 18, 2013, entered in the Northern District of Illinois patent infringement case Brandeis and GFA Brands v. Keebler et al., Judge Posner excluded vast chunks of the plaintiffs’ proposed damages testimony, concluding that the expert “has not used a reasonable methodology” (Opinion at 12) in many of her proffered damages opinions. As discussed below, despite employing a number of approaches in an effort to arrive at the reasonable royalty demand, the patentee’s damages expert was ultimately left with the ability to testify on only one “possible basis for estimating a reasonable royalty” in addition to educating the jury on “general principles of patent damages.” (Id.) At minimum, Judge Posner’s ruling rendered a lot of spending and effort by the patentee a waste.

What makes Brandeis, as Apple before it, an important ruling for patent litigators (and their clients) is that Judge Posner was not passing judgment on subpar damages presentations or unqualified experts. To the contrary. Like Apple’s damages expert, Brandeis’ damages expert was found to be “highly qualified” to testify by Judge Posner. (Op. at 8) There was “no doubt about her general competence to estimate damages” either. (Id.) The problem, in Judge Posner’s view (and potentially in the eyes of like-minded trial judges) was the “methodology” employed by the expert to arrive at potential royalty amounts. And the starting point of Judge Posner’s critique of that methodology was his strong view that the defendant would never have agreed to a royalty “higher than the cost to it of switching to a non-infringing substitute.” (Op. at 9)

While that sentiment may be true in some, if not the majority of cases, whether or not it is a universal principle applicable to all patent disputes is debatable. Nevertheless, it is Judge Posner’s view. After expressing it in the Brandeis opinion, he quickly turned to the question of whether the damages expert could rely on her discussions with one of the technical experts on the question of available non-infringing substitutes. Finding her investigation into the question inadequate, she could not. As a result, she could not opine on the cost of non-infringing alternatives, nor use those costs as a basis for estimating the reasonable royalty. (Op. at 9-11)

To be clear, Brandeis’ damages expert did speak to a technical expert in an effort to arrive at the cost of the non-infringing alternatives. But in Judge Posner’s view (as in Apple) she did not speak to the right expert – in this case someone who could opine on customer preferences in cookies, and consumer demand for cookies generally. (Op. at 9) Compounding the problem in Judge Posner’s view was the Brandeis expert’s calculation of the “maximum reasonable royalty not on costs, but on the maximum profits” that were at risk for the defendant in the absence of a license to use the patented technology. (Op. at 10) To arrive at her calculation, the expert relied on an earlier license (referred to as the Company A license) that the patentee had obtained from a competitor of the defendant. Using that license amount as a base, she multiplied that amount by an undisclosed integer, based on an understanding that the defendant had lost (and would continue to lose) market share prior to adopting the allegedly infringing technology. As a check on her new calculation, the expert also relied on a royalty that another competitor of the defendant (referred to as Company B), had agreed to pay to settle an infringement case brought by the patentee against that competitor. Importantly, however, Judge Posner noted that the patent Company B licensed was never asserted against Keebler (the remaining defendant) and that Keebler’s “vast” sales disparity with Company B rendered the Company B license irrelevant. Testimony on the Company B license was thereby excluded. (Op. at 10-11)

A third license, between the patentee and a Company C (which was granted the license in resolution of a patent suit filed by the patentee against Company D, a subsidiary of Company C), was similarly rejected as a proper vehicle for arriving at a reasonable royalty by Judge Posner. In that instance, the Court found fault with the expert’s failure to “value any component” of the “complex” settlement agreement leading to the license grant. As such, there was no responsible valuation of the patent license contained within the broader settlement agreement, and any testimony regarding the Company C license was excluded. (Op. at 11-12)

So what was left for the patentee’s damages expert to present to the jury? Only the license that she had previously pointed to as “the minimum royalty” that the patentee would accept. Of course, most patentees do not hope for the “minimum” return on their litigation investment. But that was the only part of her multi-pronged damages opinion that Judge Posner found reliable. Reliable for the simple reason that Keebler very well may have paid as much for a license as a similarly situated competitor (Company A, who had taken a license and made similar products to Keebler while enjoying similar market status) had already agreed to pay. (Op. at 11) Accordingly, the amount of the Company A license (not multiplied in light of the declining market share and Company B license arguments previously rejected by Posner) was admissible. The Company A license, structured as a flat-rate yearly payment, was therefore deemed a “possible basis for estimating a reasonable royalty.” (Op. at 12) So the jury could hear about it, but only unencumbered by any arguments that the patentee would have demanded a better deal from Keebler than it had accepted from Company A. (Op. at 11) Crumbs, indeed.

Left unanswered, is what the damages expert could have done to pass muster, in the absence of the Company A license. Ultimately, this case sends a clear message that at least certain judges will take their role as “gatekeeper” very seriously when it comes to patent damages claims. While the patent world awaits the Federal Circuit’s treatment of Judge Posner’s approach in Apple, his views will undoubtedly find some acolytes at the district court level in the interim. So what should clients and advocates start considering? For one, patentees asserting patents with uncertain value (due to lack of prior licensing activity for instance) should strongly consider seeking preliminary injunctions. For patents that have been licensed, patentees must consider the possibility that those license amounts (particularly if they are suing similarly situated companies to ones that they have licensed) may represent the ceiling of their potential reasonable royalty recoveries. And defendants facing such patents should start thinking about drawing out and submitting exaggerated damages claims to judges for review as early as possible in cases. Put another way, if the trial judge is going to eat the whole damages cookie and leave the patentee with crumbs, defendants are very interested in learning about that – as early as possible in a case. Ultimately, so would patentees and courts, as all involved would benefit from having unsustainable damages claims addressed earlier on in cases – rather than on the eve of trial, after incurring indigestion-inducing legal fees.