Reprising his now-frequent role as a trial judge in patent settings, Judge Richard Posner of the Seventh Circuit Court of Appeals, recently issued yet another patent damages opinion of note. In an Order dated May 27, 2013, in the Northern District of Illinois patent infringement case Promega v. Applied Biosystems et al., Judge Posner cut the heart out of the patentee’s (Life Tech, who Promega sued for a declaratory judgment of non-infringement) proposed damages testimony, concluding that the expert “cannot be permitted to testify to a reasonable royalty rate.” (Order at 4) As discussed below, despite trying to justify a reasonable royalty rate in a variety of ways, the patentee’s damages expert was ultimately left excluded from testifying at trial. And Judge Posner’s treatment of the defense’s damages expert was only slightly kinder, as will be discussed below. The net effect? Possible removal of the damage issues out of the hands of the jury completely. Many patentees, hoping for favorable (and emotion-driven?) jury awards would be disappointed with such a result.
Judge Posner’s damages analysis actually had a head start in this case in that there was a relevant cross-license previously entered into by Promega and a subsidiary of Life Tech. That cross-license, entered into in 2006, “specified a 2 percent royalty on sales of Promega products” in the “Genetic Identity” field of use. (Order at 2) For purposes of calculating the royalty base in this particular case, Life Tech’s damages expert Jed Greene (whose credentials appear to have passed muster with Judge Posner even as much of his analysis did not) focused on the “sales outside of the Genetic Identity field” as those sales were “outside of the field of use of the 2006 cross-license.” (Order at 2) Judge Posner found no fault with that approach, and authorized Green to “testify to the dollar amount of the sales to which, if infringement is found, a royalty rate may be applied” – subject to an as-yet unissued ruling on the geographic scope of infringing sales. (Id.) In addition to his attempted testimony on the royalty base, the patentee’s damages expert also entered an opinion on the appropriate reasonable royalty rate. As noted in the Order, “Greene opines that a reasonable royalty rate would be 10 percent,” to be applied to worldwide sales of Promega products falling outside of the 2006 cross-license. (Order at 3).
But even as Judge Posner granted the patentee the opportunity to present testimony directed to the royalty base, he withheld permission for Greene to testify to a reasonable royalty rate. The core of Greene’s approach was to analyze a set of “20 intellectual property licenses entered into by either Life Tech or Promega” and select six licenses as “the ones most relevant to the ‘096 patent.” (Id.) Based on that analysis, Greene opined that the reasonable royalty for sales of infringing products (outside of the field of use) should be 10 percent. Judge Posner was not impressed with the analysis and the Order faults Greene for: 1) not identifying “the six licenses he relied on or explain why they were the most relevant;” 2) not being able to identify those licenses at the Daubert hearing; 3) utilizing an “arbitrary” midpoint of a “range of royalty rates in disparate licenses for unknown different inventions as the estimate of a reasonable royalty for a license for Promega products outside the field of use of the 2006 patent,”; and 4) relying generally on a “totality of the circumstances” approach to his reasonable royalty rate determination. (Id.)
So what could Greene have done to pass muster before Judge Posner? According to the Judge, Greene would have been on firmer footing by giving greater weight to the cross-license, and using that as a starting point for determining the “likely differences between the 2006 negotiations and a hypothetical 2012 negotiation for a royalty for sales outside the field of use.” (Id.) By not using that license as a starting point, and by not estimating either “the profits that Promega would have lost had it not obtained a license and had ceased selling the products in question outside the field of use, or the share of those otherwise-lost profits that Life Tech could have extracted in negotiating a license,” Greene forfeited his right – in Judge Posner’s opinion- to testify at trial to a reasonable royalty rate. (Order at 3-4) The combination of giving short shrift to the evidence that the Judge considered most relevant, while articulating an “arbitrary” theory as an alternative, was ultimately too much for Judge Posner to swallow. And as a result, Greene became a new entrant into the club of patentee damages experts blocked by Judge Posner from testifying at trial.
Promega’s damages expert, Carl Degen, fared slightly better. For the most part, Judge Posner was prepared to allow him to testify regarding the proper royalty base. (Order at 7) The main caveat was that Degen was not permitted “to testify that any distributor sales are covered by the cross-license” and that his testimony would be further qualified depending on a ruling on the “geographic scope of infringement.” (Id.) On the royalty rate issue, Judge Posner seized on Degen’s testimony that the “reasonable royalty for a license for Promega products outside the field of use of the 2006 cross-license would be 2 percent or perhaps slightly higher.” (Id.) As a result, Judge Posner found that Promega had conceded “that if it is determined to have infringed the ‘096 patent, Life Tech is entitled to a 2 percent royalty.” And because there would not be any testimony allowed from the patentee’s damages expert as to a higher royalty rate, Judge Posner found that there was no need to allow Degen to testify to the royalty rate just to reiterate his “concession.” (Id.) But since this case was a complex one technologically, Judge Posner was uncomfortable not having any expert testimony at all on damages. So before he excluded Degen from testifying completely as to the royalty rate, he asked the parties for more briefing “clarifying their positions on damages” in light of his exclusion of Greene’s “royalty rate opinion.” (Order at 8) In doing so, the Judge also informed the parties that he was inclined to take “Promega’s 2 percent concession” as the “only basis for any award of damages,” and asked them to either stipulate to the appropriate royalty base or have it resolved as a matter of law on summary judgment. (Id.) The net effect of the Judge’s closing proposal would be removal of the damages issue from the jury’s hands entirely.
Ultimately, Judge Posner held the asserted patent claims invalid in a subsequent order dated June 12, 2013. As a result, judgment was entered in Promega’s favor. In the June 12 Order, Judge Posner briefly treated the damages issues put before him on summary judgment. With respect to damages, the Court determined that it would have been proper to have let Degen testify a 2 percent royalty rate, with the patentee entitled to challenge him based on his “back-up” royalty rate of 4.4 percent – a figure he derived from an analysis of the cross-license agreement the parties had reached in 2012. So if a trial would have been held, the patentee would not have been able to put on a damages expert, and the jury would have heard only from the damages expert for the defendant – who would be arguing for a very low royalty rate. In effect, the best Life Tech could have hoped for would have been a rate more than fifty percent less than the 10 percent its damages expert Greene had intended to ask the jury for. Not an ideal situation for a patentee.
Judge Posner’s treatment of damages issues in patent cases such as this one remains worthy of consideration. There is no doubt that he is challenging patentees to have a solid economic basis for their damages claims, and is unafraid to revoke their right to present suspect damages theories to juries. At the same time, one can ask whether Judge Posner believes that damages issues in patent cases – perhaps because of their inextricable link to complex technological issues, such as an evaluation of the costs and feasibility of potential design-arounds – should be the province of the jury at all. That question is for now unanswered, and perhaps more importantly, so is the question of how the Federal Circuit views Judge Posner’s approaches to damages issues in patent cases. That remains to be seen. In the meantime, there is no doubt that damages will continue to be a complex issue for counsel to deal with in many patent cases.