In Apple, Inc. v. Motorola, Inc.,1 a recent smartphone litigation, the district court focused on the sufficiency of expert testimony on damages. The case was before Judge Richard Posner of the Seventh Circuit, sitting by designation in the Northern District of Illinois. This article discusses two opinions from the case: a Daubert opinion (an opinion analyzing the admissibility of expert-witness testimony) and a final opinion dismissing the case, both with significant implications for patent litigation. The court first determined that neither party presented admissible evidence on damages, and in light of an absence of damages evidence, the court dismissed the case with prejudice, without considering infringement or invalidity. Posner's opinions may signal significant changes in the way in which litigants and their experts approach damages calculations.

The Daubert Opinion

Apple sued Motorola, claiming infringement of four patents relating to smartphone and tablet technology. Motorola then countersued Apple for infringement of several of its own cell phone patents. The Daubert opinion from the district court addressed challenges to the admissibility of expert testimony on damages from both sides. The court emphasized that admissible evidence must meet threshold levels of reliability by following accepted methodologies in the relevant field—only then may a fact-finder rely on the evidence.

The court offered two tests for distinguishing between a "disabling problem" (which provides a basis on which to exclude the expert's testimony) and a mere  "weakness" (which the jury should address). The first test asks whether the expert applied "the same level of intellectual rigor" as an expert practicing in the relevant field, outside of a litigation context. The second test asks whether the expert sufficiently explained the connection between the evidence and the conclusion the expert drew from the evidence. Analytical gaps in an expert's analysis may signal inadmissible testimony. The court in Apple v. Motorola described both tests as tools that a judge may use to test the adequacy of proposed testimony.

Applying the tests described above, the court dismissed almost all of the damages testimony proposed by both parties. For example, Apple's '002 patent relates to preventing total obstruction of a notification toolbar, which functions to provide basic information about a device. When addressing the '002 patent, Motorola's damages expert proposed a figure based on an interview with a Motorola technical expert. The court held that this was not a reliable methodology because the expert would not use this approach outside litigation—if the expert were a consultant asked to assess infringement risks or evaluate alternative technology approaches, he would have sought information outside Motorola because Motorola would not need an expert to evaluate its internal information.

Apple's damages expert proposed damages for infringement of the '002 patent 140-times larger than those proposed by Motorola's expert. He arrived at this amount by assigning monetary amounts to a Motorola consumer survey on smartphone features. The court criticized this approach as (1) based on unreasonable assumptions, (2) extrapolating significance from vague and nonanalogous survey data, and (3) choosing arbitrary divisors. But the court was particularly concerned that the expert assumed that the occasional partial obstruction of the notification window would mean that Motorola would have to reduce the price of its cellular phones. In particular, Apple's expert allocated value only to the features of a phone used on a daily basis, thus inflating the value of that more limited set of features. The court rejected this approach, analogizing that airbags in a car are an important feature to some consumers even though they may never be used. At bottom, the court faulted Apple's expert for failing to compare the prices of phones with and without the patented feature. It refused to excuse what it considered to be a failure to "conduct a responsible inquiry that would have been feasible to conduct."

For the other litigated patents, the court similarly excluded the evidence from both experts for (1) not analyzing reasonable and cheaper alternatives, (2) making inappropriate assumptions not within their areas of expertise, and (3) basing estimates on potentially biased information from interested parties. Regarding Apple's '949 patent, directed to turning pages in a reader application by tapping (rather than swiping), the court held that Apple's damages for a royalty could not exceed Motorola's cost of avoiding infringement—either by permitting only a swipe gesture or by not preinstalling the application that used a tap action. The court excluded evidence from Motorola's expert because he based his value on the cost to implement the swipe-gesture feature and assumed that removing the tap feature would impose a similar cost. Although the feature had cost approximately $18,000 to implement and Motorola's expert used a royalty of $100,000, the court found his approach flawed. The expert had not assigned a cost to Motorola foregoing the application with the infringing feature. Apple's expert, on the other hand, based his damages value on the premium that customers would pay for Apple's Magic Trackpad, an input device sold for computers, as compared to a regular mouse. The court faulted this approach as disconnected from the cost to avoid infringement. Under the court's approach, a damages expert must always consider the cost of avoiding infringement when determining the cost of a reasonable royalty.

Regarding Apple's '263 patent, relating to smoothly streaming audio and video, the court applied similar criticisms of the proposed damages evidence. It excluded the opinion of Apple's expert because it relied on information from Apple's technical expert. The court reasoned that a company facing infringement would not turn to the patentee to determine the cost of avoiding infringement. And the same end befell Apple's '647 patent, which relates to "structure detection and linking." Apple's expert had identified a third-party application for Apple devices that in part provides the claimed functionality, but the court rejected that approach because the functionality was duplicative to that already in Apple's operating system. In other words, consumers must have purchased the application for its nonduplicative functionality—the application offered no information about the value of the duplicative (claimed) functionality.

Finally, the court addressed Motorola's two patents at issue, which relate to communication between a cell phone and cellular base stations. Because the patents were considered "standards essential," the court looked for evidence of a license rate that was fair, reasonable, and nondiscriminatory (FRAND). As with the evidence relating to other patents, the court rejected the approach of Motorola's expert because it did not consider the lowest cost of avoiding infringement.

The Dismissal

Following the district court's opinion excluding expert testimony on damages, the parties both filed motions for summary judgment, seeking to foreclose any right to damages or an injunction. The court asked the parties to consider whether anything remained of the case if both damages and injunctive relief were unavailable. While Motorola had asked the court to hold Apple's patents invalid, it did not contend that the court had continuing jurisdiction over the case without an issue of damages or injunctive relief.

The court first rejected the parties' damages claims based on evidence other than that which the court had excluded in its earlier order. The detailed reasoning of those rejections is beyond the scope of this article but largely follows the court's criticisms described above. Apple sought to support its damages case with evidence from its expert witness on liability. But since this second witness did not sufficiently identify and price an alternative technology essential to the damages claims, the court held that the expert was not qualified to testify. The court also held that since Motorola was not uniquely able to find a cheaper alternative technology, the burden did not shift from Apple to Motorola to find this information. The court described Apple's alternative basis for assessing damages as "an afterthought" and concluded that Apple could not support its damages claim. Motorola's remaining damages expert, on the other hand, suggested a royalty disproportionate to the value of the patent portfolio, according to the court.

Then, facing a case without proof of damages, the court considered whether it should issue injunctions. As the court stated, if a party seeks equitable relief, it must first demonstrate that damages are an inadequate remedy. This proved problematic since the court excluded most of the damages experts' testimony.

The court denied Motorola's request for an injunction based on its right to secure a FRAND royalty because Motorola could not demonstrate Apple's unwillingness to pay a FRAND royalty for a Motorola "standards-essential" patent. Although Apple rejected Motorola's initial offer ( a 2.25-percent royalty), the court noted that an injunction is not the next logical remedy. Since Motorola committed to license at FRAND rates, it implicitly acknowledged that a royalty adequately compensates for the use of that patent.

According to the court, neither party showed that damages would not be an adequate remedy. Although the court had excluded evidence the parties would need to prove damages, it distinguished that from a case where damages were actually impossible to prove or simply inadequate. Accordingly, the court could not assess and offer injunctive relief. Posner suggested that a compulsory license with ongoing royalty would be a preferred remedy in cases like this, but since Apple did not request this relief, the court could not assess it. The court also pointed out that the patents were relatively easy to design around, so an injunction would not meaningfully allow the patentee to preserve its market position. In other words, the patentee stood to lose only the reasonable royalties the court had found the patentee unable to prove. Finally, the court noted that the accused features formed only a minor part of the overall product and that an injunction would therefore impose a substantial burden on the infringer, by requiring removal of the entire product from the market while it removed the infringing feature.

Because it held that neither party was entitled to damages or injunctive relief, the court dismissed the case. It did so "with prejudice," meaning that the parties could not refile the case based on the same allegedly infringing acts, reasoning that it should not give the parties a second opportunity to prove damages.

Strategy and Conclusion

This litigation shows the increasing concern that courts have over the accuracy and sufficiency of evidence underlying damages calculations. The opinions demonstrate that courts may look very closely at the methodology used by a damages expert and require that the approach seem reasonable to the court. In particular, the court here placed great emphasis on methodologies that clients would deem acceptable in parallel, nonlitigation contexts. While courts will permit a certain degree of speculation in calculating damages, experts should justify any uncertainty with the facts. Courts will likely permit uncertainty only when the cost of eliminating it is outweighed by the benefit of the damages testimony. If this case signals the standard for damages experts in future litigations, then experts should be prepared to offer testimony based on definitive, objective evidence and industry-standard approaches.

As the financial and reputational stakes of patent litigation increase (particularly in the consumer-technology space), courts may show more reticence to imposing severe remedies without an appropriate foundation. Damages experts should provide sound economic evidence, accepted analytical methodologies, and reasonable hypothetical alternatives to avoid exclusion of evidence.

Finally, this case also has potential implications for owners of standards-essential patents. Judge Posner held that such patent owners are likely not entitled to injunctive relief if they have committed to license their patents on a FRAND basis. In a recent policy statement, the Federal Trade Commission suggested that it also agreed with this approach in the context of the issuance of exclusion orders in the International Trade Commission based on standards-essential patents. In re Certain Wireless Communication Devices, Portable Music & Data Processing Devices, Computers & Components Thereof, Inv. No. 337–TA–745, www.ftc.gov/os/2012/06/1206ftcwirelesscom.pdf (visited September 2, 2012). Thus, this issue bears watching for any owners of patents in this area.