In a recent patentPatent Word Surrounded by Light Bulbs infringement case, the Plaintiff Programming Company and the Defendant Software Corporation asked the U.S. District Court Judge to rule on the parties’ motions in limine; this opinion focused on Defendant’s motions in limine to exclude the questionable opinion of Plaintiff’s damages expert.

In scrutinizing an expert’s principles and methodology, the judge quoted the Supreme Court that a court “may conclude that there is simply too great an analytical gap between the data and the opinion proffered.” However, court may not, she said “evaluate the credibility of witnesses, resolve conflicts in testimony, or evaluate the weight of the evidence.”

Defendant argued that plaintiff’s damages expert used incomplete data to calculate the percentage of sales. The expert arrived at his conclusion by the software piracy rates across the industry (20%), and subtracting the piracy rates experienced by another software corporation (Corp B), which settled its liability in the action (6-10%)—allegedly exhibiting the benefit of using the claimed invention (10-14%). As a result, the expert didn’t consider piracy data specific to Defendant, but instead relied on data across the entire industry. He did not take into account the software type or whether the software used some form of digital rights management (DRM). He relied on Corp B’s data—even though it settled and wasn’t shown to be infringing. Defendant believed that the expert didn’t analyze how differences in the software might affect his calculations.

Plaintiff responded that the damages expert used the evidence that was available to him, and contended that Defendant didn’t produce the data on piracy rates of its products or the efficacy of its DRM strategy. Defendant stated it provided piracy information, but didn’t have the statistics Plaintiff sought because it didn’t track that information. Nonetheless, the judge stated that even if information tracking Defendant’s accused products wasn’t available, data tracking products shown to be “sufficiently similar” to the accused products would have been more relevant. The judge reasoned that different softwares would likely experience different rates of piracy based on demand, importance, price, and availability of alternatives, among other factors. The damages expert did not show how Defendant would experience piracy rates equal to the average of the industry. Further, the expert did not justify his assumption that Corp B and industry data were an accurate representation of what would occur with Defendant, but acknowledged in his deposition that Corp B and Defendant’s products were different. The judge held that there were too many uncertainties that the damages expert didn’t address in his use of industry and Corp B’s data as a proxy for Defendant data. Because piracy and the effectiveness of DRM technology may vary widely across the industry, she said the damages expert’s numbers were inherently unreliable.

Defendant also attacked the damages expert’s methodology for calculating the yield of a hypothetical negotiation between the two parties. Citing a recent Federal Circuit decision, the judge explained “the classic way to determine the reasonable royalty amount is to multiply the royalty base, which represents the revenue generated by the infringement, by the royalty rate, which represents the percentage of revenue owed to the patentee.” Defendant contested both the royalty rate and royalty base used in the expert’s report.

In calculating the royalty rate, the damages expert assumed the parties would begin their negotiation at an equal 50-50 share of saved profits. Defendant argued that this was contrary to established Federal Circuit case law. In Uniloc (2011), the Federal Circuit disapproved of arbitrary starting points for negotiations of a reasonable royalty rate. The expert in that dispute implemented Robert Goldscheider’s “25 Percent Rule.” This rule assumes that the manufacturer would be willing to pay the patentee 25% of its expected profits for the product that incorporated the intellectual property at issue. To arrive at a reasonable royalty rate under the 25 Percent Rule, the judge explained that the profits for the product embodying the invention are divided by the expected net sales yielding a profit rate, which is then multiplied by 25% to arrive at a running royalty rate. Because the rule was “essentially arbitrary” and did “not relate to any issue in the case,” the court held that it was “fundamentally flawed” and inadmissible as a matter of law under Daubert.

The Judge held that the damages expert adopted a 50% starting point based only on his general experience. During his deposition, the damages expert admitted that he had not seen any evidence of either party initiating negotiations with a 50-50 profit split. This starting point, she wrote, based only on his personal experience—and not limited to the DRM industry—was even more arbitrary than the rule rejected in Uniloc. To ensure damages figures are not conjectural or speculative, the judge said a starting point should be “tied to case-specific factors grounded in reliable data.” This can be factors such as the parties’ relative bargaining power, the relationship between the patented invention and the accused product, other licenses involving the same patent, and analogous licenses in the industry for patents covering component parts.

Defendant next criticized the damages expert’s use of the entire value of the accused products as the royalty base. The judge wrote that it was well-established that a patentee may assess damages based on the entire value of the accused product “only where the patented feature creates the ‘basis for customer demand’ or ‘substantially creates the value of the component parts.’ ” Otherwise, the patentee must “apportion the defendant’s profits … between the patented feature and the unpatented feature,” the judge wrote, quoting Uniloc.

Plaintiff argued that it was free to use revenue of the entire product for its royalty base as long as it is “economically justified.” However, the judge stated that Plaintiff ignored more recent cases from the Federal Circuit and the Northern District of California that clarified the same point. In Uniloc, the Federal Circuit explained that the plaintiff misinterpreted the pertinent passage in earlier decisions—that “the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range”—because it was preceded by the qualification that the entire market value couldn’t be used in that case as there was no evidence that the patented feature was the basis of consumer demand. Because there wasn’t evidence that the patented feature drove demand, the judge held the damages expert’s use of the entire market value of the products wasn’t justified.

Due to the multiple flaws in the damages expert’s inputs and analysis, his damages testimony was excluded in full. Upon the finding of infringement, the plaintiff was entitled to “in no event less than a reasonable royalty for the use made by the invention by the infringer,” the judge allowed the damages expert to submit a revised damages report correcting his numbers and calculations. If the damages expert’s report was deficient at that point, the judge said she would preclude him from testifying and allow only Defendant’s damages expert to testify.